income; on $6000 the tax would be $40, which is two thirds of I per cent on the whole income.

A genuinely progressive tax, however, proceeds farther than this. It begins, let us say, with a 1-per-cent tax on the excess above $2000, I per cent more on the excess above $10,000, and I per cent more on the excess above $50,000, and so on. Under this scheme, then, the individual who had an income of $60,000 a year would pay I per cent on $58,000 (the excess above $2000), 2 per cent on $50,000 (the excess above $10,000), and 3 per cent on $10,000 (the excess above $50,000), making a total of $1880. Whether the tax be an income tax, an inheritance tax, or a tax on general property, the principle of the graduated tax is the same.

Canons of taxation. Adam Smith, in his "Wealth of Nations," laid down what have since his day been called the canons of taxation. They are as follows:

(1) The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. ... (2) The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.... (3) Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it. ... (4) Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.1

The first of these relates to the general question of justice; the others are so obviously practical and expedient that there has never been any serious discussion of them. A great deal of discussion, however, has centered round the first. Just what is meant by "in proportion to their respective abilities" has never been definitely decided. At first thought it sounds as though this meant proportional rather than progressive, or

1 Adam Smith, The Wealth of Nations, Vol. II, pp. 414, 415, 416.

graduated, taxation. If we assume that a man's ability is in exact proportion to his income, then obviously if he pays in proportion to his ability he must pay in proportion to his income. But it is contended that a man's ability to pay increases more than in proportion to his income, and that therefore if he pays in proportion to his ability, he must pay a progressive, or graduated, tax on his income or his property. That there is some justification for this opinion is evidenced by the almost universal practice of exempting a certain minimum. The individual whose income is barely able to support him and his family may be said literally to have no ability to pay taxes, and yet he has an income. If his income is slightly greater than necessary to support himself and his family, then he may be said to have some ability to pay taxes. This obviously calls for a certain degree of progression in the way of taxation.

Repressive taxation. The tendency is more and more for expert opinion to favor some sort of progressive, or graduated, taxation as more just than proportional taxation. Just how far in this direction we should go is not easy to determine. It is never wise to kill the goose that lays the golden eggs. Neither is it ever wise to tax anyone so heavily as to drive him out of productive business. If taxes are ever made so heavy upon people who are carrying any large enterprises as to discourage accumulation, enterprise, and thrift, the state will be doing itself an injury. Professor E. A. Ross 1 has suggested a new canon of taxation to add to the four which Adam Smith gave us: A tax should be as little repressive as possible.

The sum and substance of all sound taxation is that the taxes should be as little burdensome as possible. The burden of a tax is twofold. There is, in the first place, the disadvantage to the payer of the tax. It is a loss to him to have to give up his revenue. In the second place, there is the discouragement to enterprise which a heavy tax involves. This is

1 "A New Canon of Taxation" (abstract), Publications of the American Economics Association (1893), Vol. VIII, pp. 49-50.

particularly disastrous when the government is irregular and whimsical in its taxing moods. When producers never know what to expect from the government and its tax collectors, they have little inducement to enterprise. Under such conditions there will be little wealth produced for the government to tax, and things are likely to go on from bad to worse.

In case there are undesirable businesses which the government does not care to prohibit, or undesirable habits which the government does not care to suppress, the repressive power of taxation may be used. Men may then be made to pay for their folly, or to give up their folly to avoid taxation. In extreme cases complete suppression is doubtless better than mild repression; in milder cases, such as luxurious consumption, ostentatious dressing, etc., the mildly repressive effect of a tax is desirable.

CHAPTER XLIV

THE FINANCING OF A WAR

What is meant by the financing of a war. By the financing of a war is meant the keeping of the National Treasury supplied with money with which to purchase military supplies and pay other war expenses. This problem should be kept distinct from the physical problem of producing supplies and war materials. The latter is a problem not for the financial expert but rather for the industrial engineer, the business manager, or some other expert in the organization and coördination of the factors of physical production. While the financial problem is one of tremendous importance, it is not only less important but also very much less difficult than that of producing the supplies themselves.

Financial problems less difficult than problems of production. Difficult as is the financial problem, all the factors are within the control of the government, or at least of the people behind the government. Consequently, if they fail in their attempts to handle the problem, they have only themselves to blame; their failure cannot be laid to the physical difficulties or to factors which lie beyond their own control. In short, the failure will be due to the stupidity of their rulers or of the people who refuse to support a sound financial policy on the part of the rulers. The problem of producing supplies, on the other hand, especially on the part of a beleaguered country, may depend upon factors which lie beyond the control of either government or people. For example, the difficulties of the South during the Civil War were on the physical side insuperable; they were hemmed in by blockading fleets and invading armies. On the financial side, however, their difficulties were

of their own creation. In other words, the difficulties in the way of supplying themselves with horses, salt, nitrogen, and a number of other necessaries were insuperable, but the difficulties which they, as well as the Northern people, had in finding money with which to pay for such supplies as they could get were within their own control.

In most of our discussions of the problems of war finance, too little attention is given to certain large elementary principles. The practical financiers are fully absorbed with the details of the problem, and the financial writers in the ephemeral press are more concerned with finding out what the people want them to say, and then saying it, than they are in getting at the root of the problem.

Speeding up the circulation of money. One large economic fact which greatly simplifies the financing of a war is that an increase in the rapidity of the circulation of money has, in all essential particulars, the same effect as an increase in the physical quantity of money. To double the speed of circulation, for example, enables a given quantity of money to do twice as much work. Analogies, though often dangerous, are sometimes useful. A useful one is found between the circulation of blood in the human system and the circulation of money in the country. When increased muscular exertion calls for increased supplies of blood in the limbs, it is not necessary to increase the total volume of blood; the need is met by increasing the rapidity of the circulation. But in order that the heart may send increasing quantities of blood per unit of time to those parts where it is demanded, it must have means of getting increased quantities per unit of time back again from the extremities; in other words, the problem of getting the blood back again is obviously as important as that of pumping it out to the places where it is needed. The National Treasury is confronted by a similar problem in time of war. It is called upon to send out money in increasing quantities to pay the enormously increased expenses of the government. In order