I. GeneralEarl R. Rolph
II. Personal Income TaxesJoseph A. Pechman
III. Corporation Income TaxesArnold C. Harberger
IV. Property TaxesDick Netzer
V. Sales and Excise TaxesJohn F. Due
VI. Death and Gift TaxesCarl S. Shoup
Taxation is a general concept for devices used by governments to extract money or other valuable things from people and organizations by the use of law. A tax formula contains at least three elements: the definition of the base, the rate structure, and the identification of the legal taxpayer. The base multiplied by the appropriate rate gives a product, called the tax liability, which is the legal obligation that the taxpayer must meet at specified dates. A tax is identified by the characteristics of its base, such as income in the case of an income tax, the quantity of distilled spirits sold in the case of a liquor tax, and so on. The rate structure may be simple, consisting of one rate applying to the base, such as a specified number of cents per gallon for a tax on gasoline, or complex, for example, varying rates depending upon the size of the base for a tax on personal income.
Taxes may be assessed in money or in kind. The government of Communist China imposes taxes on peasants assessed in units of grain produced, and it requires payment in grain itself. In the American Confederacy, because of the deterioration of the Confederate money during the latter phases of the American Civil War, some taxes were assessed and collected in terms of commodities. In American frontier settlements of the eighteenth and early nineteenth centuries, the local governments formed by the people in the region commonly imposed taxes by requesting that each adult male work a given number of days constructing community facilities such as roads and schools. The modern-day counterpart of this practice is conscription of men for service in the armed forces, although conscription is not generally considered as a tax. The dominant practice, however, in the contemporary world is the assessment of taxes in money and the settlement of the tax liability by the payment of money.
Taxation presupposes private ownership of wealth. If a government owned all wealth in a society, including the wealth embodied in people, it would obtain all income, and there would be nothing to tax. No government has gone to such extremes in concentrating the wealth of a society in its own hands. Even in highly socialized societies, such as the Soviet Union, people are permitted, subject to restrictions, to own themselves, household goods, savings accounts, and money. Taxation therefore becomes feasible. Nevertheless, the more wealth a government itself owns, the less is taxation necessary, because revenue from the management of assets is a substitute for tax receipts. National governments, with the exception of some of the highly socialized countries, typically find themselves on the other side of the ledger, having on balance negative net worths apart from their taxing power. Some local governments in western Europe and the United States have substantial revenues from government-owned facilities such as electric power plants, municipal water facilities, and transport systems. The profits from the management of these facilities are occasionally sufficient to permit a government to dispense with taxation altogether.
Taxes are to be distinguished from prices imposed by a government for goods and services that it provides. A price is a money payment made as a condition of obtaining goods or services. It serves as a rationing device provided that the price is positive and provided that the amount of the goods or services the buyer receives in return depends upon the price. If a government supplies water and charges according to the amount of water taken by the buyer, the device is a price and not a tax. Borderline cases arise in two types of circumstances: (1) when a charge is made as a condition of an all-or-none choice, such as a fee for a license for an automobile as a condition of operating the vehicle on any public highway; or (2) when a government imposes a requirement that the citizen use a service and then charges for the service taken, such as a requirement for a passport for foreign travel accompanied by a charge for the passport. In situations in which the element of government compulsion enters significantly, it is customary as well as reasonable to treat the charge as a tax rather than as a price.
Classification of taxes . Taxes may be classified in various ways. Since a tax is a formula of three ingredients—a base, a rate structure, and identification of the legal taxpayer—a common characteristic of any of these three elements may be employed for grouping. Thus taxes may be classified as personal or business. In such a classification, a tax on beer is a business tax because business organizations are in fact the legal taxpayers. More commonly, taxes are grouped on the basis of similarities of the tax base; for example, commodity taxes refer to all taxes in which the production or sale of commodities becomes the occasion for a government levy. Even though personal income taxes vary widely in their characteristics among countries, the presumed common element of the tax base—personal income—is used for grouping purposes.
Perhaps the single most widely used distinction is between what is called “direct” taxation and what is called “indirect.” This is a classification based on certain presumed effects of various taxes. A direct tax in this usage refers to one in which the legal taxpayer cannot shift any of the tax liability to other people, such as customers or suppliers. A clear illustration of a direct tax is a lump-sum charge levied on a person—sometimes called a head tax or poll tax. Income, death, net worth, expenditure, and sometimes property taxes are commonly classified as direct. Indirect taxes refer to those that are thought to be shifted from the legal taxpayer to others. Commonly, taxes on sales of commodities, import duties, and license fees are grouped together as indirect.
By postulating common effects of various taxes, the direct-indirect classification becomes subject to two serious defects. The effects of a particular tax device are not intuitively apparent; their discovery entails careful scientific investigation. It is thus awkward to employ a classification that begs these questions in advance. There is the further difficulty that the shifting of a tax by the legal taxpayer to others may occur in various degrees from 0 to 100 per cent. If a particular tax is proved to be shifted to others by the amount of 25 per cent, for example, the direct-indirect classification becomes irrelevant. One should have to say that the tax is 75 per cent direct and 25 per cent indirect. The difficulty arises because an all-or-none test is used when the relevant distinction is one of degree. For these and other reasons, the direct-indirect classification, although widely used in reporting revenue data, is usually avoided in scientific investigations.
Among other possible dichotomous classifications, taxes may be divided into those described as systematic means-test devices and those without this characteristic. Personal income, expenditure, and net worth are examples of means-test taxes: taxes whose base is systematically related to some relevant index of the taxpayer’s economic position. Personal income, the money gain a person experiences over a period, may be, and commonly is, looked on as a measure of his economic position. An expenditure tax treats the amount spent for personal living expenses or consumption as the index of relative economic status. Likewise, net worth, the value of assets possessed minus debts owed to others, may be used as such a measure. When the purposes of taxation include large yields and systematic redistribution of economic power, some form of means-test taxation must be employed. Although other taxes can also provide large yields, they are likely to be erratic in their effects on income distribution.
Functions of taxation . Any tax that has a yield extracts money from people or organizations and provides money for a government. As a result of a tax formula, taxpayers find themselves with less money to spend; governments, on the other hand, find themselves with more money. This transfer of money from people to government gives rise to two functions of taxation: a reduction in the spending potential of the private sector and an increase in the spending potential of the public sector.
Revenue. The negative function of reducing the spending potential of people often may be viewed as an unfortunate by-product of taxation. Few city officials, for example, would applaud the fact that as a result of the imposition of local taxes, the local citizenry has less money to spend. For local government units, it is the financial needs of the government that justify taxation. Until recent decades, this view was assumed correct for all levels of government; taxation was believed to arise solely out of the financial needs of governments rather than from a public objective of reducing citizens’ spending power.
A sovereign government with an advanced type of financial system controls the money system and, as one feature of this control, can if it wishes provide itself with unlimited quantities of money at negligible cost. This power arises from the use of national monies in the form of bank deposits and currency as opposed to commodities, such as gold and silver, whose quantity cannot be increased by government decree. A national government need no longer levy taxes in order to finance itself.
The discovery of the power of governments to free themselves from internal financial constraints has a long and complicated history. By the time of the Napoleonic Wars, the British government had discovered the convenience of having the Bank of England provide it with funds. In America, the colonies experimented rather freely with the money-issuing power; Massachusetts has the distinction of being the first government in the world to issue paper money. Yet the necessary institutions for the exercise of this power did not exist in the United States at the time of the War of 1812, and the federal government for the first and only time in its history found itself literally bankrupt. World War i was the first occasion when the power to finance government by creating money was freely used by all major belligerents. This financial power was clearly recognized by governments during World War n and was used on a vast scale. In the contemporary world, the possibility of national governments having insufficient money to finance their internal expenditures is no longer a real one. Thus, the amount of revenue to be raised by taxation depends on policy objectives rather than on government financial necessity.
Even though sovereign governments have freed themselves from financial constraints, the revenue function of taxation has not disappeared; this function becomes that of regulating private expenditures so as to stabilize employment and the price level. During periods of insufficient private expenditures, for example during recessions, a national government may allow its revenues to fall automatically and, in addition, may take steps to reduce effective rates of tax in order to increase private expenditures. Similarly, during periods of excessive expenditures, tax rates may be increased as a depressant measure. Even as late as the 1930s, few governments possessed leaders who understood the policy choices available; through fear and desperation they took steps to increase tax rates when effective recovery called for tax reduction. Thanks to the spread of economic intelligence, such serious errors in financial policy are unlikely to be duplicated should a serious world depression ever again develop.
Resource reallocation. In addition to the revenue function of taxation, taxes may alter the product-mix generated within the private sector. In Great Britain, for example, such commodities as automobiles, household appliances, liquor, and tobacco are made more expensive by taxation, whereas such items as milk, vegetables, meat, cider, and household help are made less expensive, in part through subsidies, or negative taxes. As a consequence, the British people use rather more of the latter group of commodities and rather less of the former. The tax-induced change in the product-mix comes about through the effects of taxes on prices and quantities produced. British manufacturers of electric dishwashers, for example, being confronted by a heavy tax on these goods, charge higher prices for them, and so the number these companies can profitably sell is curtailed. The labor and capital services not used to produce dishwashers as a result of the curtailed output of them are devoted instead to the production of other commodities that are lightly taxed or not taxed at all. These other commodities are therefore made more abundant and sell for lower prices. From the point of view of buyers, this alteration of the product-mix benefits those who happen to like the lightly taxed commodities and injures those who prefer the heavily taxed goods. Whether the entire consuming public as a whole can be said to be better off or worse off as a result of the alteration of the product-mix depends on whether an optimum is defined in terms of consumer preferences as expressed in the market or as expressed through political processes. [See Consumer Sovereignty.]
Almost all actual tax devices commonly used by governments display some features that may alter the pattern of productive activities in the society. Personal income taxes as found in the Western world define the tax base incompletely, leaving some gains subject to little or no tax. In the administration of net worth taxes in the Scandinavian countries, agricultural land in comparison with other types of assets is appraised lightly for tax purposes. Value-added taxes, as employed in the state of Michigan and in France, completely omit important types of value-adding activities from the tax base. In all such cases, the tax system encourages some activities over others. Although complete neutrality of a tax system can never be achieved in fact, actual tax systems become more neutral as their coverage of economic activities becomes more general.
As tax systems have developed, they have tended to favor activities of a nonmarket character, such as leisure, production of goods for personal use instead of for sale, and “do-it-yourself” projects in general. Governments have difficulty in catching such gainful activities in their tax net and, with occasional exceptions, do not attempt to do so. Consequently, and for political reasons also, tax policies in advanced countries generally favor agricultural over industrial activities.
Income redistribution. A further main function of taxation is the redistribution of economic power as measured by income or wealth. With respect to money income, a tax system is distributionally neutral if it reduces each person’s income in the same proportion. Taxation may be systematically progressive in the sense of taking an increasing proportion of income increases. Technically, a tax system is defined as progressive if the marginal rate of tax with respect to income exceeds the average rate of tax, provided marginal rates do not exceed 100 per cent. Regressive tax structures refer to the opposite case. In this context, “proportional,” “progressive,” and “regressive” describe the effect of the entire tax system on the distribution of income.
Accompanying the development of democratic political institutions in the Western world, various ethical ideas arose concerning the appropriate criteria for evaluating taxes. The dominant ethical idea that emerged is the “ability-to-pay” doctrine. This rather vague expression is intended to provide a justification for tax systems that are systematically progressive as opposed to those that are proportional, regressive, or merely erratic. Income is usually taken as the appropriate measure of personal ability-to-pay, although net worth and expenditure have also been advocated as appropriate measures. The concept of ability-to-pay implies both equal treatment of people with equal ability, however measured, and a progressive rate structure. The ability-to-pay doctrine has strong affinities to egalitarian social philosophy; both support measures designed to reduce inequalities of wealth and income.
Strict adherence to the test of ability-to-pay, when income is used as the measure of ability, would call for a monolithic tax structure restricted to personal income taxation. Logically, the idea implies systematic negative taxation as well. If a person with a modest income pays zero tax, a person with an even smaller income should pay less than zero tax—that is, receive a subsidy—to achieve appropriate differences in the treatment of people with different tax-paying abilities.
In the development of actual tax systems, only modest success can be claimed for reducing the incomes of the very wealthy by tax measures— even in countries such as the United States, Great Britain, and Australia, all of which use progressive income taxation and have been governed over appreciable periods of time by groups unsympathetic to economic plutocracy. There is little evidence to suggest that in these countries taxes have substantially reduced the wealth of the very wealthy, despite the apparent high rates of tax on large incomes and large estates.
By far the most important government measures used to reduce income inequality have been government welfare programs. Various social services, such as medical care, education, and income maintenance in the form of social security programs, have mitigated the economic hardship of low-income groups in Western countries. These programs directly raise the money incomes of the unemployed, the aged, and the incapacitated; they also potentially raise the consumption of all qualifying groups by providing some services free or at nominal cost. In some Western countries, the programs have virtually eliminated grinding poverty; they have not achieved this goal in the United States.
Shifting and incidence . A tax is said to be shifted if the legal taxpayer can by some means force others to contribute extra amounts of money to him because of the presence of the tax. Shifting is therefore achieved in degrees ranging from zero, that is, no shifting, to 100 per cent, or complete shifting. To the extent a tax is shifted from the legal taxpayer, such as the proprietor of a retail establishment in the case of a retail sales tax, other people are thereby selected to contribute to the government. Actually, full explanations of tax shifting require the determination of the true amount each person must pay to governments, including the amounts shifted to him, so that at least in principle the investigator can state precisely the amount of money a person or family contributes to government per unit of time. Nothing approaching this precision has yet been achieved in any country. It is a safe generalization that the typical citizen goes through life never knowing, even within wide limits, how much in tax he is actually paying.
The concept of tax incidence, sometimes called tax burden, is closely related to that of tax shifting. If, of the taxes imposed by a government, none are shifted at all, the incidence of a tax is said to fall on those who are the legal taxpayers—those persons who would be sued by the government for failure to pay the amounts specified by the tax formula used. In this event, the incidence of the tax holds few mysteries. The concept does involve difficult issues, however, if a tax is shifted in whole or in part. The concept of tax incidence is concerned with the identification of the persons who “finally” or “ultimately” pay the tax liabilities as opposed to those who, although legally required to pay money to the government, are acting wholly or partly as intermediaries in the tax-collection process. Thus, legislators in voting taxes on such items as liquor or cigarettes do not ordinarily assume that the vendors of these commodities are “really” paying the tax because legislators ordinarily operate on the theory that vendors can pass along the tax to buyers. Granted the validity of the theory, the incidence of the tax falls on these buyers.
Theories of tax shifting and incidence exist in great variety. Insofar as a consensus can be found, it is that means-test taxes (for example, income taxes) either are not shifted at all or are shifted only to a trivial extent and that commodity taxes, including import and export duties, are largely shifted from the legal taxpayers to others. The incidence of the general property tax imposed by local governments in the United States, company (corporation) profits taxes, taxes on the transfer of physical and financial assets, and of many minor levies is analyzed in many different ways; no definite consensus can be found among experts on the subject.
Differences in analysis of various tax devices reflect differences both in the general theoretical framework deemed appropriate to explain economic events and in the precise manner in which the investigator views the device being studied.
Tax theory has developed mainly as a by-product of classical and neoclassical economic theory, as exemplified by the works of such thinkers as Adam Smith, John Stuart Mill, W. Stanley Jevons, and Alfred Marshall. Continental general equilibrium approaches, mainly through their influence on such American thinkers as Irving Fisher, have, after a considerable time lag, become important in the explanation of the effects of various taxes. The Keynesian system of thought has a large and devoted contemporary following; it is widely used to explain the effects of entire fiscal systems. More recent theoretical work has been dominated by model building, often of a highly esoteric kind, constructed with such highly simplifying assumptions that government only rarely gets into the picture at all . Given the variety of approaches to the explanation of economic events, a generally endorsed approach to the explanation of how taxes are shifted and in what amounts cannot be expected.
Real income approach. The question of just what the investigator is attempting to explain in connection with taxation is also approached in different ways. A major disputed issue is the alternative, implicitly or explicitly presupposed, to the tax under investigation. Some students define the problem as the effects of the tax together with some government expenditure assumed to be financed by that tax. Accordingly, the problem of explaining a personal income tax is looked upon as including the effects of certain or all of some government expenditures. This approach is adopted more or less automatically by those who view economics as fundamentally a “real” system, meaning a system in which money is assumed to be absent or in which money is viewed as a purely passive device to effect exchanges, having no distorting effect on price relations among goods and services. In this approach, a tax is viewed as levied in goods and services that the government either uses directly in its affairs or trades with private individuals to obtain the goods and services used in its expenditure programs. Explanation consists of showing how the combination of income taxation and the assumed expenditures changes relative prices, quantities produced, and the amount of leisure taken. The incidence of the tax-expenditure combination is believed to be established by showing what groups experience a decline in real income.
This approach has little appeal to most students of public finance because of its remoteness from reality. (It remains, however, the dominant approach to the analysis of the incidence of import duties in pure international trade theory.) It has the further defect, apart from its restrictive assumptions, of identifying particular taxes with particular government programs, when in fact neither a government nor an individual can generally determine which expenditure is financed from a particular tax or income source. Logically, the approach is inherently incapable of isolating the effects of a tax as such, because a tax apart from expenditures is undefined. Since, in fact, government programs can take on any of a great variety of forms, including negative taxes (subsidies), the approach in principle can only give answers for each of an indefinitely large number of possible combinations.
