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either a surplus or a deficit at the end of the fiscal year, and the state is powerless to determine which way the balance will be. Further the taxpayer does not take as keen an interest in the expenditure of his money as when he pays it directly into the public treasury and consequently does not hold the public officers to the same strict accountability. We contend for the principle that tax contribution and demand for revenue shall act and adjust themselves each to the other."

231. Taxation of Personal Property *

It was for a long time a theory of American finance that all property should be taxed equally at a certain valuation, but with the growth of enormous masses of wealth in the form of intangible securities which escape assessment, serious defects have become apparent in the application of the old principle, and a demand has come for its abandonment. The problem is fully considered in the recent report of the Minnesota Tax Commission:

property

tained.

The criticism against the general property tax has been directed Why the personal almost wholly toward the personal property side of the tax. Commission after commission, author after author, and expert tax is reafter expert, have fulminated against the tax upon personal property. Despite these criticisms this form of tax still continues to stand on the statute books in many states as well as in Minnesota. The general fear has been that its removal or modification might result in an increase in the burden upon real estate, which is regarded as a fundamentally just and practically workable tax. This contention has no little weight and will check any change in the personal property tax until the owners of real estate are satisfied that the tax burden on their property is not increased, but lessened, by the alteration of the law.

As has been shown in some degree in previous chapters, the The burden on tangible assessment of personal property is a matter of the greatest difficulty personal not only in determining the values but in locating the property. In property. most instances the assessor is compelled to ask the value of stocks of goods, to use an average value for determining the assessment against

No increase in personal property returns.

Small returns of bank deposits.

live stock, and, when it comes to the existence of intangible property, to depend entirely upon the word of the owner. A great deal of personal property necessary to the existence of every home is unproductive; sewing machines and pianos pay no visible money return to their owners, but are listed because they can be seen. On the other hand the owner of so-called intangible wealth refuses to list it, either because it is easily concealed or because the tax rate is such a large part of the income derived from the property that to report it practically means confiscation of the income. Thus the anomaly exists of tangible non-earning property paying a heavy tax and intangible income-bearing wealth going into hiding and escaping the payment of its share of the tax burden.

In the last ten years the personal property returned by the assessors in Minnesota is about one-fifth of the total assessment, and the credits and moneys returned will average about one-fourth of the personalty. This close approximation to a given proportion indicates hide-bound methods of making assessments and the return of practically the same amount of goods each year except as the aggregate is increased by the growth of population. Testing this statement by a comparison of per capita returns for assessments, it will be found that the per capita assessment of personal property is no larger in 1905 than it was in 1880, though the per capita total assessment grew from $343.91 in 1880 to $443.71 in 1905. The per capita returns. for credits in 1880 and 1905 are practically the same, but less than they were in 1885 and 1890.

The conclusion to which all of the facts brought forth in the various tables trend is that the burden of the general property tax falls upon the real estate and the familiar everyday classes of property known to every one. The return of moneys to an amount less than four per cent of the deposits in banks is evidence of defects in the law and the method of making assessments. The law fails to distinguish between types and kinds of property, regarding them as alike, whether big or little, and whether income earners or unproductive; the assessment was wrong in method when inaugurated and has steadily grown more unsatisfactory as

the machinery of assessment has had to cope with larger and more difficult problems.

for false returns.

Despite the showing made of the inadequate returns of the per- Penalties sonal property tax even under coercion, there are men who believe the general property tax law can be enforced and who call for more stringent methods, asking that men be punished by imprisonment and confiscation of their property for falsification of returns. While it is not generally known, Minnesota has a law on the statute books which is severe, yet it seems to have had practically no effect in securing better enforcement of the law regarding assessment returns. The law reads as follows: "Every person who, in making any statement, oral or written, which is required or authorized by law to be made as a basis of imposing or reducing any tax or assessment, shall wilfully make any statement as to any material matter which he knows to be false, shall be guilty of a gross misdemeanor. Whoever shall be convicted of a gross misdemeanor for which no punishment is prescribed by any statute in force at the time of conviction and sentence shall be punished by imprisonment in the county jail for not more than one year, or by fine of not more than one thousand dollars."

