the inheritance taxes. The states which are working out the scheme of tax reform at present rely to a continually increasing extent on corporation and inheritance taxes. A state income tax, in view of the state general property tax, would thus check a salutary movement.

Any one of the above four arguments would in itself be sufficient. Taking them together, their cumulative force is overwhelming. Especially in the more advanced and industrial commonwealths a state income tax would be a step backward, not a step forward. If, however, under the name of the income tax we introduce what are either business taxes or house rental taxes, the situation is very different.

The real difficulty lies at another point. According to the arguments advanced above the income tax should be a federal tax; but from the point of view of revenue the income tax is needed for state and not for local purposes. Why would not a way out of the difficulty consist in having the tax levied and administered by the national government with an apportionment of the proceedsto a large extent at least to the various states, perhaps to be further apportioned to the localities? The method of federal administration and state and local apportionment is one that is familiar to students of public finance, but it has not yet been tried to any great extent in the United States. Some adjustment must be reached whereby the legitimate demands of equality and uniformity may be secured without sacrificing the ends of efficiency and adequacy. The interests of the states must at all costs be safeguarded; but the difficulties inherent in the state administration of what has become national in character must be avoided. I am afraid that Professor Adams has not taken a sufficiently long look ahead.

T. N. CARVER: With the general spirit and purpose of Professor Davenport's admirable paper, I am in complete sympathy. I think, however, that there are different ways of getting at the same result at which he aims. Instead of calling everything capital that is in any way a means of acquiring wealth, I should limit it to what he has called the technological instruments of production, or at least to material things, including perhaps dwelling houses that are rented for an income. But while I should include in the capital column only an inventory of such material, tangible forms of wealth, I should make another in

ventory for the purpose of the theoretical economist; and in this other inventory, or this other column, I should set down opposite the names of the technological instruments, etc., the factors. which enable the owners of the technological instruments to get income from them. In this column I should put down, for example, the disutility involved in waiting. This acts as a check upon the supply of these instruments of production, and gives them a higher marginal productivity than they would otherwise have; and this in turn gives them greater income-procuring capacity. Again, I should set down what Mr. Hawley has called the "irksomeness of risk" as another factor which limits the number of such instruments, or reduces the willingness of men to handle them. This again adds something to their income-procuring capacity. Then there are patent rights, trade secrets, and good will, which still further control or limit the supply of some of these technological instruments and give them a still higher income-procuring capacity. Finally, there are doubtless a great many fraudulent and unscrupulous practices by means of which the same owners mulct the public and still further increase their in

comes.

It seems to me that this arrangement meets the requirements of the theoretical economist better than Professor Davenport's method of putting everything-technological instruments, trade secrets, and unscrupulous practices-all into the same category. His method seems to be putting very unlike things into the same class.

Now the question will next arise, which of these functions that give income-procuring capacity to the technological instruments may be regarded as productive or useful, and which not. Inasmuch as a certain amount of waiting is absolutely essential in order that the world may be supplied with tools, and inasmuch as men do not as a rule like to wait, it seems to me that we should have to agree that that part of the income which is due to that necessity of waiting may be regarded as earned. Similarly with the taking of risk: as to whether patent rights, trade secrets, good will, etc., are productive or useful, and entitle the owner to an income, may be open to discussion. I should think that it would have to be decided independently in each individual case, with the burden of proof on the shoulders of him who denies that the income from these sources is earned.

Of course all unscrupulous and fraudulent methods of business

are not only unproductive, but are positively destructive. Income secured by these means is not only unearned; it is stolen. There are many ways of classifying wealth, but from this point of view we may logically divide wealth into three classes: earnings, stealings, and findings. Incomes secured by these fraudulent methods are stolen. The attitude of the state should be one of complete hostility; there should be no compromise. All such incomes should be prevented or prohibited. On the subject of findings, however, it seems that there must be a compromise. The unearned increment of land, and inherited wealth, are the two most conspicuous examples of this kind of wealth. Though such wealth is not strictly earned, it is entirely false to say that it is stolen. It is like finding wealth; it is wealth which comes to one in a perfectly open, legal manner, recognized and approved by all modern states, and in fact by all civilized society. Only such wealth as may be classified as findings, it seems to me, is fit to be made a special subject of taxation. Stealings, as before intimated, are not fit subjects for taxation; they should be prohibited altogether. But inherited wealth, and the unearned increment of land, may very well be made special subjects of taxation; for the reason that taxes may be raised from these sources without really disturbing or repressing any productive industry. From a purely economic point of view, such taxes conform to the rule of imposing the least possible burden by means of taxation. Tax the products of industry, and you not only tax the payer but you repress industry. Tax these forms of unearned wealth, and you burden the payer, it is true, but you do not repress industry. There is, therefore, less burden imposed upon the community by this form of tax.