Money income approach. A relatively recent approach, what may be called the “income theory” of tax incidence, views the basic problem of tax analysis to be the determination of the portion of each person’s income diverted to the government by a tax. This approach finds that any tax that provides a government with revenue must simultaneously make the after-tax money income of some people who work or own property smaller by the amount of the revenue. The investigator, accordingly, attempts to identify, for each tax device, those persons whose after-tax incomes are curtailed. In this approach, government expenditure for goods, services, or assets enters as a factor determining demands for current output and as analytically distinct from revenues.
This approach to taxation can be explained by illustration. A tax on cigarettes, for example, is commonly believed to be paid by cigarette smokers. According to the income theory, such a tax reduces the money incomes of certain groups. People, as buyers of services and goods, including cigarettes, are prepared to spend some dollar amount per period. The demand schedule for cigarettes being highly inelastic, a change in price results in little change in the quantity purchased—the tax raises the price of cigarettes by almost the full amount of the tax per unit, and the dollar amount spent on cigarettes increases. Given constraints on total private expenditures, the amount spent on other commodities diminishes. If these “other commodities” consist of all commodities other than cigarettes, all industries find the demands for their products lowered and all will earn lower incomes. If these “other commodities” consist of a narrow class of commodities, such as food, the industries, including agriculture, producing these goods experience reduced prices and reduced income. To only a small extent, because of the low price elasticity of the demand for cigarettes, do tobacco companies and tobacco growers also experience lower profits and wages. The product-mix changes only slightly in this case. If a tax is placed on cornflakes, the pattern of results would be somewhat different. Cornflakes, being one of a great variety of breakfast foods, has a highly elastic demand. The tax would increase the price of cornflakes, greatly reduce the amount bought, and drive resources out of cornflake production. In this case, the companies and workers in the taxed industry would experience lower incomes.
There is no shifting of a general tax on income or net worth; taxpayers experience a lowering of their after-tax income and no incentive is created to reduce further other factor incomes. Commodity taxes, import duties, retail sales taxes, and expenditure taxes are shifted more or less, depending upon the setting where they are used. Property taxes of the American type, where the tax base is mainly the assessed value of real estate, business equipment, and inventories, present complications because of the great diversity in effective rates within and among local jurisdictions and because of the benefit element of local expenditures to owners of taxed property. Property taxes can be shown to reduce property income in general and to be progressive with respect to total income.
The income theory of tax incidence applies in a symmetrical manner to negative taxes, such as subsidies to the production of some food products in Great Britain and to income-maintenance social security programs. The incidence of negative taxes refers to the identification of the ultimate recipient and the amount he receives. As is the case with ordinary taxes, the problem is to identify the private counterpart of the government’s financial transactions.
The income theory of tax shifting, as the name implies, treats government income as arising at the expense of private income. Tax revenues are treated as a form of transfer income—as are interest paid to owners of debt instruments, dividends paid by corporations, and pensions and social security payments made by governments.
Role of determinant price systems. In order to arrive at definitive conclusions, all theories ’of tax shifting need a pricing system that is determinant as opposed to one that is capricious or random. If prices of commodities depend on what executives of corporations eat for breakfast, the incidence of corporation income taxes or commodity taxes cannot be definitively ascertained. Actual price systems in Western countries exhibit capricious elements arising from market power, illustrated by the pricing of some varieties of labor services, government price regulation based on concepts of fair return and historical costs, and many others. Systematic tax theory, like the economic theory of which it is a part, assumes the orderly features of price systems and fails to the extent that the actual world lacks these characteristics. Economists differ widely in their outlook on the degree of orderliness exhibited in contemporary societies; some find that the economic world neatly illustrates the properties of a perfectly competitive pricing system, and, at the opposite pole, others find no system to explain and as a consequence deprecate economic theory.
Taxation and fiscal policy . The main financial weapons of a national government are its expenditures on goods and services, transfers (including negative taxes), taxation, public debt management, and monetary policy. Some or all of these may be manipulated to alter the level of total expenditures by all groups in the economy and at the same time may be used to alter the pattern of these expenditures.
The deliberate manipulation of taxes for the purpose of achieving full employment is subject to both political and economic constraints. The reduction of effective rates of tax, for example, may be irreversible because of political objections to tax rate increases. In addition, taxes have other functions besides revenue, such as resource reallo-cation and income redistribution, and these functions may be partly defeated by changing the tax structure for purposes of influencing private expenditures. These considerations do not imply that the manipulating of effective rates of tax poses insurmountable difficulties; only that the difficulties must be recognized and, if possible, weighed when making a final decision.
Taxes are interdependent among themselves and also interdependent with other fiscal weapons. A reduction in taxes on company profits leads to increased revenue from a personal income tax because some portion of the increase in after-tax profits will appear as an increase in dividends. Different taxes compete for the income of owners of resources; an increase in the effective rates of one tax reduces the yield of others. In selecting taxes to manipulate in influencing private expenditures, these repercussions on other tax yields must be taken into account if the desired total change in revenues is to be achieved.
Taxes are also interdependent with other fiscal devices. In Western countries, and many others as well, national monetary systems are banking systems characterized by bank creation and destruction of money, fractional reserve requirements, and central bank determination of changes in bank reserves. Treasuries must conduct their finances within this institutional framework. Effective fiscal policy presupposes cooperative central bank policies; otherwise, fiscal measures designed to stimulate the economy may be offset by monetary measures. A main problem in financial administration remains that of effective coordination of fiscal and monetary policies. They are so closely interdependent that some students prefer to speak of national financial policies rather than of two sets of policies, fiscal and monetary.
The use of taxation as a weapon to influence private expenditures becomes feasible to the extent a treasury is free from financial constraints, and freedom from constraint implies access to an unlimited amount of money. Central banks are the institutions that have the power to create money in any amount. If, then, a government decides, for example, to reduce effective rates of tax as a stimulating measure during a depression, its treasury will initially find itself depleting its cash position or, in the case of European national treasuries, will be increasingly in debt to the central bank. If the treasury department sells public debt or if the central bank does so instead, the cash released to taxpayers is reabsorbed by net sales of public debt. Depending on the circumstances, these combined actions may be perfectly offsetting, or they may on balance be stimulating or depressing with respect to private expenditures on goods and services. If a stimulating combination of measures is to be assured for a given amount of tax reduction, the maximum is achieved if no debt is sold to the public at all. In this event, with a fractional reserve system of banking, bank reserves increase at the rate of the tax cut. Such increases in bank reserves, given the practice of relatively low fractional reserve requirements or customs, would lead to a potential increase in the amount of money so exceedingly large for even modest tax reductions that central bankers would almost certainly feel obliged to offset them in part. Perhaps a more relevant definition of zero offset is a central bank response to a tax-rate change that permits the quantity of demand deposits plus currency in the hands of the public to change by the change in the yield of the tax systems. In actual practice, however, it would be rare to observe such a result. Normally, central banks and treasuries, when tax cuts are made, use debt operations to offset a sizable fraction of the tax change. For this and other reasons, faith in the efficacy of tax changes to influence the economy must be tempered; one must examine what response, in terms of changes in the size of the outstanding debt, may be expected.
World tax structures . In advanced countries, tax revenues range from a high of about 35 per cent of the gross national product in West Germany to a low of about 21 per cent in Japan; the United States government (federal, state, and local) takes an amount equal to about 25 per cent of the gross national product. Such comparisons may, however, be misleading. In advanced European countries, provision for retirement income is usually made through government programs, whereas in the United States various private pension plans supplement in substantial amounts the federal social security programs. Were retirement deductions from the remuneration of employees counted as taxes, the United States would rank closer to such high-tax countries as West Germany, Sweden, and France in effective tax rates.
International comparisons also neglect negative taxes such as family allowances, subsidies, and social security transfers, creating an impression of heavier taxation of the average household than would data showing both the amount taken in tax and the amounts received in the form of government transfers. Net tax data have unfortunately not been systematically compiled for purposes of international comparisons.
The structure of tax systems reflects the political and social characteristics of national groups. France, a country of high taxation, relies heavily on value-added taxation, whereas the United Kingdom, also a high-tax country, relies heavily on income taxes. The. United States, being a federal political system with long traditions of local financing of local functions, employs many taxes that can be administered at the state and local levels, resulting in a highly complex combination of taxes, such as federal, state, and even local income taxes, state and local retail sales taxes, and the continuation of the important, though generally criticized, local property tax. A centralized system of taxation as found in France would be alien to the mores of Americans. Tax systems, to be workable, must be in keeping with popular feelings and beliefs. This consideration explains why politicians may succeed when tax experts, especially foreign experts, fail in attempts to redesign a country’s tax system.
Of the developing nations, apart from some oil-rich countries, few are in a position to impose taxation at the effective rates found in advanced European and English-speaking countries. Mass poverty, weak public administration, and the concentration of political power in the hands of wealthy groups rule out heavy taxation. Tax systems in these countries ordinarily consist of import duties and, in a few, export duties, transaction and commodity taxes, low-rate income taxes, land taxes, and some form of death tax, usually of the inheritance type. India uses systematic income taxation, although less than 10 per cent of the population is subject to it. As these poor countries develop, their tax systems may be expected to develop as well, and in the direction of higher effective rates of tax.
The outlook generally is for continued high-level taxation where already found and increasingly high effective rates of tax elsewhere, with the possible exception of the communist countries. From a long-run point of view, revenue requirements of government are closely geared to government expenditure and transfer programs. The goods and services that governments provide are looked upon as superior to alternative private commodities, with the consequence that, even apart from military programs, government expenditures exhibit a long-run tendency to rise relative to national income. This tendency is not inevitable and may be reversed. Yet continued urbanization alone, with all that this development implies for government action, may be sufficient to assure relatively expanding government programs. In addition, the welfare state has already demonstrated its political popularity in the Western world, and, despite the lamentations of political conservatives and some economic liberals, government activities appear destined to grow both absolutely and relatively. If so, high taxation can also be expected to be an enduring characteristic of advanced societies.
Earl R. Rolph
[See also Public Expenditures
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Vickrey, William S. 1947 Agenda for Progressive Taxation. New York: Ronald Press.
II. PERSONAL INCOME TAXES
The personal income tax is widely regarded as the fairest method of taxation yet devised. It is the major element of progression in modern tax systems and permits differentiation of tax burdens on the basis of family responsibilities and other personal circumstances of taxpayers. The yield of the tax expands or contracts more rapidly than personal income, thus imparting built-in flexibility to government revenue systems. The income tax is less burdensome on consumption and more burdensome on personal saving than an equal-yield expenditure tax, but the difference in aggregate terms is probably small for taxes of broad coverage. The effect of the income tax on work and investment incentives is unclear. Although personal income taxation has a long history, some of its major features still present numerous unsettled problems.
The first general personal income tax was introduced in 1799 in Great Britain, where it has been in effect continuously since 1842. Despite this early example, other countries were slow in adopting this tax. It was used for a brief period in the United States during and after the Civil War, and it was permanently enacted following the ratification in 1913 of the sixteenth amendment to the constitution. Austria adopted the income tax in 1849 and Italy in 1864; Australia, New Zealand, and Japan followed in the 1880s and Germany and the Netherlands in the 1890s. Elsewhere the income tax is a twentieth-century phenomenon. It spread quickly during and after World War i and became a mass tax in many countries during World War ii. Today the personal income tax raises substantial amounts of revenue in all industrialized countries of the free world and is employed, although to a lesser extent, in most underdeveloped countries.
Analysis of tax equity has been concerned largely with the distribution of tax burdens among persons in different economic circumstances, i.e., with vertical equity. Questions regarding the treatment of persons in essentially the same economic circumstances—the problems of horizontal equity —have only received close attention since the 1930s.
Vertical equity . Progressive taxation appeals intuitively to most people as an equitable method of distributing the tax burden by income classes, and economists and political theorists have devoted a great deal of intellectual effort to justify it on logical grounds.
An early theory of taxation that was widely held prior to the mid-nineteenth century was that taxes should be distributed in accordance with benefits received. The benefit theorists supported a minimum of government activity, possibly including defense and police and fire protection, but not much more. The benefits of such government services were assumed to be proportionate to income, and this was regarded as a major rationale for proportional income taxation. This theory of tax distribution proved to be untenable both because of its narrow view of the role of government and the arbitrary assumption it made regarding the distribution of benefits of government services.
In the latter half of the nineteenth century, progressive income taxation was justified by the sacrifice theories that emerged from discussions of “ability to pay.” Under this doctrine, ability to pay is assumed to increase as incomes increase, and the objective is to impose taxes on a basis that would involve “equal sacrifice” in some sense. If the marginal utility of income declines more rapidly than income increases, equal absolute sacrifice leads to progression, equal proportionate sacrifice to still more progression, and equal marginal sacrifice to leveling of incomes from the top down until the required revenues are obtained. The assumptions of sacrifice theories—that the relative utility of different incomes is measurable and that the relation between income and utility is approximately the same for all taxpayers—cannot be verified by actual data or experience. Nevertheless, the ability-to-pay idea has been a powerful force in history and has undoubtedly contributed to the widespread acceptance of progressive taxation.
The basic justification for the progressive personal income tax is now probably the socioeconomic objective of reducing great disparities of welfare, opportunity, and economic power arising from the unequal distribution of income. More specifically, the justification is based on two propositions: (a) it is appropriate public policy to moderate economic inequality, and (b) taxation of personal incomes at progressive rates is an efficient method of promoting this objective, since it does not involve direct intervention in market activities. The acceptable degree of progression varies from time to time and place to place; it depends on the distribution of pre-tax incomes and the post-tax distribution desired by the voters. In practice the re-distributive effects of the income tax have been moderate in all countries.
Horizontal equity . A personal income tax conforming strictly with the “equal treatment” principle would apply to all income from whatever source derived, making allowances only for the taxpayer and his dependents. In accordance with the “accretion” concept, income would be defined as consumption plus (or minus) the net increase (or decrease) in the value of an individual’s assets during the taxable period, perhaps modified to exclude gifts and inheritances that are ordinarily subject to separate taxes and, for practical reasons, to include capital gains when realized or when transferred to others through gifts or bequests. In practice most of the income taxes now in existence depart from this standard by a wide margin.
Differentiation of tax liability on the basis of family responsibilities is ordinarily made through a system of personal exemptions for the taxpayer and other members of his family. The personal exemption was originally regarded as a device to avoid taxing individuals and families with incomes that were not adequate to provide minimum levels of subsistence. Today personal exemptions are not high enough to cover a socially acceptable minimum level of subsistence in most countries; they serve primarily to remove low-income recipients from the tax rolls and also contribute to progression in the lower part of the income scale. At higher income levels the purpose of the personal exemption seems to be to moderate the tax burden as family size increases, although the degree of moderation varies greatly among countries. Special exemptions are allowed in some countries for particular groups of taxpayers (e.g., the aged); these exemptions are subsidies that could probably be handled more equitably through direct government outlays.
A second type of differentiation employed in most countries is based on the source of income. The provisions include credits for earned income and for dividends, preferential treatment for capital gains, exemptions for transfer payments and amounts set aside for retirement, omission of the rental value of owner-occupied homes, and numerous other special benefits. The earned-income credit is regarded as a convenient method of making rough allowances for depreciation of labor skills and for expenses of earning income from personal effort which are not recognized for tax purposes. The United States abandoned the earned-income credit in 1944 for simplification reasons, but it is still in existence in the United Kingdom, Australia, and other countries. Dividend credits are designed to moderate the so-called “double taxation” of corporate profits. Preferential treatment of capital gains grew out of the English concept of income, which excluded irregular receipts from income. This treatment is now rationalized on incentive grounds and also as a procedure to avoid applying the graduated rates, in the year of realization, to incomes accrued over a period of years. Transfer payments are excluded because they accrue largely to low-income people. Payments by employers into pension plans are not included in employees’ taxable income to promote the development of private pension plans. The rental value of owner-occupied homes is untaxed in most places because it is difficult to apply the income tax to nonmoney incomes.
The third type of differentiation is based on the use of income. Deductions are required under a “net” income tax for expenditures that are essential to earning income. However, deductions for a wide variety of personal expenditures and for some forms of saving are also permitted. In one country or another, allowances are made for such items as medical expenses, charitable contributions, interest on personal loans and mortgages, state and local taxes, casualty losses, child care in families of working parents, deposits in saving associations, premiums for life, sickness, and accident insurance, and payments into annuity, pension, or other retirement plans.
Personal exemptions are an important element of a progressive income tax, but there is little justification for most of the special exclusions, deductions, and credits based on the source or use of income. Such provisions narrow the tax base and require the use of higher tax rates to raise a given amount of revenue. This puts a premium on earning or spending incomes in forms receiving preferential treatment, interferes with business and investment decisions, and distorts the allocation of resources. Since the deviations from equal treatment tend to be arbitrary, they create dissatisfaction among taxpayers who are subject to discrimination and result in pressures for the enactment of additional special benefits, pressures which legislatures find it difficult to resist. This process has been called “erosion of the tax base” in the United States, where taxable income is at least one-third lower than it would be under a comprehensive income tax. Measures to broaden the base and to use the revenues for rate reduction have been proposed by tax experts, but it is evident from the public and Congressional response that progress along these lines will be slow.
Three major aspects of the personal income tax may be distinguished in appraising its economic effects: first, its automatic response to changes in total personal income; second, its effects on the allocation of personal income between consumption and saving; and, third, its impact on work and investment incentives.
Automatic flexibility . The role of the personal income tax as a built-in stabilizer is one of its most significant features. In the United States, at the rates prevailing in the 1950s and in the 1960s, the personal income tax automatically offset more than ten per cent of the reductions in personal incomes during contractions. The corresponding figure for the United Kingdom was perhaps twice as large, the difference being attributable primarily to the higher starting rate in the United Kingdom. Such changes in tax liability reduce fluctuations in disposable personal income and thus help to stabilize consumption.
