once lived, for instance, resided in a single room in a cheap hotel. To have used the rental value of his habitation as a measure of his ability or taxability (to coin a convenient word) would have been obviously absurd. Of course this extreme illustration is not wholly fair to the real virtues of the habitation tax. But the illustration does arouse a train of thought which is valuable in this connection. Why rest content with rental value as an evidence of income when we know it is misleading? Why not use the habitation tax as a minimum to be indefinitely improved by any additional evidence which the assessor can secure? In short, why not have an income tax which is operative as a habitation tax when the assessor is doubtful of the returns of the individual taxpayer?

I believe that the future will see in American state taxation an ever increasing use of external indicia. But attention should be called to the fact that these external evidences can be far more successfully employed by administrators than by legislators. The relation between income and rental is at best a rela tion between types, and holds not for individuals but for averages. Moreover, the relation changes with the time, the place, and the circumstances of the taxpayer. An instrument so delicate and variable is not likely to be wisely handled by a busy state legislature. If enacted into statute law, it must be stated so simply and rigidly that it will work a vast amount of unnecessary injustice. If, however, it could be applied by a first class tax commission capable of investigating the different relations between income and the external index at different times and different places, it would be capable of an indefinite amount of good. My proposal, in other words, is to place the administration of the income tax in the hands of a central tax commission, and authorize that commission to devise and apply all helpful kinds of external indicia in the assessment of incomes when the commission has reason to believe the return of the income has not been honestly made. Some such procedure as this is what we are now as a people attempting in the introduction of rate regulation. That is to say, we are organizing expert central commissions and charging them with the duty of enforcing "just and reasonable rates." We know that the ideal is impossible of complete realization, but we confidently expect an approximate realization of the ideal. A central tax commission could, in matters of taxation, attack this problem of taxation with as much chance of success as our

public service commissions are attacking the intrinsically far more difficult problems of rate regulation. Such a commission can safely be vested with an administrative discretion in the use of external indicia, which could not be entrusted to ordinary local assessors. Moreover, business men would be far more willing to make disclosures to the agents of such a central commission than to local assessors under no central control.

(b) Business Taxes. Very similar arguments can be cited against the taxes most frequently proposed as substitutes for that part of the general property tax which is applicable to busi

ness concerns.

A flat license tax with little or no adjustment to profits is or may be highly productive, certain, and inexpensive to collect. But it is so regressive that it stands practically no chance of adoption in states north of the Mason and Dixon line.

The moment we depart from flat rates, however, we get into trouble. Immediately there begins a differentiation or classification in accordance with character of business, size of town in which the business is located, gross profits, and other indications of taxability, which has no logical stopping place short of an income tax. And the process of evolution is not a seductive one. First there comes the logrolling in the legislature and pressure from various commercial interests to obtain a favorable status in the law itself. After the law is passed, the assessor has a continual struggle with the taxpayer to get him properly classified. Some experience in Porto Rico with a graded license tax modeled closely on the French impôt des patentes led me to the conclusion that the proper classification of business concerns in the assessment of a finely graded license tax is as difficult as, or more difficult than, their proper assessment under an income tax. And the experience of Louisiana with the graded license tax is apparently similar to that of Porto Rico, as the Louisiana Tax Commission of 1906 (reporting in 1908) after going on record "as opposed to the principle of license or occupation taxes on ordinary pursuits as a permanent source of revenue", went on to say regarding the operation of the tax: "In addition to this there is no form of tax which provokes such a flood of perjury as accompanies the levy and collection of these taxes. The amount of the tax depends on the return of the taxpayer. The honest taxpayer makes an honest return. The dishonest taxpayer makes a dishonest return. Large numbers of persons make their affidavits with the

same looseness of morals with which the average respectable citizen will attempt to defeat the customs laws on returning from a trip abroad. They regard cheating the government as venial, and not in the category of crimes."

In Canada business concerns are quite generally taxed in accordance with the rental value of the premises which they occupy or the floor surface of such premises. In some of the provinces these methods of taxation have been consciously introduced as substitutes for preëxisting taxes on personal property. In the case of the Canadian taxes just described, as in the case of most other foreign taxes, it is difficult for the outsider to ascertain with any certainty just how successfully they work. It may be said with certainty, however, that these taxes are far superior to the American method of taxing the personal property of business enterprises. But from all I can learn, they are not without serious defects. They create exceedingly difficult questions of classification, because the rental value or the floor space bears an entirely different relation to net income among the different classes of business enterprises, and the rates have to be adjusted accordingly. In consequence the legislative body which imposes such taxation is constantly beset with applications for changes in the classification, while at the same time a certain amount of plain injustice always exists because of the impossibility of adjusting any simple classification to the varying ability of business con

cerns.