Ohio and Iowa have resorted to tax ferrets to get at their hidden personal property. Such officers were given large rewards in return for discovery of property upon which back taxes could be collected. The result was unsatisfactory, forcing men to leave the state, and reducing rather than increasing the amounts of property on the personal property rolls. The signers of a supplemental report made by the New York special tax commission in 1907, stated that: "Every possible attempt has been made to enforce the personal property tax. We have had lenient measures and listing bills; self-assessments and official assessments, 'tax inquisitors' and 'tax ferrets.' We have had taxation of debts and exemption of debts. . . . We, therefore, brush aside as undeserving of any serious consideration, the proposition to remedy the present evils of personal property taxation, by attempting to make

The failure methods.

of drastic

Exemption of intangible wealth.

the law more rigorous. What has been tried so often and always so unsuccessfully everywhere else will not succeed here."

The Massachusetts tax commission of 1907 had this to say about the Ohio laws: "It will be seen that the law makers of Ohio have about exhausted human ingenuity in inventing drastic methods of securing the disclosure of personal property. The only known expedient which they seem to have overlooked is the use of torture, which was employed in the Roman Empire to force reluctant tax payers to disclose their personal estates. What has been the result of the drastic measures which Ohio has seen fit to employ? From the reports of the State Auditor we learn that in 1870 personal property, including, according to the Ohio classification, the property of railroads and some other corporations, amounted to 38 per cent of the total property assessed for taxation; in 1905 it amounted to 31 per cent; so that in Ohio, as elsewhere, an increasing proportion of the burden of taxation has fallen upon real estate."

A second group of critics and advocates recognize the defects of the personal property tax and feel that it cannot be enforced when in direct opposition to economic law. They therefore call upon the legislatures to abolish all taxes on credits and intangibles and to establish a system of franchise, gross earnings, habitation and license taxes in lieu of the one now so generally existent. Their argument for the exemption of credits, moneys and other so-called intangibles is the familiar one that personal property, if returned for taxation at the regular tax rate and the cash value of the property, may pay a tax equal to one-third or one-half of the income. In addition, the point is made that promissory notes, bonds and obligations of different kinds are not tangible, but have their being through the ownership of existent tangible property; in other words that credits, not being property, their taxation, if permitted, would result in double taxation.

Much of this contention can be admitted, yet the courts have repeatedly held that credits are property subject to taxation. To the average man, a security, be it bond or stock, mortgage or mere credit, is a demand for purchasing power which men seek and prize

highly. In the opinion of the community the man who owns securities and receives an income from them because of his ownership, ought to share in the burdens of the community by paying something in the form of taxes. No one denies this proposition; the advocate of the personal property tax insists he shall do it directly, while the contender for no tax on credits and securities maintains that he does it indirectly, the whole matter being a question of economic adjustment. To add taxes means higher rates of interest, which the borrower must always pay, not the man who lends.

Between the two positions described above is a third, which A middle ground. recognizes something of the contention of both by taking what is essentially a compromise position. Income, rather than the value of what is taxed, is the keynote to the third view of the personal property tax. The procedure from this point of view is, briefly to exempt from taxation some tangible property in the form of household goods, live stock, and mechanics' tools, and to place upon credit, stocks, bonds, moneys, mortgages, and promissory notes a moderate tax which will not be confiscatory, but eminently fair. In two states this method of taxation has been tried with results that stand out in marked contrast to those attained in states using the personal property tax. In Pennsylvania the assessment of intangibles reached in 1907 the enormous sum of $1,014,000,000. In Maryland, the assessors of the city of Baltimore alone secured an assessment of $150,000,000 upon intangibles in the same year.

A minority of a special Tax Commission which reported on taxation in New York in 1907 made an indictment of the personal property tax:

erty tax.

We, the undersigned, members of the Tax Commission, have The failure of the persigned and concur in the conclusions and recommendations arrived sonal propat in our main report, but beg herewith to submit an additional and supplemental report for the taxation of incomes as a substitute for the present tax on personal property. We deem the following facts have been fully established before this Commission.

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