Built-in flexibility operates in both the expansion and contraction phases of the business cycle, so that the personal income tax moderates the growth of incomes during a business recovery just as it cushions the fall in income during contractions. This symmetrical response of the income tax (and of other stabilizers) during a business cycle is unavoidable. It should not lead to the abandonment of the stabilizers but rather to the establishment of basic tax-expenditure relationships that would be consistent with a prompt return to high employment following periods of recession. Discretionary changes in tax rates and in expenditures may be needed to implement this objective.
The responsiveness of the income tax to changes in personal incomes is a useful characteristic for underdeveloped as well as for developed countries. An increasing proportion of the nation’s resources must be devoted to public and private investment to increase the rate of economic development. Since voluntary saving is usually inadequate, the bulk of the investment funds must be provided by government. A progressive income tax automatically provides some of the financing as incomes increase. Where development is associated with rising prices, the income tax serves the dual role of moderating inflationary pressures and of increasing the rate of national saving.
Effect on consumption and saving . A personal income tax applies to the income of an individual regardless of the allocation of this income between consumption and saving. By contrast, a general consumption or expenditure tax can be postponed or avoided by delaying or eliminating consumption. It follows that an income tax is less burdensome on consumption than an equal-yielding consumption or expenditure tax which is distributed in the same proportions by income classes. In practice, where the income tax is paid by the large mass of people, much of the tax yield comes from income classes where there is little room in family budgets for reducing consumption in response to tax incentives. Under these circumstances the differential effect of the two types of taxes on total consumption and saving is likely to be relatively small.
Graduated expenditure taxes have been proposed in recent years as a method of avoiding or correcting the effects of income tax erosion, particularly in the top income brackets where exemption or preferential treatment of capital gains permits accumulation of large fortunes without tax payment. Expenditure taxation, it is felt, would discourage lavish living by people with large amounts of property and thus increase saving and risk taking without resorting to regressive taxes. Despite its apparent advantages, the expenditure tax has not been widely used. Rates in excess of 100 per cent would be required to raise significant amounts of revenue from high-income taxpayers. Moreover, the expenditure tax is more difficult to administer than the income tax and also raises much more serious problems of compliance.
Work and investment incentives . It is difficult to evaluate the effect of personal income taxes on work and investment incentives. On the one hand, high tax rates reduce the net rewards of greater effort and risk taking and thus tend to discourage these activities; on the other hand, they may provide a positive stimulus to obtain more income because they cut down on the income left over for spending. These two effects tend to offset one another, and there is no basis for deciding which is more important.
Empirical studies have shed little light on this question. The evidence suggests that income taxation does not have a significant effect on the amount of labor supplied by workers and managers. Work habits are apparently not easily changed, and there is little scope in a modern industrial society for most people to vary the hours of work or the intensity of their efforts in response to changes in tax rates.
A highly graduated income tax applying to all property incomes might reduce incentives to take risk somewhat, since it is impossible to reimburse taxpayers for losses at precisely the same rate at which their incomes are taxed. However, the income tax actually applies to a small fraction of property income in all countries. The opportunity to earn income in the form of capital gains— which are either not taxed at all or are taxed at relatively low rates—is a great stimulant to risk taking in the face of high rates on other incomes. Moreover, risk investment is to a large extent undertaken by firms operating in the corporate form; such firms are generally permitted to retain earnings after payment of more moderate tax rates than those applying to investors in the top personal income tax brackets.
The base of the personal income tax is determined by the definition of income, the allowable deductions, and the personal exemptions. Within wide limits, these elements can be combined with various tax rates to produce a given amount of revenue. Many of the difficult issues in most countries are an outgrowth of local problems and developments. Nevertheless, several structural problems in income taxation appear to be common to practically all countries, and these will be discussed briefly in this section.
Tax treatment of the family . Throughout most of the history of the income tax, differentiation was made among taxpayers with different family responsibilities through the use of personal exemptions. Recently, there has been a trend toward the use of different tax rates to provide additional differentiation, particularly in the middle and higher tax brackets. In the United States, France, and West Germany, this has been accomplished by the adoption of the principle of “income splitting” between husband and wife or among all family members. Other countries achieve the same objective by applying different rate schedules to taxpayers in different family situations.
In France the income of the family is divided by the number of family units, with the taxpayer and his spouse counting as one unit each and each dependent child as an additional one-half unit. The tax is then calculated as if the income of the family were divided proportionately among the family units. In West Germany and the United States, splitting is extended only to husband and wife. By contrast, the United Kingdom has made the use of joint returns by husband and wife mandatory since the early days of its income tax. Under this system the graduated rates are applied to the couple’s combined income after allowance for personal exemptions and other deductions.
Income splitting between two persons doubles the width of the taxable income brackets and thus reduces the progression in tax burdens applying to married couples. The absolute size of the benefit depends entirely on the rate of graduation; it bears no relationship to the level of tax rates. For example, if rates increased one percentage point for every $1,000 of taxable income, income splitting would reduce the tax of a married couple with taxable income of $20,000 by $1,000. This would be true whether the starting rate was 1, 10, 20, or 50 per cent.
Income splitting is generally justified on the ground that husbands and wives usually share their combined income equally. For most families the largest portion of the budget goes for consumption, and savings are ordinarily set aside for the children or for the enjoyment of all members of the family. Two conclusions seem to follow if this view is accepted. First, married couples with the same combined income should pay the same tax irrespective of the legal division of income among them; second, the tax liabilities of married couples should be computed as if they were two single persons and their total income were divided equally between them. The first conclusion is now firmly rooted in the tax laws of most countries and seems to be almost universally accepted. It is the second conclusion on which opinions—and practices— still differ.
The case for the sharing argument is applicable to the economic circumstances of taxpayers in the lower income classes, where incomes are used almost entirely for the consumption of the family unit. At the top of the income scale the major rationale of income taxation is the reduction of the economic power of the taxpayer unit, and the use made of income in these levels for family pur poses is irrelevant. Obviously, these objectives cannot be reconciled if income splitting is extended to all income brackets.
Aside from reducing progression, the practical effect of income splitting is to produce large differentials in the taxes of single persons and married couples. Differentials by marital status that depend on the rate of graduation are difficult to rationalize. However, it is difficult to justify treating single persons with families more harshly than married persons in similar circumstances. As a remedy for this problem, France grants to a widow or widower the same total number of family units for splitting purposes as if the spouse had survived. The United States permits widows and widowers to split their incomes for two years after the death of the spouse and provides half the advantage of income splitting for single persons who maintain a household for children or other dependents or support their parents in a separate household.
One of the major reasons for the acceptance of income splitting may well be inadequate differentiation provided by the traditional types of personal exemptions among taxpayers in the middle and top brackets. Single people, it is felt, should be taxed more heavily than married couples because they do not bear the costs and responsibilities of raising children. But the allowance of income splitting for husband and wife clearly does not differentiate between taxpayers in this respect since the tax benefit is the same whether or not there are children. Nor does the extension of splitting to children give the correct answer, since the benefits depend on the rate of graduation as well as on family size.
The source of the difficulty in the income-splitting approach is that differentiation of family size is made through the rate structure rather than through the personal exemptions. It would be possible to differentiate among taxpayer units by varying the personal exemptions to take account not only of the number of persons in the unit but also of the size of income, with both a minimum and maximum. If this is unacceptable, the only alternative—other than income splitting which produces anomalous results—is to vary tax rates by marital status and family size, as a number of countries have already done.
Personal deductions. In principle, the use made of a given income should have no bearing on the amount of tax to be paid out of that income. In practice, some allowances are made almost everywhere for selected items of consumption or saving. These deductions may be divided into three major types: (1) those that provide supplement to the personal exemption; (2) those that subsidize particular activities or expenditures; and (3) those that improve coordination of Federal income taxes with state or provincial and local taxes, where they exist.
A strong case can be made for allowing some deductions for large, unusual, and necessary expenditures when the personal exemptions are low. Deductions for medical expenses are the best example of this type of expenditure. They are often involuntary, unpredictable, and may exhaust a large proportion of the taxpayer’s income. Expenditures for noninsured losses due to theft, fire, accident, or other casualties are of a similar nature. In keeping with the purpose of this type of deduction, it should be limited to an amount in excess of some percentage of income, which would be high enough to exclude all but extraordinary expenditures for these purposes.
Subsidy-type deductions are most common for contributions to charitable, religious, educational, and other nonprofit organizations. In many countries heavy reliance is placed on philanthropic institutions to supplement governmental activities and in some cases to provide services which governmental units do not perform. It may be argued that private philanthropy should not be encouraged at the expense of government funds. However, few people subscribe to this view because the activities of these organizations, with rare exceptions, are considered desirable and useful.
Subsidy-type deductions are also allowed in some countries for selected items of personal saving. Great Britain has permitted the deduction of a portion of life insurance premiums since the beginning of the income tax. West Germany allows deductions for personal insurance and for deposits in building and savings associations. A number of countries have recently enacted limited deductions for amounts set aside in annuities or retirement plans by self-employed persons and employees not eligible for company pension plans. The major motivation for these deductions appears to be to promote saving, but more particularly to encourage adequate provision for retirement and for catastrophic events that entail large outlays or loss of income. The deductions for personal contributions to retirement plans are also intended to remove the discrimination resulting from the exclusion usually granted to employer contributions to employee pension plans. The growth of allowances for particular types of saving has made substantial inroads into the philosophy of income taxation; in fact, these policies constitute a substantial movement toward the expenditure tax approach.
Suggestions have been made in recent years that the tax laws should permit a deduction for the cost of higher education. These suggestions reflect the importance of higher education for economic growth and the increased costs of a college education. On the one hand, a deduction allowed to parents would give the largest benefits to the highest income classes and would therefore be inequitable. On the other hand, some portion of expenditures for higher education is an investment which is not recognized for tax purposes as an expense of earning income. The appropriate treatment would be to regard the outlay by a parent as a gift to his child and to permit the child to write off a portion of this outlay over his earning career for, say, twenty years. However, there is no basis for estimating the proportion of educational outlays allocatable to investment, and the problems of administration and compliance would be substantial. [See Capital, Human.]
Deductions for income taxes paid to overlapping governmental units are required to prevent confiscation if one or more levels of government employ high rates in the upper end of the income scale. Where the rates are moderate, it is quite appropriate to levy two taxes on the same base without coordination. However, it may be desirable to permit deductions even if the rates are not confiscatory as a device to moderate interstate differentials. For example, with a Federal rate of 70 per cent and without deductibility of state taxes, the combined tax on residents of two states with rates of 5 and 10 per cent would be 75 and 80 per cent, respectively. By permitting taxpayers to deduct the state tax on their Federal returns, the combined rates are reduced to 71.5 and 73 per cent. (If the states also permit a deduction for Federal taxes, the combined rates are further reduced to 70.5 and 71 per cent. This type of mutual deductibility is unnecessary for coordination purposes, since the coordination achieved through single deductibility is quite adequate.)
A deduction for income taxes paid to state and local governments may be a practical necessity in a Federal system, but the same justification does not hold for state and local sales, excise, and property taxes. The latter deductions defeat the purposes of taxes levied to obtain payments from taxpayers for benefits received from state and local governments and reduce the progressivity of the combined tax system.
In the United States, where personal deductions have proliferated more than in any other country except perhaps West Germany, taxpayers are granted a “standard” deduction, in lieu of the itemized deductions, of up to 10 per cent of income (with a maximum of $500 on separate returns of married persons and $1,000 on all other returns). This device was adopted in 1944 for simplification reasons, in recognition of the fact that most personal deductions are small and few taxpayers keep adequate records to support them. To an important degree, the standard deduction violates the rationale of the itemized deduction; it reduces differentiation in tax liabilities while the itemized deductions are intended to introduce such differences for the purposes selected. The existence of both a standard deduction and itemized deductions suggests that there is some ambivalence toward many of the personal deductions in the United States income tax structure.
On balance, equity would be better served by avoiding erosion of the tax base through the use of numerous costly personal deductions. This should not preclude the adoption of a restricted list of deductions for unusually large and extraordinary expenditures to prevent hardships. Subsidy-type deductions are appropriate only if they promote a significant national objective and if the deduction route is the most efficient and equitable method of achieving that objective.
Capital gains and losses . As already indicated, an economic definition of income would include capital gains in full on an accrual basis. This method is impractical for three reasons: (1) valuations of many types of property cannot be estimated with sufficient accuracy to provide a basis for taxation; (2) most people would regard it as inequitable to pay tax unless income has actually been realized; and (3) taxation of accruals might force liquidation of assets to discharge tax liabilities. Thus, where capital gains are taxable, they are included in income only when realized.
Few countries tax the capital gains of individuals, but the United States has done so since the beginning of its income tax. Realized capital gains were originally taxed as ordinary incomes, but they have been subject to preferentially low rates since 1921. The provisions applying to such gains changed frequently during the 1920s and 1930s but were stabilized beginning in 1942. In general, capital gains on assets held for periods longer than six months are subject to half the rates on ordinary income, up to a maximum of 25 per cent.
The treatment of capital gains is likely to be a compromise among conflicting objectives. From the standpoint of equity, it is well established that capital gains should be taken into account in determining personal tax liability. Moreover, low rates or exemption of capital gains encourage the conversion of ordinary income into capital gains by devices that distort patterns of investment and discredit income taxation. On the other hand, the bunching of capital gains in the year of realization requires some provision to moderate the impact of graduation. On economic grounds full taxation of capital gains is resisted because it is believed that it would have a substantial “locking-in” effect on investors and reduce the mobility of capital. It is also argued that preferential treatment of capital gains helps to stimulate a higher rate of economic growth by increasing the attractiveness of investment generally and of risky investments in particular.
The “bunching” problem can be handled by prorating capital gains over the length of time the asset was held or by adopting a general averaging system applying to other types of income as well as to capital gains. However, unless the marginal rates were fairly low, the tax might still discourage the transfer of assets. Part of the difficulty is that adherence to the realization principle permits capital gains to be transferred tax-free either as a gift or at death. The solution to this problem is to treat capital gains as if they were constructively realized as a gift or at death, with an averaging provision to spread the gains over a period of years. Great Britain adopted the constructive realization principle when it added a capital gains tax to its tax structure. Under such a system the only advantage taxpayers have from postponing the realization of capital gains is the accumulation of interest on tax postponed. Unless the assets are held for many years, this advantage is small as compared to the advantage of the tax exemption accorded to the gains transferred at death; in any event, the interest on the tax postponed is subject to income tax when the assets are transferred. Under the circumstances, the incentive to hold gains indefinitely for tax considerations alone is very greatly reduced.
Capital losses are no easier to handle than capital gains. In principle, capital losses should be deductible in full either against capital gains or ordinary income. However, when gains and losses are recognized only upon realization, taxpayers can easily time their sales so as to take losses promptly when they occur and to postpone the realization of gains. There is no effective method of avoiding this asymmetry under any system of taxation applying to realized gains and losses. In the United States, capital losses of individuals may be offset against capital gains plus $1,000 of ordinary income in the year of realization and in subsequent years for an indefinite time period. This restrictive policy is perhaps most harmful to small investors, who are less likely than those in the higher brackets to have gains against which to offset their losses. The only solution to this problem is a pragmatic one which would be as liberal as possible for the small investor without opening the door to widespread abuse and large revenue losses.
Relation to the corporate income tax. Unless corporate incomes were subject to tax, individuals could avoid the personal tax by accumulating income in corporations. Short of an annual allocation of corporate incomes on a prorata basis—a method which is excellent in theory but not in practice—the equity and revenue potential of the personal income tax can be protected only by a separate tax on corporate incomes. However, the existence of two separate taxes on the same income creates a difficult equity problem. Concern over the “double taxation” of dividends is evident in the various devices used in different countries to alleviate its alleged discriminatory effects.
On the assumption that all or a significant portion of the corporate income tax rests on the stockholder, the effect of double taxation is to impose the heaviest burden on dividends received by stockholders with the lowest incomes. Assume a corporate income tax of 50 per cent and suppose a corporation pays out $50 in dividends. The corporate income before tax from which these dividends were paid amounted to $100. If this $100 had been subject to personal income tax rates only, the nontaxable individual would have paid no tax on it; the additional burden of the corporate income tax in this case is the full $50 corporate tax. By contrast, a stockholder subject to an eighty per cent rate pays a personal income tax of $40 on the dividend, and the total tax burden on the original $100 of corporate earnings is $90. But since he would pay $80 under the personal income tax in any case, the additional burden on him is only $10.
The simplest and most effective method of dealing with this problem would be to permit corporations to deduct all or a portion of their dividends in computing taxable income. This method would apply the regular corporate tax rate to undistributed profits and would reduce or eliminate the corporate tax on distributed earnings. It would also have two additional advantages: first, dividend and interest payments would be treated more nearly alike, thus reducing the discrimination against equity financing by corporations; second, the same proportion of the corporate income tax on distributed income would be eliminated for all taxpayers regardless of their personal income tax status.
Despite these advantages, undistributed profits taxation is not used widely. The United States experimented with it in the 1930s, but the experiment created a great deal of resentment (possibly because the differentiation between distributed and undistributed profits was made by the imposition of a penalty tax on the latter rather than by allowing a deduction for dividends). The major drawback of undistributed profits taxation is that it discourages internal financing by corporations and thus may reduce saving and investment. On the other hand, some believe it is unwise as a matter of policy to permit corporations to avoid the capital markets for financing their investment programs.