H. A. MILLIS: Professor Adams's paper is very interesting and unusually suggestive. It contains a great many things which appeal to me very strongly. The relativity of things is made to stand out clearly. Great emphasis is very properly placed upon the machinery used in the administration of a tax system. The fact is realized that the possibilities of an income tax depend largely upon the details of the law, the details of the administrative system, and the popularity of the tax itself. With all of this and much more contained in the paper I heartily agree.

Professor Adams makes "a plea to the economists of this country to cease declaring flatly that a state income tax is impossible and to formulate the conditions which must be fulfilled to make the

state income tax practicable." He has in mind certain measures and administrative methods which he believes would effect an improvement in the systems now employed in state and local taxation systems in which the general property tax occupies a dominant position. While agreeing with most of what Professor Adams has said and with his assumption that our present systems are very faulty, I wish in the few moments at my disposal merely to point out some difficulties which his scheme-in so far as he has outlined it has not overcome.

In the first place, Professor Adams would exempt from taxation all intangible and a part of tangible personal property. In the second place, he would introduce income taxes levied under a state law, upon assessments made by local officers appointed by and responsible to a state tax commission, the rates imposed being low and prescribed by the state law. His argument calls for (1) a tax upon the incomes derived from business conducted in urban communities and presumably of a local character, without regard to the place of residence of those who share these incomes; and (2) a tax upon the entire incomes of those who reside in these urban communities, without regard to the sources from which their incomes are drawn. The habitation tax would be used as a minimum in assessing personal incomes; no doubt external indicia would be employed in assessing incomes from local business as well.

These two taxes Professor Adams advocates to make good the losses from the exemptions of personal property and to add to the revenues of the treasury, and to make for greater justice in taxation. They are preferred very properly to heavier taxes upon real estate as it is now taxed. They are also preferred to differential rates upon certain kinds of personal property, and such business or occupation license taxes as are now employed in the United States, the Canadian provinces, and many of the European countries.

In passing I may state that I fail to see why the income tax should be regarded as a substitute for the low rates placed upon a few kinds of personal property, as in Maryland, Pennsylvania, and Connecticut, unless the total of the two taxes should become greater than the traffic will bear. Logically, it seems to me that his suggested business income tax should be regarded as a substitute for business taxes levied in lump sums or graded according to gross earnings, as in Louisiana, according to space occupied or rental values of the premises used or otherwise,

while his personal income tax should be regarded as a substitute for the local habitation tax, or a federal income tax.

Professor Adams advocates the net earnings business tax because net earnings indicate ability, while gross earnings, rental values, etc., do not. All of his adverse criticism of such business taxes as are now employed on this continent is well merited. Yet I do not believe that the substitution of a net earnings base would effect an improvement. In the first place, taxpayers do not care to let their profits from specific business enterprises of a local competitive character become known; yet it would not do to keep the records of assessments and of taxes paid secret were it possible to do so. In the second place, in spite of the great improvement which is still possible in administrative methods, the opportunities for fraud and evasion would be too great and corruption would probably follow the introduction of a local net earnings tax. The appeal to the success of our various commissions in dealing with corporation accounts and corporate values carries little weight here, for these state officers have usually not been assessing net incomes for the purpose of taxation. Moreover, the problem of assessing shopkeepers and small business men generally is a difficult one, and one which offers more ways and greater inducement for evasion. It is interesting to note in a few instances in the southern states that rough business license taxes have been substituted for the income tax, because they were more definite and would work. That the delegates to the last Constitutional Convention in Louisiana eliminated the income tax long used for both state and local purposes and retained the business tax levied according to gross earnings, is not without point in spite of the fact that the latter tax is unsatisfactory and has recently been severely criticised. The Province of Ontario introduced a business tax based upon rentals a few years ago and restricted the income tax which had been more or less of a farce. Say what you will, net earnings are in most cases difficult for the assessor to estimate, though, as asserted in the paper, they may be easily enough reckoned by the business man, who must pay the taxes or evade them. My own feeling is that the net earnings business tax would not prove successful here, though in a modified form and under different circumstances it has proved so in Prussia. In most instances, without minima based upon tangible facts, assuming such administrative machinery as we can expect to develop, a net earnings tax would probably be a farce.