Here, again, it may be asked, why take the half loaf when we can get three quarters or four fifths? or four fifths? Why not develop these external indicia by scientific study and use them administratively as an aid in the assessment work, rather than enact an unduly simple and regressive scale into statute law? Of course, all this assumes much better assessors than we now have; but, unless we get better assessors, any scheme of reform is doomed. As will be seen hereafter, I am counting upon administrative reform as the principal recommendation of the income tax. I would much rather have a reform of the assessment work without the income tax, than the income tax without reform of the machinery of assessment.

3. The next reform which calls for careful consideration is what Professor Bullock has aptly called the "graded property tax." The essential proposal here is to reduce rates upon each class of property until the natural inclination to be honest

balances and then overcomes the temptation to evade the tax. This plan of reducing rates has been tried with very successful results, so far as the yield of the tax is concerned, in Pennsylvania and Baltimore.

All students of American taxation must feel deeply grateful to the champions of this reform in Pennsylvania and Maryland. It has taught us the exceedingly important lesson that a tax which is exorbitant can not succeed in an American commonwealth unless the property upon which it falls is tangible and irremovable. It has taught us, also, that there are large numbers of American taxpayers who will be honest if the state gives them half a chance. But its principal lesson may be summed up in the axiom that tax rates, like railway rates, must be fair and reasonable if the tax is to succeed. So deeply do I feel that this lesson should be taken to heart that I do not hesitate to say that the success of the income tax or any other reform project is wholly dependent upon its thoroughgoing adherence to this rule that tax rates must be fair and reasonable. Observance of this rule, in my opinion, is the principal explanation of the success of the lump-sum income tax in certain states on the continent of Europe.

But the graded property tax has, I fear, certain difficulties which would make it unpopular with the American people, and which to my mind make it inferior to the income tax. The difficulty lies in the fact that it provides no means of reaching the dishonest taxpayer, who will evade small reasonable taxes as well as high and unreasonable taxes. Notwithstanding the very large amounts of intangible personalty on the tax rolls of Pennsylvania and the city of Baltimore, it is probably true that many owners of intangible personalty in these places successfully evade taxation. The graded property tax, therefore, will relieve the treasury, but it will not remove the unfair burden upon the honest taxpayer. As a matter of fact, it actually increases the burden upon those taxpayers who are inclined to be reasonably honest. The form of income tax which I have recommended, however, would permit the taxation of those persons who are not disposed to make an honest declaration of income on the basis of any external indicia which the central assessment commission finds helpful in this connection. In other words, the income tax is easier to assess than that part of the property tax which falls upon intangible personalty.

4. In concluding this brief survey of the popular substitutes for the personal property tax, I am glad to confess that any one of them is greatly preferable to the personal property tax. But the income tax offers a more practicable substitute. My reasons for this conclusion have only been stated in part. These further considerations may be added:

(a) Most important of all is the fact that the income tax is popular. The people are familiar with it. There are things about it which thoughtful people do not like.

But its spirit strikes a responsive note in the mind of almost everyone. The people, on the other hand, know practically nothing about the substitutes which are discussed so familiarly here, and I fear none of them would stand any chance of adoption until after a long period of public education. Moreover, the income tax is the goal, the ultimate ideal of the habitation tax, the business rental tax, the graded license tax, and the graded property tax. Why not start as near the goal as possible?

(b) Next in importance is the fact that an income tax will force a better administrative system, whereas the substitutes of which I have spoken seem designed from some viewpoints to pamper and coddle the weakness and inefficiency of the assessor. They all seem to be based upon this sort of reasoning, that, whereas the average American assessor is incompetent, therefore let us change our tax laws to fit his incompetence. Any tax which makes impossible demands upon the assessment machinery is, of course, bound to fail. But it is very important that the reform which we advocate should demand as its most fundamental condition the introduction of reasonable efficiency in the work of assessment. Of course there is no necessary reason why administrative reform should not accompany the introduction of these other substitutes for the personal property tax, and the economists who champion them usually insist that they would help to bring about administrative reform. But the average

legislature, I fear, will find in these alternatives merely an excuse to amend the tax laws without rehabilitating the assessment machinery. In the case of the income tax, however, such procedure would be plainly suicidal. In the existing state of economic knowledge on the subject, any legislature which introduces an income tax without providing for fundamental administrative reforms as a condition of its introduction would be guilty on the face of political hypocrisy.