If dividend relief is given at the individual level, there are three possibilities. The first is the “withholding” method, under which all or a portion of the corporate tax is regarded as having been paid at the source by the stockholder. The taxpayer includes the tax paid at the source in his income and then receives a tax credit for that amount. This method was used in Great Britain from the enactment of the 1803 income tax until 1965. Tax burdens of shareholders on distributed corporate income are the same as the burdens under the undistributed profits tax approach.
The second alternative is to permit the taxpayer to exclude some or all of his dividends from his tax return, and the third is to permit him to take a credit against his final tax liability computed at a flat percentage of the amount of dividends he receives. The United States exempts the first $100 of dividends; and Canada uses the dividend-credit approach exclusively at a rate of 20 per cent. Great Britain now makes no special allowance for dividends.
Neither the exclusion nor the credit can be regarded as a satisfactory method of removing double taxation, since neither can remove the same proportion of the excess taxation of dividends throughout the income scale. In contrast, the undistributed profits approach and the withholding method remove the same proportion at all income levels.
The desirability of doing something about the double taxation of dividends is still in dispute. First, corporations are viable economic units with characteristics and behavior patterns that have very little relationship to the income and other characteristics of their stockholders. Moreover, stockholders in large, publicly held corporations have only indirect and remote influence on management policies. On these grounds, many experts believe that a modern tax system would be incomplete without a separate tax on corporate enterprises. Second, the argument for moderating or removing the double taxation of dividends assumes that the corporate tax rests on the corporation and, ultimately, the stockholder. If the corporate income tax is shifted forward in the form of higher prices (or backward in the form of lower wages), the case for integration collapses. In the present state of knowledge, the incidence of the corporation income tax is not clear.
If integration of the corporate and personal income taxes were considered appropriate, some solution of the capital gains problem would be an essential first step. Under a system of full taxation of capital gains, including constructive realization at death, generous provision might well be made for alleviating the double tax on distributed profits. Where capital gains are either not taxed at all or are taxed at very low rates, the case for integration is weak. No country has yet resolved all of these problems satisfactorily.
Fluctuating incomes . The use of an annual accounting period combined with progressive rates results in a heavier tax burden on fluctuating incomes than on an equal amount of income distributed evenly over the years. This type of discrimination is hard to defend on equity or economic grounds. Taxpayers do not and cannot arrange their business and personal affairs to conform with the calendar. Annual income fluctuations are frequently beyond the control of the taxpayer, yet he is taxed as if 12 months were a suitable horizon for decision making. In addition, in the absence of averaging, there are great pressures for moderating the impact of the graduated rates on fluctuating incomes by lowering the rates applicable to them. Reduced rates on capital gains are often justified on this basis, although the reductions more than compensate for the absence of averaging.
There may also be a connection between the treatment of fluctuating incomes and incentives to take risk. Even with generous provisions for offsetting losses against gains, business incomes are taxed more heavily than other incomes under a progressive, annual income tax because (a) they fluctuate more than other incomes and (£>) the losses do not come off the top of the taxpayer’s income during the loss-offset period and are therefore not credited at the maximum rate. On the assumption that there is a correlation between income variability and risk, a tax system using a one-year accounting period is more burdensome on venturesome than on safe investments and thus is more discouraging to risk taking than a tax system having a longer accounting period.
Experience with general-averaging systems has been disappointing, largely because the methods used have been based on a variant of the moving average. This requires large tax payments when incomes fall below the average and small payments when they rise above it. Taxpayers properly regard such an arrangement as highly inequitable. It is now known that the payment problem may be solved by making the averaging adjustment in the form of a refund. For example, taxpayers might be permitted to average their incomes once every five years and to receive a refund (or credit) for any amount of tax actually paid in excess of 105 or 110 per cent of the tax on the average income during the averaging period. The United States adopted a variant of this method in 1964, allowing individuals to average their incomes over a five-year period where the income in the current year exceeds the average of the four prior years by more than a third and this excess is more than $3,000.
Many averaging systems, varying from cumulative lifetime averaging for every taxpayer to averaging over fairly short periods for specific types of volatile incomes, have been explored in the literature. All averaging proposals would create problems of compliance and administration and might involve substantial revenue losses, particularly if applied to the mass of taxpayers. With the advent of electronic machines, it will be possible to solve most of the administrative problems, but the revenue implications may remain serious.
The personal income tax is still in the process of development. Methods of differentiating tax liabilities of single persons and families of different size are unsatisfactory. There is increasing recognition that capital gains and losses should enter the tax base, but the equity, economic, and administrative objectives of capital gains taxation are difficult to reconcile. The appropriate relationship between the personal and the corporate income tax continues to be disputed. Little progress has been made to alleviate the excessive burden of the income tax on fluctuating income. Finally, the concept of income subject to tax departs considerably in most countries from an economic definition of income, and too many special allowances are made for specific sources and uses of income.
Despite all of these problems, the personal income tax is the best tax yet devised, and it will continue to be an indispensable and significant element of all modern tax systems for the indefinite future.
Joseph A. Pechman
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Great Britain, Royal Commission ON THE Income Tax 1920 Report. Papers by Command, Cmd. 615. London: H.M. Stationery Office.
Kahn, C. Harry 1960 Personal Deductions in the Federal Income Tax. National Bureau of Economic Research, Fiscal Studies, No. 6. Princeton Univ. Press.
Kaldor, Nicholas 1955 An Expenditure Tax. London: Allen & Unwin.
Kalven, Harry; and Blum, Walter J. (1952) 1953 The Uneasy Case for Progressive Taxation. Univ. of Chicago Press. → First published in Volume 19 of the University of Chicago Law Review.
Lewis, Wilfred 1962 Federal Fiscal Policy in the Postwar Recessions. National Committee on Government Finance, Studies in Government Finance. Washington: Brookings Institution.
Musgrave, Richard A. 1959 The Theory of Public Finance: A Study in Public Economy. New York: McGraw-Hill.
Pechman, Joseph A. 1957 Erosion of the Individual Income Tax. National Tax Journal 10, March: 1-25.
Pigou, A. C. (1928) 1956 A Study in Public Finance. 3d ed., rev. London: Macmillan; New York: St. Martins.
Seligman, Edwin R. A. (1911) 1921 The Income Tax: A Study of the History, Theory and Practice of Income Taxation at Home and Abroad. 2d ed. New York: Macmillan.
Seltzer, Lawrence H. 1951 The Nature and Tax Treatment of Capital Gains and Losses. National Bureau of Economic Research, Fiscal Studies, No. 3. New York: The Bureau.
Shehab, F. 1953 Progressive Taxation: A Study in the Development of the Progressive Principle in the British Income Tax. Oxford: Clarendon.
Simons, Henry C. 1938 Personal Income Taxation: The Definition of Income as a Problem of Fiscal Policy. Univ. of Chicago Press.
U.S. Congress, House, Committee ON Ways AND Means 1959 Tax Revision Compendium. 3 vols. Washington: Government Printing Office.
Vickrey, William S. 1947 Agenda for Progressive Taxation. New York: Ronald Press.
III. CORPORATION INCOME TAXES
The taxation of the income of corporations has come to be one of the major sources of fiscal revenue in most countries. According to the 1965 Yearbook of National Accounts Statistics of the United Nations, corporation tax receipts in 1962 equaled or exceeded 2 per cent of the national income in 32 countries, and represented 10 per cent or more of current government receipts in 19 countries. Of the major countries, Japan places the heaviest reliance upon the corporation income tax, receipts from this tax accounting for 22 per cent of current revenues and amounting to 6 per cent of the national income. Australia, Canada, New Zealand, the Republic of South Africa, and the United States all collect more than 15 per cent of their current revenues from this source, the amounts in each case representing more than 5 per cent of national income. In western Europe corporation income taxes typically represent 3-4 per cent of national income and 6-10 per cent of current government revenues. The corporation income tax tends to be less important, relative to national income and government revenues, in the developing countries than in the more advanced economies; but this is due mainly to the fact that the corporate sector itself is less important, rather than to a failure of the developing countries to levy the tax at all or to a tendency on their part to impose the tax at significantly lower rates than those applied by the more advanced countries.
This widespread and heavy reliance on the corporation income tax testifies to its administrative feasibility and political popularity. It is highly feasible administratively because the laws under which corporations are established generally require the maintenance of accounts on a standardized basis; thus the enforcement of the tax reduces to the problem of requiring honest and accurate accounts and of resolving a series of technical issues, such as the determination of which expenditures may be expensed and which must be capitalized, and the setting of allowable rates of depreciation for specific classes of assets. These problems have been handled in most countries by administrative decrees or regulations issued by the tax-collecting authority itself, operating under broad guidelines set out in the tax legislation.
The political appeal of the corporation income tax has two roots. First, the tax obviously conforms to popular conceptions of ability to pay, since the man in the street tends to view corporations as wealthy entities themselves and as being owned predominantly by wealthy stockholders. But second, and in many ways equally important as a source of political appeal, is the fact that the corporation income tax, by definition, cannot be a source of loss to a corporation. Those corporations which have no net income pay no corporation income tax; only “profitable” companies are required to bear this levy. By contrast, other forms of business taxation can themselves be responsible for converting what would otherwise be a net profit situation into one of net loss. Hence, even within the world of business, companies in a marginal or precarious financial situation are likely to prefer the taxation of corporate net income to other forms of business taxation, and the strong opponents of corporate income taxation are likely to be the more profitable companies with the most “ability to pay.”
The administrative and political advantages of the corporation income tax do not, however, imply that it is a good tax from the economic point of view. Quite to the contrary, it is readily demonstrable that, of the major revenue sources, this tax is one of the least justifiable on economic grounds. It entails an essentially arbitrary discrimination among industries or activities, it tends to inhibit the growth of the more dynamic sectors of the economy, and it probably causes a reduction in the over-all rate of capital formation.
All the discriminatory features of the corporation income tax stem from the fact that corporate net income is the tax base. By the definition of the tax, all unincorporated activities are exempt; and even within the corporate sector of the economy, the tax falls more heavily on activities with low ratios of debt to equity (because interest on debt is a deductible expense). The consequence of these discriminations is a distortion of the economic structure, favoring noncorporate over corporate activities and, within the corporate sector, a distortion favoring those activities which can readily be financed in large measure by debt capital over those which cannot. The tax may also discriminate within the corporate sector against capital-intensive activities and favor labor-intensive activities, but the existence of this effect depends on the incidence of the tax; it may be present but need not be.
The basis for these assertions is the fact that in all economies in the modern world there is a tendency toward the equalization of the rates of return that investors receive on capital in different industries or activities. This tendency can be frustrated by restrictions on the entry of capital into given areas, can be blunted by imperfect information, can be modified by considerations of difierential risk or convenience among different investment outlets, and can be obscured by random year-to-year variations in earnings—but it is always present. Stigler (1963, p. 23) found, for example, that whereas the mean rate of return (after taxes) on invested capital in U.S. manufacturing industries averaged 7.6 per cent in 1947-1954, the standard deviation of the rates of return by two-digit industries (about this mean) was only 1.6 per cent. Moreover, he found no significant evidence of a. risk premium (either positive or negative) when he related observed average rates of return in individual industries to the standard deviation of each industry’s rate of return. Stigler’s results accord well with what one would expect a priori from a reasonably well-functioning capital market. If higher-than-average rates of return to capital exist and persist in a given activity, then one would expect investment in that activity to increase and so drive down the rate of return; if lower-than-average rates of return prevail, one would expect investment to fall off, inducing an increase in the rate of return.
The following analysis will, accordingly, be based on a tendency toward equalization of aftertax rates of return to capital in different investment uses. Given this tendency, it is clear that the corporation income tax will produce an equilibrium pattern of net rates of return among industries only through its differential impact’s being reflected in differential gross rates of return. Thus, assuming that the net-of-tax rate of return on equity would, in a given capital-market situation, tend to stabilize at 6 per cent, and assuming that the rate of return to capital in the noncorporate sector and the rate of interest on debt would also tend to stabilize at 6 per cent, we have the following possible pattern of rates of return on capital, gross of a corporation income tax at a rate of 50 per cent:
|Corporate Industry A: 2/3 debt||8%|
|Corporate Industry B: 1/3 debt||10%|
|Corporate Industry C: 100% equity||12%|
The differentials in gross rates of return on capital induced by the corporation income tax have two kinds of effects: first, they are reflected in product prices and, consequently, in the levels of output of particular activities; second, they confront the different activities with different relative costs of labor and capital and, hence, induce decisions concerning the relative intensity of use of these resources which are uneconomic from the standpoint of the economy as a whole. For example, the net annual cost of $100,000 of capital, for a year, to Noncorporate Industry (see above), would be $6,000, while that to Corporate Industry C would be $12,000. If labor of a given class is paid $6,000 per year, Noncorporate Industry is induced to operate at a point where the marginal $100,000 of capital produces a yield equivalent to the marginal product of one man-year of labor, while Corporate Industry C will tend to operate at a point where $100,000 of capital will have a yield equivalent to the marginal product of two man-years of labor. Clearly, economic efficiency could be improved by a tax system which took an equal fraction of the income generated by capital in all lines of activity, regardless of whether they were corporate in structure or not, and regardless of their degree of access to debt financing.
Effect of other taxation . The foregoing sketch of the efficiency-effects of the corporation income tax implicitly viewed the tax as the only levy in the tax system that affected gross-of-tax rates of return differently in different activities. Actually, there are a variety of taxes and tax provisions in most countries which have such effects, and it is important in any analysis of real-world tax systems to consider the combined effect of all such provisions rather than attempt artificially to isolate one tax, such as the corporation income tax, from the overall structure of which it is a part.
Property taxes, for example, are often levied at different effective rates on real property of different types. More important, property taxes often are levied only on land and buildings. Thus machines, inventories, and such may escape the property tax; and corporate capital, in which machines and inventories play a larger role than in noncorporate capital, will then pay relatively less through property taxation than noncorporate capital. In this way the property tax may tend to offset somewhat the discrimination against the corporate sector that is implicit in the corporation income tax.
Similarly, in countries like the United States, where capital gains are taxed at rates lower than normal personal income tax rates, or in countries with no capital gains taxation at all, the effects of corporate income taxation as such are likely to be offset to some extent by the favored treatment of capital gains. This is so because the earnings of capital in unincorporated enterprises are taxed under the personal income tax as they are earned, at full personal income tax rates, while the personal income tax strikes only that portion of corporate earnings paid out in dividends at the full rate. Let D be the proportion of earnings paid out in dividends, tc be the corporate tax rate, t,, the personal tax rate, and t, be the effective rate of tax on capital gains. Then $1 of corporate earnings will pay a total personal-plus-corporate tax bill equal to
tc+ (l-tc)Dtp + (1 -tc)(l -D)tg.
This can turn out to be lower than tf, the total income tax paid on $1 of income of an unincorporated enterprise, provided that the rate of tax applicable to a marginal dollar of personal income is sufficiently higher than the corporate tax rate.
For example, assume that an individual is in the 70 per cent bracket of the personal income tax and is contemplating investing some savings in either a specific corporation, C, or a specific unincorporated enterprise, 17. Suppose that both investments are expected to have a gross-of-tax yield of 20 per cent. The net-of-tax return from the investment in U will be 6 per cent, while that from the investment in C will depend on tc, D, and t,,. Suppose tc is 40 per cent, D is 331/2 per cent, and t, is 15 per cent. Then, of $20 of earnings in C, $8 will be paid in corporation tax, and $2.80 in personal tax on dividends of $4. If the corporation’s savings of $8 out of earnings of $20 ultimately are fully reflected in capital gains, and if these are taxed at an effective rate of 15 per cent, then $1.20 will be paid in capital gains taxes. The total tax on $20 of income will be $12, and the net-of-tax rate of return from the investment in C will be 8 per cent—higher by 2 points than that on the investment in U.
Obviously, the effective rate of corporate-cum-personal tax on an investment will vary from individual to individual (depending on their marginal tax rates) and from corporation to corporation (depending on their dividend policies and on the degree to which their corporate savings are reflected in capital gains). Moreover, the effective rate of tax on capital gains will itself vary from situation to situation, since individuals can postpone realization of capital gains, thus postponing payment of capital gains tax and shrinking the present value of the tax paid on capital gains account. For example, if a share bought for $100 today rises in value at 8 per cent per year, capital gains tax payable upon sale r years in the future will be tg*[(1.08)n - 1], where tg* is the nominal rate of tax on capital gains, but the present value of this tax (evaluated at 8 per cent) will be tg*[l — (1/1.08)”]. This is what was meant above by the effective rate of tax on capital gains. It is clearly, from this example, a decreasing function of the length of time that the stock is held. In the United States, the effective rate of capital gains tax can in fact be zero, since assets held until the death of the owner pass to his heirs, who in turn are taxed only on increases in value that take place after they have inherited the property.
While the property tax and capital gains provisions tend somewhat to offset the distorting effects of the corporation income tax, the traditional treatment of income from owner-occupied housing works to reinforce the distortions implicit in the corporation income tax. Obviously, owner-occupied housing generates income in real terms, but traditionally this income has not been a part of the personal income tax base. As a consequence, this important part of the income generated by capital in the unincorporated sector of the economy pays neither corporate nor personal income tax, while the income generated in the corporate sector is subject to both.
Empirical estimation . Harberger (see Krzy-zaniak 1966) has attempted to derive rough estimates of the cost to the U.S. economy of the pattern of distortions created by the differential taxation of capital in different uses. He incorporates into a single model, which distinguishes between the corporate sector and the noncorporate sector, the effects of corporate income taxation, property taxation, capital gains taxation, and the exemption from personal income taxation of the imputed income from owner-occupied housing. Making conservative assumptions about the elasticities of response of the economy to the various distortions involved, Harberger estimates the “efficiency cost” of the U.S. pattern of taxation of income from capital at approximately $2 billion per year. This estimate concerns only the costs associated with the misallocation of a given capital stock, costs which would be zero if all income from capital were to be taxed at a given constant rate. It does not take into account the possible effects of the taxation of income from capital upon the size of the capital stock itself (through the influence of taxation on the rate of saving), nor does it fully incorporate the effects of various special provisions (e.g., percentage depletion) affecting specific industries. Hence, it is a conservative estimate in this respect as well.
The incidence of the corporation income tax has long been the subject of debate among economists, a state of affairs which is likely to continue for some time. Underlying this debate are some genuine differences, both analytical (reflecting different assumptions about the behavior of firms) and empirical (reflecting differing views about, for example, the quantitative response of saving to the disturbances engendered by the imposition of the tax). However, expositions of the effects of the corporation income tax at times contain serious conceptual and analytical errors which should long since have been laid to rest.
Perhaps the main source of confusion has been the conception of the incidence of the tax as falling either (a) on stockholders, or (b) on consumers, or (c) on workers, or on some combination of these three. There are three errors involved in this traditional trichotomy. The first has to do with the use of the term “stockholders” rather than “owners of capital”; the second relates to the distinction between consumers and workers; and the third concerns the assumption, which is usually implicit when the trichotomy is stated, that none of the three groups will gain as a consequence of the tax.
The distinction between stockholders and owners of capital. The idea that the burden of the corporation income tax will fall on the stockholders of the affected corporations is a valid one within the confines of standard short-run equilibrium analysis. This is because in the short run, with the capital of each corporation considered as a fixed factor of production, the earnings of equity capital represent the residual share. This residual share is assumed, in traditional short-run models of competitive and of monopolistic behavior, to be maximized by the firm. So long as the demand and cost conditions facing the firm are unchanged— the conventional assumption—the output which generated maximum profit before the tax was imposed will also yield maximum profit in the presence of the tax.
Although the above analysis is correct for the short run, a major change occurs when longer-run adjustments are allowed for. Here the appropriate assumption is that the after-tax rate of return is equalized between the corporate and the noncorporate sectors. Any fall in the rate of return perceived by the owners of shares will therefore also be perceived by the holders of other kinds of titles to capital, and the isolation of stockholders as the relevant group when assessing the incidence of the tax is no longer correct. The relevant group becomes owners of capital, once attention is focused on the longer-run incidence of the tax.
The distinction between consumers and workers. Once the above is recognized, the error implicit in the distinction between consumers and workers becomes apparent. Since all income-earners in the community are owners of either labor or capital resources or both, the reduction in real income implicit in the tax must reflect the sum of the reductions in the real incomes of these two groups. That is to say, a distribution of the burden of the tax between people in their role as owners of capital, on the one hand, and people in their role as sellers of labor services, on the other, is exhaustive, leaving no room for an additional burden to be borne by consumers.
This is not to say that, within each group, different individuals will not bear different burdens because of differences in their consumption patterns. In general, those, whether capitalists or workers, who consume a greater-than-average proportion of “corporate” products as against “noncorporate” products will be relatively harder hit as a consequence of the tax than those who have the opposite bias in their consumption pattern. But the extra benefits accruing to those consumers with relatively “noncorporate” consumption patterns must, because of the deviations of these patterns from the average, exactly offset the extra burden borne by those with relatively “corporate” consumption patterns. (This statement is precisely correct if only the first-order effects of the change in tax regime are taken into account. When second-order effects are considered, there emerges an “excess burden” of the tax, deriving from the distortion of consumption patterns and resource allocation which results from the tax. Excess burden, however, is conventionally left out of account in discussions of incidence, for otherwise the sum of all burdens allocated would exceed the yield of the tax; that is, incidence is conventionally defined as dealing only with first-order effects.)
There is, nevertheless, a way in which sense can be made out of a statement like “The tax is wholly passed on to consumers.” For if analysis reveals that the real incomes accruing to labor and capital fall by equal percentages as a result of the tax, then it is equally convenient to describe the tax as being borne fully by people in their role as consumers. And if labor’s real income falls by 10 per cent as á consequence of the tax, while capital’s falls by 20 per cent, it is just as convenient to regard the tax burden as being a 10 per cent reduction of the real income of consumers as such (the percentage point fall common to the two groups), plus an additional 10 per cent reduction falling upon the owners of capital. But if this approach is taken, there is no burden to be allocated to labor in the example just cited, just as there would be none to allocate to capital if its real income fell by 10 per cent and labor’s by 20 per cent. Thus the idea of a three-way division of the burden remains illogical even when a plausible device is found for ascribing some of it to consumers.
The “no-gain” fallacy. The third error involved in typical presentations of the trichotomy—the implicit assumption that no group will gain as a consequence of the imposition of a corporation income tax—is perhaps the most serious of all, since it leads to a gross misapprehension of the nature of its incidence. It is not at all true that the share of the total burden of the tax which falls on capital must lie between zero and 100 per cent; a much more plausible range for capital’s share runs from a.* to l/bc (where ak is the proportion of the national income accruing to capital and bc is the fraction of the capital stock which is occupied in the corporate sector), though even this range can easily be exceeded.
To demonstrate the plausibility of the suggested range, assume that, with fixed and fully employed stocks of labor and of capital and holding the wage rate constant as the numeraire, the net-of-tax return to capital remains unchanged as a consequence of the tax. The nominal income of both labor and capital is therefore unchanged, but the real income of both groups falls because the prices of products of the corporate sector must rise to accommodate the tax. Labor and capital must therefore suffer equiproportionally as a consequence of the tax, capital’s fraction of the total burden being a,e, its share in the national income.
The other end of the range is generated when the gross-of-tax rate of return to capital remains unchanged as a consequence of the tax. The net-of-tax rate of return must therefore fall by the percentage rate of the tax imposed. But the equilibrium condition for the capital market assures that if the net-of-tax rate of return falls by this percentage in the corporate sector, it must fall by the same percentage in the noncorporate sector. Since the fall in the return to capital in the corporate sector just reflects the tax paid, the parallel fall in the noncorporate sector reflects that capital is bearing more than the full burden of the tax, the ratio of capital’s loss to the full burden of the tax being the ratio of total capital to corporate capital, or l/bc In this case, therefore, labor gains an amount equal to the reduction in real income per unit of capital times the amount of capital in the noncorporate sector.
The “plausible limits” just outlined can be derived from a two-sector model with homogeneous (of first degree) production functions, on the assumption that the elasticity of substitution between labor and capital is infinite in one sector or the other. If this elasticity is infinite in the untaxed (noncorporate) sector, then so long as some production takes place in that sector in the post-tax equilibrium, the relationship between the return to a unit of capital and the wage received by a unit of labor must be the same as in the pretax equilibrium. Capital and labor therefore must bear the same percentage losses of real income as a result of the tax. When, on the other hand, the elasticity of substitution between labor and capital is infinite in the corporate sector, the post-tax gross-of-tax return per unit of capital must bear the same relationship to the wage of labor as prevailed before the tax was imposed. Hence the net-of-tax return per unit of capital must fall, in both sectors, relative to the wage of labor, by the percentage of the tax, and capital must accordingly bear (l/bc) times the full burden of the tax.
Strikingly, these same “plausible limits” come into play when the elasticity of substitution is zero in one of the two sectors and non-zero in the other. When the corporate sector has a zero elasticity of substitution between labor and capital, the reduction in its output resulting from the tax leads to the ejection of labor and capital from that sector in the fixed proportions given by its technical coefficients of production. Suppose that the corporate sector uses labor and capital in the ratio of 1:2; as it contracts, it must therefore eject the factors in these proportions. If, now, the noncorporate sector was, in the pretax equilibrium, using the two factors in just these proportions, it will be able to absorb the “rejects” from the corporate sector without any change in relative factor prices. And since factor prices in the noncorporate sector are already net-of-tax, this means that both factors must suffer in the same proportion as a consequence of the tax, just as in the case of an infinite elasticity of substitution in the noncorporate sector.
The above result occurs when labor and capital were initially used in the same proportions in the two sectors, and it must be modified when the initial proportions differ. If the corporate sector ejects labor and capital in the ratio of 1:2, while the noncorporate sector was initially using them in the ratio 1:1, the noncorporate sector (which is assumed to have a non-zero elasticity of substitution) must alter its factor proportions so as to absorb relatively more capital. Capital’s return must therefore fall relative to labor’s, in order for equilibrium to be restored; and capital will bear more than the fraction ak of the total burden of the tax. Conversely, if the noncorporate sector were initially more capital-intensive than the corporate sector, using the factors, say, in the proportions 1:3, the relative price of labor would have to fall so as to enable this sector to absorb the “rejects” from the corporate sector; and capital would end up bearing less than a* of the total burden of the tax.
Thus, when the elasticity of substitution between labor and capital is zero in the corporate sector, capital will bear the fraction a/, of the total burden if the two sectors have equal factor intensities; will bear more than ak when the corporate sector is the more capital-intensive of the two; and will bear less than a/, when the corporate sector is the more labor-intensive of the two. Exactly how much more or less than ak capital will bear depends upon the extent of the difference in factor proportions between the two industries, on the elasticity of substitution between labor and capital in the noncorporate sector (which determines the ease with which it can absorb new factors in proportions different from those initially used), and on the elasticity of substitution on the demand side between corporate products and noncorporate products (the greater this elasticity, the sharper the decline in demand for corporate products as a consequence of the tax, the larger the ejection of resources by this industry, and therefore the greater the shift in relative factor prices required to restore equilibrium).
When, on the other hand, the elasticity of substitution between labor and capital is zero in the untaxed industry and non-zero in the taxed industry, capital tends to bear more than the full burden of the tax. In this case, when the initial factor proportions are the same in both industries, the fixity of proportions in the untaxed industry assures that they will remain the same even after the tax has worked out its full effects. The relative returns to labor and capital, being governed in this case by the proportions in which the factors are used in the taxed industry, will remain the same, gross-of-tax, as they were in the pretax equilibrium. Capital’s return net-of-tax will fall by the amount of the tax, but, as in the case of infinite elasticity of substitution in the taxed industry, the reduction will occur for capital used in either industry. The total reduction in capital’s earnings will be (l/bc) times the yield of the tax, reflecting a very substantial “overbearing” of the tax by owners of capital and a corresponding net gain to those whose income accrues principally from the sale of labor services.
The above result (for a zero elasticity of substitution in the untaxed industry) is modified when the initial factor proportions are different in the two sectors. If the corporate sector is initially more labor-intensive than the noncorporate sector, the ejection of capital and labor resources in the proportions in which the latter sector will absorb them will make the corporate sector still more labor-intensive. A readjustment of factor prices against labor and in favor of capital will have to occur, and capital will end up bearing less than (l/bc) times the observed yield of the tax. Conversely, if the corporate sector is initially more capital-intensive than the noncorporate sector, and has a zero elasticity of substitution, factor proportions will have to alter to make the corporate sector still more capital-intensive, requiring a shift of the gross-of-tax ratio of factor prices against capital. Capital will then bear more than (l/fcc) times the observed yield of the tax.
When capital bears 100 per cent of the burden. Falling well within the “plausible limits” of incidence defined by ak and l/bc is the case in which capital bears 100 per cent of the burden of the tax. This result therefore cannot be regarded as being an extreme outcome, as the conventional use of the capital-labor-consumer trichotomy implies. Added insight into the plausibility of capital’s bearing the full burden of the tax can be gained from an analysis of the case in which each industry is characterized by a Cobb—Douglas production function and in which the elasticity of substitution in demand between the products of the two sectors is unity. Letting X represent the quantity of the product of the corporate sector, Y the quantity of the product of the noncorporate sector, Px and Py their respective prices, and Z the national income, the unit elasticity of substitution between X and Y implies
(1) XPx = αZ; YPy= (l-a)Z,
where a is the fraction of Z which is spent on X. Competitive behavior of producers of X and of Y, together with the Cobb-Douglas functions X = KβalphaLalpha(1-β), Y = KΓyLy1-Γ), where β and y are constants, lead to the relations
Here Kx and Ky represent the amounts of capital used in the X and Y industries, respectively, and Lx and Ly refer to the corresponding amounts of labor. The price of labor is denoted by PL, this being the same in the two industries. The cost of the services of a unit of capital is denoted by P»» for the corporate sector and by Pk for the noncorporate sector, the former including the corporation income tax and the latter, of course, not including it. If T is the rate of corporation income tax applied to the earnings of capital in sector X, then Pt = Ptr(l — T), since the after-tax earnings (as distinct from the before-tax cost) of a unit of capital are assumed to be brought to equality in both industries through the workings of the capital market.
It can be seen from relations (1) and (2) that labor will always earn a constant fraction of the national income, regardless of whether a corporation income tax exists or not. 1’his already guarantees that exactly the full burden of the corporation tax must in this case be borne by capital. The precise way in which the burden reaches all units of capital can be seen by analyzing the relations derived from (1) and (2):
(3) KxPkz = βαZ; KyPk = γ(1 - α)Z.
From these it results that [KxPkz/KyPk] is a constant equal to βα/[Γ(l — Γ)]. But since Pk = Pkx(l - τ), this means that K,./[K;/(1 - r)] will also be a constant—that is, the ratio (Kr/Ky) will vary directly with (1 — r). If, with no tax at all, there were 150 units of capital in each sector, a tax of 50 per cent will eventually result in there being 100 units of capital in X and 200 in Y. The 200 units of capital in Y will earn the same fraction of national income as was previously earned by the 150 units of capital in Y; hence the net-of-tax return to capital will have been reduced by a quarter, say, from $1.00 to $.75 per unit. The 100 units of capital in X will cost entrepreneurs $1.50 per unit and will therefore have the same total cost as the 150 units employed in X at a unit cost of $1.00 before the tax was imposed. But the aftertax earnings of capital in X will, like those of capital in Y, have fallen from $1.00 to $.75 per unit. Overall, capital will have lost $75, represented by the reduction of $.25 per unit spread over all 300 units, and this amount will be precisely equal to the yield of the tax to the government.
The result obtained in the above example applies not only to all cases fulfilling relations (1) and (2), which are derived on the basis of unit elasticities of substitution in demand between the two products, and in production between the two factors in each industry. It has been shown elsewhere (see Harberger 1962) that the same result obtains so long as the three critical elasticities of substitution are equal, regardless of their magnitude.
The general-equilibrium, two-sector model. All the cases presented above are special cases of a general-equilibrium, two-sector model of the incidence of taxation, in which the incidence of the corporation income tax is shown to depend in a specific way on the three critical elasticities of substitution and on the relative factor intensities of the two sectors. This model, based on the assumptions that the supplies of capital and labor are not influenced by the presence or absence of the tax, that competition prevails in both the corporate and noncorporate sectors, and that per-unit net-of-tax earnings of each productive factor are equalized between sectors, was first presented by Harberger (1962) and further elaborated by Mieszkowski (1967). They have adapted the model to explore the implications of various possible types of monopolistic and oligopolistic behavior in the corporate sector; the results of the original model have proved quite insensitive to plausible allowances for noncompetitive behavior.
The chief weakness of the model appears, at this writing, to be the assumption that the path of the capital stock through time is independent of the rate of corporate taxation. If, through a tax-induced reduction in the net rate of return on capital and/or through a tax-induced shift in the distribution of disposable income, the rate of saving is affected, the relative supplies of capital and labor will gradually diverge from the path they would have followed in the absence of a corporation income tax, with consequent effects on the distribution of income. The difficulties confronting attempts to resolve this issue are twofold. First, a dynamic rather than a comparative-static approach is required, which, while not a serious obstacle as such, involves additional parameters whose magnitudes are difficult to estimate and requires the specification of the precise nature of the dynamic structure of the economy. A great deal of further work is needed before our understanding of the economy’s workings can advance to the point where these dynamic aspects can be treated with a degree of precision comparable to that with which problems of comparative statics are handled today.
The second difficulty is conceptual rather than practical. In a comparative-static approach to incidence, excess-burden being neglected, the sum of the changes in real income of the separate groups of the economy is a global reduction in real income equal to the proceeds of the tax; this is no longer true when a dynamic framework is employed. If the rate of saving is reduced by the corporation income tax, the future incomes accruing to individuals are reduced not only because the tax has to be paid each year, but also because less has been saved in the years since the tax was introduced. But it would be wrong, in estimating the incidence of the tax, to count both (a) the full reduction of real income in the year the tax is paid and (fc) the future reduction in real income stemming from the reduction in savings induced by the tax. If one counts (a), one has already accounted for the present value of the future reduction in real income. To take explicit account of the future effects of changes in the savings pattern, one would properly have to convert the entire calculation of incidence to a consumption rather than an income basis and count (c) the current reduction in consumption resulting from the tax paid today plus (d) the future reduction in consumption occasioned by the reduction in future incomes stemming from the current tax-induced reduction in the rate of saving.
When the above difficulties are considered, it appears that the current-income approach (i.e., counting only (a) as the measure of incidence) is preferable, on grounds of both clarity and convenience, to approaches attempting to introduce dynamic responses into the measurement of incidence. Nevertheless, the dynamic responses in question here are of substantial interest in their own right, even if they are not linked to the analysis of incidence. The study of this aspect of the effects of corporation income taxation has only recently begun, the most important early efforts being those of Krzyzaniak (1966) and Sato (1967).
Arnold C. Harberger
Goode, Richard B. 1951 The Corporation Income Tax. New York: Wiley.
Harberger, Arnold C. 1959 The Corporation Income Tax: An Empirical Appraisal. Volume 1, pages 231-250 in U.S. Congress, House, Committee on Ways and Means, Tax Revision Compendium. Washington: Government Printing Office.
Harberger, Arnold C. 1962 The Incidence of the Corporation Income Tax. Journal of Political Economy 70:215-240.
Harberger, Arnold C.; and Bailey, Martin J. (editors) 1968 The Taxation of Income From Capital. Washington: Brookings Institution.
Krzyzaniak, Marian (editor) 1966 Effects of the Corporation Income Tax: Papers Presented at the Symposium on Business Taxation. Detroit, Mich.: Wayne State Univ. Press. → See pages 107-117, “Efficiency Effects of Taxes on Income From Capital,” by Arnold C. Harberger.
Mieszkowski, Peter 1967 On the Theory of Tax Incidence. Journal of Political Economy 75:250-262.
Musgrave, Richard A. 1959 The Theory of Public Finance: A Study in Public Economy. New York: McGraw-Hill.
Musgrave, Richard A.; and Krzyzaniak, Marian 1963 The Shifting of the Corporation Income Tax: An Empirical Study of Its Short-run Effect Upon the Rate of Return. Baltimore: Johns Hopkins Press.
Sato, Kazuo 1967 Long-run Shifting of the Corporation Income Tax. Unpublished manuscript.
Stigler, George J. 1963 Capital and Rates of Return in Manufacturing Industries. National Bureau of Economic Research, General Series, No. 78. Princeton Univ. Press.
yearbook of national accounts statistics. → Published by the United Nations since 1958. Contains detailed estimates of national income and related economic measures for some 76 countries.
IV. PROPERTY TAXES
Property taxes are general and recurring taxes on owners or users of property, based on the capital value or the annual rental value of the assets. They are considered distinct forms of taxation, although many other taxes reach some facet of property ownership or use, including taxes on the income from property, taxes on realized appreciation in property values (capital gains), taxes in a number of European countries on net wealth, wealth transfer taxes or succession duties, and taxes on selected types of personal property, such as motor vehicles.
Property taxation is widespread and is typically used by local rather than national governments. It provides the overwhelming bulk of local government tax revenues in the United States, in the other developed English-speaking countries, in the Netherlands, and in a number of the developing countries, especially those exposed to the British tradition. The tax is also important to local governments in Belgium, Denmark, France, Germany, and Japan, countries in which it provides roughly 20 to 30 per cent of local government tax revenues.
Property taxes are most important relative to the over-all fiscal system in the English-speaking countries, where the role of local governments tends to be a large one. In Canada and the United States in recent years, the property tax has accounted for more than 45 per cent of the tax revenues of all subnational governments (including states or provinces), about 16 per cent of the total tax revenues of all governments, and more than 4 per cent of national income. It accounted for more than 13 per cent of Ireland’s total taxes; more than 11 per cent of Britain’s; and 6 to 8 per cent in Australia, New Zealand, South Africa, Denmark, and Japan.
In most countries, the tax applies to land and/or buildings only, but in the United States, some types of personal property are subject to the property tax in all but four states. Business and farm equipment and inventories are commonly taxed, and account for perhaps 75 per cent of the personal property tax base. Motor vehicles are subject to this tax in more than half the states, and household effects are taxed somewhat more rarely. Intangible personal property—securities, bank deposits, etc.—is infrequently taxed; intangibles have provided only about 2 per cent of property tax revenues recently, and all personal property about 19 per cent. In some Canadian provinces, personal property is taxed, but it provides only 1 per cent of revenues nationally; in Japan, personal property provides nearly 40 per cent of revenues.
The most common basis for taxing real property is its annual rental value, in practice usually gross rents assessed as of some earlier date, with statutory rather than actual allowances for expenses. Real property is taxed on the basis of its capital value mainly in the United States, Canada, South Africa, Germany, Austria, and Denmark. The major difference between the customary annual rental value system, such as the British, and the American-Canadian capital value variant is the treatment of land and vacant improvements. In the British system, the tax is based on the rental value of property in its present, actual use, and vacant properties therefore are not taxed. In the American system, in theory, property is valued at market value or some fraction thereof. Market value is, in an equilibrium situation, the capitalized value of expected net returns from property in its most profitable lawful use, not its present use. The capital value basis therefore tends to favor optimal use of land somewhat more than the customary annual value basis does.
The evolution of European property taxes (and their American descendant) from feudal dues into a general tax on property, and their subsequent narrowing to taxes on land and buildings, has been traced by Seligman (1895). Jensen (1931, chapter 2) gives a similar history of the American property tax. The importance of the property tax in revenue systems has declined over the years, with the growing role of national as compared with local finance. In the United States (and in Canada, as well) the property tax has also been displaced by the adoption of consumption and income taxes by state governments, beginning after 1910 but especially in response to the collapse of property values in the early 1930s. Subventions from state tax revenues increasingly replaced local property taxes, and the property tax as a proportion of total state-local taxes declined from 80 per cent in the 1920s to less than 50 per cent by 1946. However, since 1950, despite very rapid increases in the total scale of state-local finance, the property tax has maintained approximately the same relative importance (U.S. Bureau of the Census 1964).
Experience in the United States . In part, the recent buoyancy of the American property tax is related to the large role of receipts from housing in the tax. Estimates are that in 1957 housing provided about 41 per cent of tax revenues and about 44 per cent in 1962. Real estate taxes on housing amount to an average of one-sixth or more of annual rental receipts, or of cash expenditures for housing in the case of owner-occupants. This is in effect an excise tax at a rate far higher than that on any other broad category of consumer expenditure in the United States. Housing property taxes equal, on the average, about 1.5 per cent of property values (U.S. Bureau of the Census 1963a).
Slightly less than 10 per cent of American property taxes is derived from real and personal farm property. Relative to property values, farm property taxes are lower than those on nonfarm housing or business property—less than 1 per cent in recent years. However, farm property taxes equal nearly 10 per cent of net farm income, and only a slightly smaller fraction of national income originating in agriculture.
Roughly 45 per cent of the tax comes from non-farm business property. Business property taxes are especially high, however measured, for railroad, pipeline, and other public utility companies. These firms are markedly real-property intensive enterprises and are, furthermore, politically vulnerable to discriminatory taxation. In 1957, estimated property tax payments were equal to 6.3 per cent of net output for railroads and public utilities, 1.4 per cent for manufacturing, and 1.8 per cent for other nonfarm business property.
The American property tax is not a single uniform tax institution but, in reality, thousands of different taxes reflecting differences in the legal coverage of the tax, the economic tax base available, the expenditure requirements to be financed, and the resulting tax rates among the 82,000 governmental units which rely upon the property tax. The tax tends to be of least importance in state-local fiscal systems in the southeastern United States and most important in New England, the Great Lakes states and the northern Plains states. The varying role of state taxes and state aid to local government explains much of this variation, with the property tax more important in those parts of the country where the state government’s financial role is smallest.
Because urban government is costly, property tax rates are higher in urban than in rural areas and higher in the more urbanized states, notably in New England and the Middle Atlantic states, where tax rates frequently exceed 2.5 per cent of the market value of taxable property. In contrast, tax rates in most southern and Mountain states average less than 1 per cent (U.S. Advisory Commission . . . 1962, tables 37 and 41). Urbanization does not explain all the differences, however, since property tax rates in large northeastern cities are distinctly higher than in large cities elsewhere, and those in southern cities distinctly lower (U.S. Bureau of the Census 1963a). These large regional differences do not seem to have had major effects on location of industry, however, in view of the relative rates of growth of states with high and low property and other business taxes (Due 1961, p. 171).
Within large urban areas in the United States, tax rate differences are considerable among the great numbers of separate taxing jurisdictions operating in most individual metropolitan areas, and no doubt they do affect locational patterns. In the older parts of the country, per capita taxable property values tend to be lower in central cities than in their suburbs, expenditure requirements higher, and effective tax rates higher. This will tend to spur migration of business and high income residents from central city locations to suburban ones if tax differentials against the central cities are widening, as appears to be the case.
Among suburban taxing jurisdictions, property tax rates are usually lower and the level of public services higher in communities with higher property values per capita—either because they are dormitory suburbs with high-value houses or because they contain heavy concentrations of nonresiden-tial property, a situation which encourages land use planning designed to maximize the fiscal position of individual suburbs (Netzer 1962, p. 193). The results may be both inefficiency in location patterns and, to the extent that racial and other barriers limit intrametropolitan mobility, adverse effects on interpersonal equity. However, these intrametropolitan property tax differentials may be narrowing over time; the evidence is mixed in this regard.
Shifting and incidence . In theory, taxes on the value of sites—bare land—rest on the owners of the sites at the time the tax is initially levied or increased. The tax cannot be shifted forward to other users of the land, since shifting can occur only if supply can be reduced, which is not possible for land. Prospective purchasers of the sites, faced with a new or higher annual tax burden, will reduce their bids, and the higher tax will be capitalized in the form of lower land prices. There are some complications in this analysis, as Simon (1943) points out, but it is generally accepted.
In general, property taxes on improvements and on tangible personal property used in business can be expected to be shifted forward to final consumers of business services and occupants of housing. This is because the taxes will discourage new real investment in these forms, and over time the reduced supply of capital assets will raise their prices. Owner-occupants of housing will themselves bear higher property taxes because there is no way they can be shifted.
This, at any rate, is the theoretical conclusion in partial equilibrium analysis. A general tax on capital could conceivably be shifted backward to owners of capital, in the form of lowered rates of return on the whole stock of capital, provided that the supply of savings is not responsive to interest rates. Another complication is the time lag required to shift taxes on physical capital forward, since the annual increments are usually small fractions of the total stock. In addition, the partial and unequal nature of the property tax limits shifting. Firms competing in national markets are able to shift local property taxes only to the extent that these taxes are common to their competitors or reflect the value of public services financed by these taxes. But, on the whole, most business property taxes are probably shifted forward and much of the remaining portion possibly shifted backward to land owners, by reducing local land values.
Empirical studies of the incidence of the American property tax by income class based on these “shifting” assumptions have generally agreed that the property tax is, on balance, regressive when compared with current money income. Because of the forward shifting of a substantial part of business property taxes, property taxes on nonresiden-tial property are, in part, equivalent to a general consumption tax, regressive through much of the income range. Property taxes on owner-occupied housing and on rented housing appear to be even more regressive than taxes on nonresidential property. This is mainly because housing consumption outlays constitute a larger proportion of lower than of higher current money incomes.
In combination, residential and nonresidential property taxes are markedly regressive for the lowest income groups but only mildly regressive in the middle ranges of the income distribution. If no allowance is made for income tax savings due to the deductibility of property taxes, the latter are progressive for the highest income groups. When measured on the basis of a broader income definition, or one which averages income over a longer time span, the property tax is very nearly proportional in its incidence. The benefits from expenditures financed from the property tax are distinctly progressive in their incidence, notably in connection with education, as Morgan and his colleagues (1962) show.
On balance, therefore, the American property tax is no mean contributor to income redistribution from the richer income groups to the poorer ones, considered in the aggregate. However, in view of the wide dispersion about the means within income classes and of the many geographic differences, the redistributive effects with regard to individual households are highly uneven; the tax contains a substantial element of interpersonal inequity, however progressive or proportional it may be in the aggregate.
Allocative effects . In general, the American property tax (and property taxes in Canada, Britain, Ireland, and other high property tax countries) tends, over time, to shift resources in the aggregate from private construction to education and other public services. This general effect of the tax, like other economic effects, may not be visible in the empirical evidence, since it can readily be overwhelmed by other factors, such as housing subsidies and the like.
Property taxes also discriminate among inputs, encouraging the substitution of other inputs for real property; to the extent that firms and industries are limited in their opportunities to substitute, the property tax is then discriminatory among industries. Railroads are perhaps the best example of this. The competitive decline of the rails in the face of new transport technology was no doubt inevitable, but it was hastened by the property tax. Railroads are inherently real-property intensive and thus are subject to heavier taxes of this type than are their air, water, and road competitors. Rising property tax rates in the postwar years contributed to a rate of increase in rail charges which hardly assisted the carriers in their efforts to compete.
The American property tax tends to discourage housing in general, since it imposes taxes on this use of the consumer’s dollar which are markedly higher than those on most other uses. Although property taxes are frequently very high in dormitory suburbs, whether measured by house value or by personal income, the deterrent effect there may be small, since the tax is directly tied to school and other expenditure benefits realized by householders. However, in large cities, the tie to expenditure benefits is tenuous for many housing consumers, and property taxes amounting to large fractions of gross rental receipts—25 per cent or more in large northeastern cities—probably inhibit the construction of new rental housing and the rebuilding of the older cities. In any event, property tax rebates or reductions for selected classes of new housing have proved to be among the most effective stimulants yet devised.
Administration—Assessment problem. The fundamental administrative problem in property taxation is that of valuing or assessing property. In a number of countries, including Britain, valuation is done by a central government agency. In the United States, however, assessment of most classes of property is made (except in Hawaii) by local assessors; according to the U.S. Advisory Commission on Intergovernmental Relations (1963, p. 101), there are probably eighteen thousand assessment districts in the country. The quality of local assessors and assessment varies widely; it has been vigorously criticized by students of the problem since the last quarter of the nineteenth century. Some assessors are elected, part-time amateurs using primitive methods and tools; other assessment organizations are large, professional agencies applying all the technological aids available. In the best-administered jurisdictions in the United States, owners of single-family houses with similar market prices are likely to have assessments which vary by less than 10 to 15 per cent; in the worst the average variation may be far in excess of 50 per cent.
Some observers, such as the Advisory Commission, noting the important revenue role of the property tax, have urged its administrative rehabilitation. This involves limiting the coverage of the tax to classes of property which can be discovered and valued practicably, devising large enough assessment districts so that all can be served by full-time professional staffs, and greatly enlarging the role of the states in the provision of technical assistance to and supervision of local assessment.
Other observers are much more pessimistic. They note the inherent difficulties of valuing widely differing assets, only a few of which are actually sold within a short span of time and some of which—like large industrial plants—are never sold. They regard the standard of “good” assessment—assessments for similarly market-valued properties differing in the aggregate by no more than 20 per cent from the average—as an un-acceptably low level of performance as compared with sales and income tax administration. They
query whether some of the most glaring disparities in assessment practices—such as discrimination among classes of property within a city—are not in reality accommodations to a level of taxation which, if applied uniformly, would be economically and/or politically intolerable.
Prospect . Despite its inequities, its questionable impact on economic efficiency, and the poor quality of its administration (at least in the United States), the property tax persists and in revenue terms has been holding its own in the past few years in the United States and in a number of other countries. Part of the reason for this is that property tax revenues have risen rapidly in recent years, along with the level of economic activity. The market value of taxable property—the economic base of the tax—has risen almost as rapidly as gross national product in the postwar period, an apparent interruption to a long-term downward trend in capital-output ratios. Burkhead (1963, p. 70) concludes that the property tax is a far more responsive source of local government revenue than its traditional critics have allowed.
Site value tax (”single tax”). Perhaps the most vigorously advocated alternative to the prevalent systems of real property taxation is the site value tax, first propounded as “the single tax” by Henry George in 1879. The equity argument for site value taxation is that bare site values, or location rents, are created by population growth and general community improvements rather than by the actions of individual landowners, and that therefore taxation of this “unearned increment” is highly equitable. The resource allocation argument is that the site value tax applies to a surplus—the differential returns available from conducting an activity at particular sites—and therefore is economically neutral. Taxation does not reduce the supply of sites, but lowers their after-tax capitalized net returns, or price. But this neutrality is in contrast with the existing property tax, which, by applying to improvements as well as to site values, discourages new construction in general. The existing tax, moreover, tends to encourage low intensity uses, or holding of land idle for speculation, since taxes are lower if improvements are minimal. As noted earlier, the British type of property tax has this effect to a marked degree. Shifting to a site value tax would tend to foster improvements in general, and would discourage withholding of land from use, relative to present property tax practices in most places.
Site value tax advocates have tended to claim much more than this for their proposal. Some, for example, argue that site value taxation by itself can cure most of the ills of the large older cities. Opponents have presented three principal arguments against it. The first is the difficulty of separating site values and improvement values in the case of improved property; this appears to be a real difficulty administratively but not conceptually. The second is an equity argument: large windfall losses and gains would stem from a shift from the present system to the site value tax and would be intensified by the fact that many present landowners have not been the recipients of the “unearned increments” but have paid prices reflecting these to previous owners. The third is the problem of revenue adequacy. It has been estimated that to replace the present yield of American taxes on real property with a tax solely on site values would absorb more than the entire (before-tax) rent of land. These arguments suggest that a partial replacement is perhaps the maximum possibility.
Differentially higher taxation of land, or complete exemption of improvements from general ad valorem taxes on real estate, is practiced in the United States only in Pittsburgh and Hawaii but is widespread in Australia, New Zealand, South Africa, and Canada. In Australia and New Zealand, most local taxing units have exempted improvements from taxation, this trend beginning in the 1890s. In South Africa, most local authorities have either differential taxation or complete exemption of improvements. In Canada, differential taxation is widespread in the four western provinces. Because of so many environmental differences other than the property tax, it is difficult to discern whether the advantages claimed for the site value tax have been realized in these places. Most economists, however, agree that the site value tax should have better resource allocation effects than the prevalent property tax institutions.
[See alsoLocal Finance. Other relevant material may be found in Land; Property; and the biography of George
Burkhead, Jesse 1963 State and Local Taxes for Public Education. Syracuse Univ. Press.
Due, John F. 1961 Studies of State-Local Tax Influences on Location of Industry. National Tax Journal 14, June: 163-173.
Heilbrun, James 1966 Real Estate Taxes and Urban Housing. New York: Columbia Univ. Press.
Jensen, Jens P. 1931 Property Taxation in the United States. Univ. of Chicago Press.
Morgan, James N. et al. 1962 Property Taxes and the Benefits of Public Education. Pages 288-308 in Michigan, University of, Survey Research Center, Income and Welfare in the United States: A Study. New York: McGraw-Hill.
Netzer, Dick 1962 The Property Tax and Alternatives in Urban Development. Regional Science Association, Papers and Proceedings 9:191-200.
Netzer, Dick 1966 Economics of the Property Tax. Washington, D.C.: Brookings Institution.
Robert Schalkenbach Foundation, New York 1955 Land-value Taxation Around the World. Edited by Harry Gunnison Brown et al. New York: The Foundation.
Seligman, Edwin R. A. (1895) 1928 Essays in Taxation. 10th ed., rev. New York: Macmillan. → See especially pages 19-65, ’The General Property Tax.”
Simon, Herbert A. (1943) 1959 The Incidence of a Tax on Urban Real Property. Pages 416-435 in American Economic Association, Readings in the Economics of Taxation. Homewood, 111.: Irwin.
U.S. Advisory Commission ON Intergovernmental Relations 1962 Measures of State and Local Fiscal Capacity and Tax Effort. Report M-16. Washington: Government Printing Office.
U.S. Advisory Commission ON Intergovernmental Relations 1963 The Role of the States in Strengthening the Property Tax. 2 vols. Report A-17. Washington: Government Printing Office.
U.S. Bureau OF THE Census 1963a Census of Housing: 1960. Volume 5: Residential Finance. Washington: Government Printing Office. → Contains data on real estate taxes in relation to property value, income, and rental receipts. This census is taken decennially.
U.S. Bureau OF THE Census 19636 Census of Governments: 1962. Volume 2: Taxable Property Values. Washington: Government Printing Office.
U.S. Bureau OF THE Census 1964 Census of Governments: 1962. Volume 4, no. 4: Compendium of Government Finances. Washington: Government Printing Office. → Contains comprehensive data on property tax revenues and all other federal, state, and local government financial data for 1962, by states and counties. This census is taken quinquennially, in years ending in 2 and 7.
V. SALES AND EXCISE TAXES
Taxes on the production or sale of commodities are among the oldest taxes known; they play a significant role in the tax structures of most countries of the world. Despite rapid expansion of income taxation in the last century and widespread acceptance of the argument that by usual standards such taxation is superior, the sales and excise taxes have not only maintained their position but in many countries have increased in importance. Despite the long experience with these taxes, major disputes about them continue—on such questions as shifting and incidence, relative effects on economic welfare through resource reallocation, and effects on economic development and the maintenance of full employment.
Sales and excise taxes have traditionally been classified as forms of indirect taxation, although this term has fallen into disuse because there is no generally accepted delineation between such taxes and those labeled direct. On a somewhat different basis of classification, they are designated as consumption taxes (as distinguished from income, wealth, or other taxes), under the assumption, questioned below, that their burden is distributed in relation to consumer expenditures.
The distinction between excises and sales taxes is based on the scope of coverage. Excises apply to particular commodities or related groups of commodities (such as tobacco products), while sales taxes apply to broad categories of commodities, typically to all commodities other than those specifically exempted. Obviously, a broad system of excises, such as that of Spain, does not differ basically from a sales tax and can have broader coverage than a sales tax limited to certain categories, such as the British purchase tax, or one with widespread exemptions, such as those of the Canadian provinces. However, commodity taxes usually fall clearly into one category or the other, and the distinction is useful for purposes of analysis. The terminology as outlined is not universally employed; for example, excises are sometimes referred to as selective sales taxes, and some proposals for a federal sales tax in the United States have referred to the proposed levy as a general excise tax. But the concepts given are now those most commonly employed.
Historical development . Excises are among the oldest forms of taxation, dating back, in their rudimentary form, to ancient Rome. The first use in England came in 1643. France was a major user, especially under Colbert, in the seventeenth century. Except for a few early attempts, the United States did not employ excises until the Civil War, when an extensive system was introduced for war-financing purposes. Only the liquor and tobacco taxes survived, however. Ultimately, other excises were introduced: during World War I, the depression era, and World War II. Since World War II, the taxes have slowly been reduced, and most of the remaining ones, except those on liquor, tobacco, motor fuel and motor vehicles, and telephone service, were repealed in 1965. The states have confined excises largely to liquor, tobacco, and motor fuel, and these three categories are also the major revenue producers among the federal excises and the excises of other countries. In the newly developing economies excises are typically introduced as supplements to the customs duty system when domestic production of liquor and tobacco products is first undertaken.
Sales taxation dates back to the Spanish alcabala, introduced in the fourteenth century. Because this tax was blamed for the commercial decline of Spain, it was not adopted by other countries, and the sales tax did not come into widespread use until the twentieth century. The financial problems during and immediately after World War i led Germany, France, Italy, other Continental countries, and Canada to impose the tax. More countries followed in the depression years and during World War ii; among the most recent national sales taxes are those of Sweden and Denmark. The movement in the United States began in the depression years of the 1930s, when the states were squeezed between declining revenues from other taxes and increasing expenditure needs. Following the success of Mississippi with the tax in 1932, some 29 states levied a sales tax prior to World War n, although six subsequently allowed it to expire. In the postwar era the pressures of rising expenditures led additional states to impose the tax. There has also been a trend toward higher rates and broader coverage. The sales tax movement in the provinces of Canada has been similar to that in the United States.
Forms of excise and sales taxes. Excise taxes may be collected at the manufacturing, wholesaling, or retail level; the manufacturing level is by far the most common because the relatively small number of firms facilitates control. Excises may have specific rates, applied per unit of the physical product, as, for example, motor fuel taxes; or ad valorem rates, applying to the sale price. The former are easier to administer, if the product is highly standardized, but may be regarded as less equitable, since the tax rate does not rise in relation to value, and the yield of the tax is not automatically responsive to price changes. Excise taxes are also often classified in terms of general purpose or philosophy. Those on products such as liquor and tobacco, the use of which the government seeks to penalize as a matter of policy, are known as sumptuary taxes. Typically, these are highly productive of revenue. Luxury excises are ones designed to distribute tax burden in relation to ability to pay, as measured by purchase of luxury articles. Another group of widely used excises is directly related to motor vehicle use and is designed to distribute the costs of highways on the benefit principle. The United States provides a more direct link between the yield of these taxes and the costs of financing highways than do most countries.
The most significant classification of sales taxes is on the basis of stage of collection. Multiple-stage sales taxes are those which apply at two or more stages in the production and distribution channels. The complete turnover tax version applies at all stages in production and distribution: to the sales of materials and parts, as well as to all sales of the finished products—by manufacturers, distributors, and retailers. In practice the turnover taxes in use are not entirely complete or uniform. Lower rates are sometimes applied to sales by wholesalers (e.g., Germany), and retail sales may be excluded (e.g., Belgium). The turnover tax suffers from several major defects: integrated firms are favored over nonintegrated ones, thus encouraging integration; and the over-all tax on a particular product depends upon the number of stages in the production and distribution channels through which it passes.
The single-stage taxes are confined to one stage in production and distribution and avoid the disadvantages arising from the multiple application of the turnover tax. There are three major versions. The manufacturers sales tax, as used in Canada, applies to the sale by the manufacturer of finished products. The wholesale sales tax applies to the last wholesale transaction, that is, the purchase by the retailer. The retail sales tax applies to the final sale at retail. Each of these forms of tax will operate satisfactorily. On the whole, the retail tax, while collected from a much larger number of vendors than the others, gives rise to the fewest problems, because it can be applied to the actual selling price in virtually all instances. Avoidance of discrimination among various types of distribution channels is very difficult with the other single-stage taxes, since the taxable price is influenced by the structure of distribution. With a manufacturers tax, a manufacturer selling at retail is subject to a higher tax on a given product than one selling to a wholesale distributor. Attempts to meet this problem lead to serious complications in the tax. Nonretail taxes also tend to pyramid on the way to the final consumer, because of application of percentage markups. The retail tax, however, is not suitable in a country in which most retailing is conducted on a very small-scale, noncommercial basis, through family shops and market stalls.
The most recent version of the sales tax, the value added tax, as employed in France and accepted as the ultimate standard form of sales tax for the European Common Market countries, involves the application of tax to each firm in the production and distribution channels but only taxes the value added by the firm (in practice, the tax rate is applied to the firm’s gross sales, and from this figure is subtracted the tax paid during the period on goods purchased by the firm). Thus, the evils of the turnover form of tax are avoided, since the type of distribution channel will not affect the amount of tax liability, while the direct impact of the tax is spread out over a much wider range of taxpayers than is the case with the single-stage taxes, and much of the tax is collected from large firms at stages prior to retailing. This form may facilitate exclusion of capital goods from the tax. However, it offers little if any general advantage over the retail sales tax in situations where administration of the latter is feasible.
Present use . It is not feasible to present a detailed survey of existing sales tax structures. Table 1, however, gives a general outline for the major countries. Sales taxes are now employed by all countries of western Europe except Spain (which has an extensive system of excises), although the British purchase tax is of restricted scope. The tax is used by many states in India; by Pakistan, Indonesia, and the Philippines; and by Australia and New Zealand. In Latin America, the tax is used in Brazil by both the national government and the states, and it is a significant revenue source in Chile, Argentina, Uruguay, Ecuador, and Mexico. In Canada the tax is used both by the dominion government (manufacturers sales tax) and by nine provinces (retail taxes). In the United States the retail sales tax is employed in 43 states, but the federal government uses only a limited list of excises. Countries in early stages of economic development find customs duties the most satisfactory form of commodity tax.
Virtually every country of the world uses some form of excise tax, particularly on liquor, tobacco, and motor fuel; others, especially those not using sales taxes, also apply excises to various luxury goods. No simple summary of excise systems is possible.
It is very difficult to make precise comparisons between countries of relative dependence on various
|Table 1 — Sales taxation in major countries, 1967|
|Type of tax||Basic percentage rate|
|Italy||turnove, to retail||3|
|Germany||turnove, through retail||4|
|Belgium||turnove, to retail||6|
|Netherlands||turnove, to retail||5|
|Luxembourg||turnove, through retail||2|
|United Kingdom||wholesale, selected commodity groups||varying|
|Finland||wholesale and retail||10|
|Austria||turnover, through retail||5.25|
|United States (43 states)||retail||2 to 5|
|(9 provinces)||retail||5 to 8|
|Mexico||turnover||1.8 plus state supplements|
|South and Central America:|
|(federal)||manufacturing||varying, 2 to 10|
|(most states)||turnover||2 to 5|
|India (states)||turnover or,retail||wide variation|
|Australia||wholesale||varying, 10 to 30|
taxes. In the United States, sales taxes generally yield about 25 per cent of the revenues of the states in which they are levied, but in a few states they yield as much as 50 per cent. Excises yield about 11 per cent of federal revenue. The Canadian federal sales tax yields about 18 per cent of total federal tax revenue; the provincial sales taxes, 26 per cent of provincial tax revenue.
The turnover tax provides 42 per cent of the German federal revenues; other figures of sales tax yield include 35 per cent in France, 21 per cent in Italy, 40 per cent in Belgium, 19 per cent in the Netherlands.
Shifting and incidence . Traditionally it has been argued that both excises and sales taxes are typically shifted forward, through price increases, to the consumers of the products and thus are borne in relation to consumer spending on the taxed commodities. In purely competitive markets, with a fixed stock of goods on hand in the market period there will be no initial change in price, and temporarily the burden will be borne by the producers. But output and supply will fall, and the market price will rise. Over a long-run period the exact amount of the tax will shift forward, if the industry is one of constant cost conditions. Under increasing cost conditions, the ultimate increase in price will be less than the amount of the tax and a portion of the burden will be borne by the owners of specialized resources used in the industry, the prices of which decline as the volume of the product sold is reduced because of the higher commodity prices.
In nonpurely competitive markets the pattern of incidence is less clear. Typically—and there is considerable empirical evidence of this—prices will be raised immediately in response to the imposition of the tax, since firms take the initiative in setting their own prices and will likely adjust prices upward when they experience a general increase in costs. As long as the various competing firms follow the same policy, the increase is likely to be profitable. There are certain to be exceptions, however. If some firms fail to increase, the others will find an increase unprofitable. The over-all demand for some products may be so elastic that increases are unprofitable. Over a longer period there will be a greater tendency for price to rise by the amount of the tax, since prices must cover average cost. Here again, however, there will be exceptions. A monopolist or a group of firms following a concerted policy and having obtained, prior to the tax, maximum excess profits for the group will find it profitable in most instances to absorb a portion of the tax, since raising price by the full amount would result in a loss in revenue greater than the reduction in cost due to reduced output. It may be argued that a general sales tax can be shifted more easily than excises, since there is less danger of a loss in sales to untaxed commodities. The common practice (often required by law), under retail sales taxes, of adding the tax to the customer’s entire bill, rather than readjusting individual prices, undoubtedly facilitates shifting.
The argument that sales taxes are borne primarily by consumers has been questioned in recent years. Rolph (1952) maintained that a sales tax is borne in the same fashion as a flat-rate income tax, namely, in proportion to factor incomes. Rolph assumed perfectly competitive markets and perfectly inelastic supplies of the factors of production, and he disregarded the use of the revenue received from the tax. Thus, factor demand and factor prices fall. His conclusions, however, have been questioned, particularly in regard to the assumption about the use of the revenues. Buchanan (1960), and Rolph in more recent writings (Rolph & Break 1961, chapter 13), have argued that regardless of the assumption made about the use of the revenue, a sales tax cannot be borne by consumers because a tax rests on consumers only if the general price level increases and general price level increases cannot be attributed to taxes but only to monetary considerations. Musgrave (1959, chapters 10, 15, 16) maintains that the distribution of tax burden depends, not upon the direction of change in prices, but rather upon the relative changes in commodity and factor prices and concludes that a sales tax confined to consumer goods is borne in relation to consumption, whether commodity prices rise and factor prices remain unchanged or factor prices fall while commodity prices remain unchanged. He argues, however, that if the tax applies to both consumption and investment goods, the burden is distributed in the same fashion as that of a proportional income tax, regardless of the direction of change in price levels. Despite this extended theoretical controversy, policy discussions relating to sales taxes generally assume that the tax is, for the most part, shifted to consumers.
The excess burden argument . For a number of years the prime criticism advanced against excise taxes and, to a lesser extent, sales taxes of restricted scope has been that of “excess burden.” A tax on a particular commodity shifts purchases to untaxed commodities, thus resulting in a loss in economic welfare without an offsetting gain to the government. The pioneer statements were those of Hotelling (1938) and Joseph (1939). Critics pointed out that the thesis was valid only if the original revenue allocation was an optimum one and the pattern of income distribution the prefererred one. Other critics, such as Wald (1945), argued that income taxes, by affecting the choice between work and leisure and choices among various economic activities, likewise adversely affected economic welfare. But in a recent study of the question, by Harberger (The Role of Direct and Indirect Taxation in the’ Federal Revenue System 1964), the conclusion is reached that, on the basis of reasonable relevant assumptions, it is likely the excess burden of excises is greater than that of income taxes, primarily because of the limited response of work effort to income tax burdens.
General evaluation . The controversy over the relative desirability of commodity and income taxation has continued for many years with no lessening of intensity. Much of the debate centers on relative economic effects. Supporters of increased reliance on sales and excise taxes argue that income taxes retard economic growth and produce unemployment by discouraging savings, investment in business expansion, and work effort, especally on the part of business executives and professional men. Since sales taxes do not have progressive rates and may be avoided by saving rather than consuming, they do not directly penalize the gains from additional effort or business expansion and give some positive incentive to save more and consume less (except when savings are made for the purchase of goods in the future with the tax still in operation).
The opponents of sales taxation question the seriousness of the adverse effects of the income tax and argue that the greater relative impact of sales taxes on consumption will reduce national income and increase unemployment in situations in which there is some tendency toward unemployment because of inadequate total spending. A sales tax, by concentrating its burden more heavily on persons spending high percentages of their incomes and by providing some limited incentive to save more, may increase the potential rate of capital formation at full employment, but the tax may make it much more difficult to attain full employment and may thus lessen the actual rate of economic growth. Furthermore, to the extent to which the income tax does have adverse effect on the economy, this may be attributed in large measure to the high progressivity of rates and may be eliminated much more simply by changes in the income tax structure than by a shift to a sales tax. The differences attributed to the two forms of taxes are largely a result of the differences in rate structure, rather than in the base of the taxes.
In recent years the emphasis of the discussion has centered on the possibility of the replacement of the corporate income tax by the value added tax. The change has been advocated in large measure on the argument that the foreign exchange position of the country would be improved. Full export rebates would be granted for the value added tax, whereas no rebate is given for the corporate income tax, nor can one be given without violating present GATT (General Agreement on Tariffs and Trade) rules. The argument that the corporate tax places American exporters at a disadvantage, however, has validity only to the extent that the tax is reflected in higher prices of the products. The change proposed would temporarily aid American exports, whether the tax is now shifted or not, but such a change could easily invite retaliatory moves by other countries, especially if the tax is now not shifted.
Increased use of commodity taxation also has equity implications, and much of the opposition to the taxes has always been based on equity grounds. The income tax can be made progressive relative to income and can be adjusted in terms of various circumstances, such as size of family, which are considered to affect taxpaying ability. On the other hand, a sales tax with a broad coverage is regressive relative to income, because the higher-income groups save a greater percentage of their income, on the average, and spend more on nontaxable services. The tax likewise tends to burden large families more heavily, compared with smaller families, at given income levels (Hansen 1962). Food exemption, however, appears to eliminate regressivity (Davies 1961), but it fails to bring the precise adjustment to tax capacity that can be attained with an income tax. Some persons have suggested that the correct basis for comparing burdens is that of permanent income [see Consumption Function], rather than actual income (Davies 1961). On this basis, even a broad-based sales tax is not regressive. But it may also be argued that actual year-by-year income is the better basis for measuring tax burdens. The significance of the equity argument is, of course, one of value judgment; to many persons the use of some regressive taxes in a tax structure that is progressive over-all is not objectionable. But in terms of usually accepted standards of equity, major reliance on such taxes is undesirable.
Sales and excise taxes are also justified on administrative grounds—as being easier to enforce than income taxes. With improved income tax administration, this argument has lost most of the merit it once had. Furthermore, since the issue is one of using a sales tax along with, not in lieu of, an income tax, the over-all administrative task is obviously greater with a sales tax than without one.
In countries with a federal government, a final argument for sales taxation is the need of the states for autonomous revenue sources, in light of federal domination of the income tax field.
On the question of the choice between sales and excise taxes, the former are less discriminatory against individuals, in terms of their preferences, than excises and are less likely to distort resource allocation. On the other hand, excises, limited to particular commodities, may be easier to administer, may accomplish certain desired goals in tax policy (such as the placing of special burdens on highway users or consumers of tobacco and liquor), and may provide a more acceptable overall distribution of burden. But to raise significant revenue, either rates must be relatively high or many commodities of widespread use must be brought within the scope of the tax, and then the excise system comes to resemble a sales tax.
John F. Due
Buchanan, James M. 1960 Fiscal Theory and Political Economy. Chapel Hill: Univ. of North Carolina Press.
Davies, David G. 1961 Commodity Taxation and Equity. Journal of Finance 16:581-590.
Due, John F. 1957 Sales Taxation. London: Routledge; Urbana: Univ. of Illinois Press.
Due, John F. 1963a State Sales Tax Administration. Chicago: Public Administration Service.
Due, John F. 1963b Sales Taxation and the Consumer. American Economic Review 53:1078-1084.
Hansen, Reed R. 1962 An Empirical Analysis of the Retail Sales Tax With Policy Recommendations. National Tax Journal 15, March: 1-13.
Hotelling, Harold 1938 The General Welfare in Relation to Problems of Taxation and of Railway and Utility Rates. Econometrica 6:242-269.
Joseph, Margaret F. W. 1939 The Excess Burden of Indirect Taxation. Review of Economic Studies 6:226-231.
Morgan, Daniel C. 1964 Retail Sales Tax: An Appraisal of New Issues. Madison: Univ. of Wisconsin Press.
Musghave, Richard A. 1959 The Theory of Public Finance: A Study in Public Economy. New York: McGraw-Hill.
Organization For European Economic Cooperation, European Productivity Agency 1958 The Influence of Sales Taxes on Productivity, by C. Campet. Paris: The Organization.
The Role of Direct and Indirect Taxation in the Federal Revenue System. 1964 Princeton Univ. Press. → A conference report of the National Bureau of Economic Research and the Brookings Institution.
Rolph, Earl R. 1952 A Proposed Revision of Excise-tax Theory. Journal of Political Economy 60:102-117.
Rolph, Earl R.; and Break, George F. 1961 Public Finance. New York: Ronald Press.
Sullivan, Clara K. 1965 The Tax on Value Added. New York: Columbia Univ. Press.
U.S. Congress, House, Committee ON Ways AND Means 1964 Excise Tax Compendium: Compendium of Papers on Excise Tax Structure. ... 6 parts in 2 vols. Washington: Government Printing Office.
Wald, Haskell P. 1945 The Classical Indictment of Indirect Taxation. Quarterly Journal of Economics 59:577-596.
Walker, David 1955 The Direct-Indirect Tax Problem: Fifteen Years of Controversy. Public Finance 10, no. 2:153-176.
VI. DEATH AND GIFT TAXES
Taxes upon the transfer of property at death are known as estate taxes if they are imposed on the value of the decedent’s estate as a whole with little or no regard to the status and number of heirs, and as inheritance taxes if they are imposed upon the heirs individually. The estate tax consequently employs a single rate scale applied to the entire estate, while the inheritance tax is calculated separately on the amount received by each heir. The inheritance tax commonly employs a series of rate scales that vary with the degree of relationship of the heir to the decedent.
The tax on gifts made during life (gifts inter vivos) can likewise in principle be divided into a tax collected from the donor and a tax collected from the donee. In practice, only the tax on the donor is employed, and even that is used sparingly, most taxing jurisdictions not levying a tax on gifts inter vivos at all. Some gift taxes are cumulative, in the sense that a progressive rate scale is applied to the sum of gifts made by a given donor over his lifetime, as is the U.S. federal gift tax (Harvard Law School 1963a, chapter 3). Other gift taxes apply the graduated rate scale only to gifts made during a given year, as is the case in the German Federal Republic (Harvard Law School 1963b, chapter 4).
The death tax and the gift tax could be integrated either as a cumulative tax on all transfers made by a given donor during his lifetime or as a cumulative tax on all accessions to a given donee either through gift or inheritance. The cumulative integrated tax on donors has been proposed from time to time in the United States; as yet no country has employed it. The cumulative donee tax, or accessions tax, was in force for a short time in Japan—from 1950 to 1953 (Japan, Ministry of Finance 1963, pp. 9, 91), and exists in an incomplete form in Colombia and Italy (Shoup 1966, p. 13).
History. Taxes on the transfer of property at death have a long fiscal history. The Roman vicésima heredltatum, “the twentieth penny of inheritances,” is mentioned in Adam Smith’s Wealth of Nations (1776, book 5, chapter 2, appendix to arts. 1 and 2). In the United Kingdom, the tax dates back to 1694, but not until 1779-1780 did it attain something like its modern form (Palgrave [1894-1896] 1963, vol. 1, pp. 490-493). The U.S. federal government levied an inheritance tax during the Civil War and again during the Spanish-American War (Shultz 1926, pp. 151-155). The present U.S. federal estate tax dates from 1916; many of the state death taxes have longer histories (ibid., chapters 8, 9). Virtually all of the industrialized nations now employ some form of death tax, and it is also common in underdeveloped countries (see United Nations 1954).
The death duty predates the modern type of mass income tax and also the modern general sales tax. In many instances it has a longer history even than the more restricted income taxes of the period before World War n. The widespread and early use of the death tax can be explained largely by the fact that property had to be listed and valued in any event—for transfer to the state or to feudal overlords, under prevailing doctrines regarding land tenure; or to members of the family of the deceased possessing certain minimum rights in the property; or to other inheritors. The occasion thus proved a convenient one for computing a tax base and collecting a tax. Valuation remains, however, a vexing problem with respect to much of the transferred property.
Revenue . Although the history of the death tax has been impressive in terms of longevity and spread, its revenue role has been much less so. Today it rarely accounts for more than one per cent of total tax revenues in any country, despite the fairly steep graduation that characterizes most of the rate structures. While the income tax has been transformed in some countries into a tax that strikes almost every family and while social security payroll taxes and the general sales taxes, both inventions of the twentieth century, have added enormously to fiscal revenues, the estate and inheritance taxes have remained confined to only a small percentage of the populace. Most households in most countries have little or no property, at least relative to their incomes. In the more prosperous countries death taxes have high exemptions, and the starting rates are low. Thus, in the United States in 1961, for example, only some 45,000 out of 1,400,000 adult deaths resulted in estates subject to the federal estate tax (U.S. Department of Health, Education and Welfare 1963, vol. 2, part B, pp. 9-78, table 9-3). No movement has developed in any country to convert the death tax into a mass tax imposed on virtually everyone who dies possessed of property. In any event, conversion to a mass tax would not produce the striking percentage increase in yield that has been experienced under the income tax, since wealth is far more concentrated than income.
Avoidance . Sophisticated avoidance techniques, particularly in the United States and the United Kingdom, restrict the yield of the death tax. Under Anglo-Saxon property law concepts, trusts and life estates can be so set up as to skip one or more generations in the passage of property subject to death duties. In the United Kingdom, where expiration of a life estate gives rise, in principle, to full taxation of the corpus on which the life interest is based, tax has been avoided by several devices, notably the discretionary trust. This can be so formulated that owing to the discretion lodged in the hands of trustees as to who shall receive the life payments, it is not legally certain upon the death of one life tenant that any one of the others obtains any greater interest in the property than he had before (Harvard Law School 1957, chapter 3; Wheatcroft 1965, pp. 68-69, 132-137). In the United States, expiry of a life estate or similar property right does not give rise to inclusion of the corpus in the taxable estate of the decedent. Special statistical studies made by the U.S. Treasury have shown that in the wills of wealthy decedents the life estate that skips at least one generation is common (Shoup 1966, chapter 3; Jantscher 1967, chapters 4-7). These particular avoidance techniques are apparently not available in continental European countries because of the absence of the Anglo-Saxon concept of the trust.
In many countries, including the United Kingdom, gifts made during life (gifts inter vivos) are not taxable. In some of these countries, as also in the United States, gifts made within a certain number of years before death, or deemed made in contemplation of death, are included in the taxable estate. Thus, in the United Kingdom gifts made within five years of death are included, in part, in the taxable estate.
Where gifts are subject to a separate gift tax, as in the United States, the lower rate scale of the gift tax and the opportunity for splitting the property into two parts, each of which can obtain the benefit of low brackets (gift tax and estate tax), not to mention certain other technical features, leave a broad avenue for substantial tax reduction by gifts during life. In fact, however, even the most wealthy property holders seem to avail themselves of this possibility far less than a priori reasoning might suggest; the British consequently do not appear to believe that the revenue from their death tax is appreciably imperiled by the absence of a gift tax.
Contributions to charitable, educational, religious, and similar organizations are completely exempt under the U.S. federal estate tax, in contrast to the restricted exemptions, if any, granted in other countries. Once more, the opportunity for complete escape has been utilized rather less than one might expect (Harriss 1949; Shoup 1966, pp. 60-65).
The mobility of elderly wealthy persons is another restraining influence on heavy death taxation. Recently, both the United Kingdom and the United States have altered their death tax laws to include in the tax base real estate located abroad. This change has added pressure on elderly wealth-holders to change their residence and perhaps even citizenship as they reach extreme old age. Again, the number of such decisions will probably prove to be minor compared with the prospective tax saving.
In some respects the death duty offers fewer opportunities for avoidance than does the usual income tax. In the United States, state and local securities are fully subject to inclusion in the decedent’s taxable estate even though during his lifetime the interest on such obligations is exempt from the federal income tax. Property values arising from capital gains are fully included for U.S. estate tax purposes and also for the death duties in Britain, while under the income tax they are given preferential treatment. The percentage depletion provisions in the United States that have caused so much comment with respect to the income tax are, of course, not operative for the death tax.
Effect on consumption . Per dollar of revenue, the death tax probably decreases consumption spending less than most other taxes on households. This is so because the decedent-to-be seems unlikely to decrease his standard of living appreciably in order to improve the prospects of his heirs, prospects that have been impaired by the death tax. The future heirs, in turn, seem unlikely to reduce their current standard of living merely because they are aware that they will later receive less than if no death tax were in force. With respect to the period following transfer of the property at death, it has been cogently argued by Ricardo and others that the heirs tend to look upon the capital that they should preserve as being simply the amount they receive after death tax. They thus feel under no pressure to try to rebuild the estate to a level closer to what it would have been without such a tax (Shoup  1960, chapters 3, 15). Doctrinal discussion in Anglo-Saxon economic literature over the past century and a half has centered more on the reaction of the decedent-to-be than on the heirs, prospective or actual, and some difference of opinion has developed on this score (Fiekowsky 1959, chapters 1, 3). McCulloch, for example, expressed the opinion that the property owner would attempt to build up his estate somewhat in an effort to recoup for his heirs a part of the value that would be lost by the estate tax. Present-day thought, however, does not follow McCulloch, especially in view of the apparent indifference of wealthy persons as evidenced by their failure to transfer much property during life in order to save tax money for their heirs (Shoup 1966, Appendix F).
On the other hand, it is not at all certain that this failure to take advantage of what appear to be bargain tax rates during life necessarily indicates indifference. The welfare of one’s heirs is weighed against other considerations, some more admirable than others. As modern medicine has enhanced the possibility that an elderly person may live to extreme old age, sometimes under very expensive medical and hospital care, the risk that his financial resources may be exhausted before his death has become correspondingly greater. Dread of dependence on his children and loss of flexibility in arranging for his later years, even if expensive medical care is not a problem, are powerful forces in causing a wealthy decedent-to-be to cling to his wealth, particularly when he believes that he has already given enough to his children to start them in life with substantial advantages and conjectures that further wealth would do them more harm than good. To these motives must be added sometimes a desire to retain psychological control over prospective heirs, and sometimes a gradual drift into senility before the individual can be persuaded to think about death and act on his thoughts. Simple inertia explains much, especially on the part of some elderly women who have little interest in property management, and extremely busy men of affairs who do not pause long enough even to sign a will. Family jealousies also play an occasional role in restraining gifts during life.
The transferor or the heir might recoup some of the death or gift tax by increasing his money-making efforts. The high income tax rates to which this class of persons is commonly subject make this method of capital preservation, as compared with restricting one’s consumption, a difficult one.
Effect on distribution . The distribution of wealth and income, as indicated by a Lorenz curve, has probably been made more nearly equal to a modest degree during the past thirty years or so of graduated death taxation in the United States and the United Kingdom, compared with what it would have been if the same revenue had been raised, for example, by an increment to general sales taxes (Fiekowsky 1959, chapter 3). The result seems not to have been as substantial, however, as has been hoped for by proponents of the tax, to whom a chief virtue of death duties is their presumed tendency to limit accumulation of extreme fortunes and to reduce inequality generally. The explanation for this disappointment, if such it is, lies largely in the number of avoidance devices indicated above and partly in the relatively high level of exemption (for the U.S. federal estate tax it is $60,000) and low rates in the initial ranges. No practical support has developed for the Rignano plan or its variants, which would tax especially heavily and eventually confiscate inheritances that came from inheritances, after two or three or four generations. It is instructive to recall that an inventor of one of these variants, Hugh Dalton, made no move to introduce it into the British law while he was chancellor of the exchequer in the late 1940s (Dalton 1923, pp. 114-118 in 1936 edition; p. 232 in 1954 edition).
Death taxes are said to have forced small, closely held family firms to restrict their rate of growth in order to accumulate liquid assets sufficient to pay the tax upon the death of the founder or other large family owner, or alternatively to have induced them to merge with large firms whose stock is actively traded on exchanges so that liquid assets for payment of the tax could be obtained without restricting growth of the business (Somers 1958, pp. 201-210). The extent to which these effects have in fact materialized is not clear. In the United States the law has recently been amended to guarantee the estate the privilege of a ten-year installment payment provision if the company in question meets certain tests. In any case, an extended period of payment can be granted at the discretion of the tax administration.
Present trends . Among the current trends in death and gift taxation, the most noticeable one seems to be a tendency to personalize the estate tax, so that the amount of tax will vary depending particularly upon the relationship of the heir to the decedent. In this way, the estate tax may become more and more like an inheritance tax. The U.S. federal estate tax allows exemption of up to 50 per cent of an estate with respect to transfer to the surviving spouse, and pressure is growing to exempt completely interspousal transfers and to give some tax reduction for transfers to children.
Another trend, this time working toward an increase in revenue, is evidenced in current discussions of methods by which skipping one or more generations can be reduced, through taxing expiry of life estates and inhibiting the use of discretionary trusts. The task is much more difficult than this brief discussion might indicate, because of the intricacies of property law and the consequent opportunities to avoid even the most complex anti-avoidance measures. However, additional legislation on these subjects may be expected in both the United States and the United Kingdom during the next few years. In the view of some, the death and gift tax system should be so constructed that no matter by what route property is transferred to a generation distant in time, the present value of taxes on the transfers would come to the same thing, as under the proposal by Vickrey of a bequeathing power tax (Vickrey 1947, chapter 8). To achieve this end, however, is to relinquish the relationship of heirs to decedent as grounds for differentiation of the tax.
No trend is apparent with respect to the level of exemptions and the rate and type of graduation. Both the exemption and rate structure have shown great stability over time in most countries; in the United States, for example, the present rate scale dates from 1942. Graduation by brackets, as in the income tax, is characteristic of most death taxes, but the British prefer to graduate by a series of effective (average) rates. Such graduation facilitates an equitable division of the tax between the executors of the estate and owners of parcels of property that, although not appearing in the decedent’s estate, are nevertheless aggregated with his estate in determining the tax rate applicable to such parcels and to the estate (an example is property that was transferred as a gift inter vivos within five years of death).
Jurisdictional problems either among states in a federation or among countries continue to occupy much time and thought of tax lawyers and legislators, but exert little influence on total revenues. In the United States the federal-state issue has been met by allowing up to a certain amount of state death taxes paid to be credited directly against the federal tax, with the consequence that all of the states of the United States, excepting Nevada, impose either the estate or the inheritance tax or both, sometimes indeed rather beyond the limits of the federal credit. The United States has concluded tax conventions with many other countries, chiefly to avoid double taxation of properties of nonresident aliens.
Legal and administrative complications arise through linkages of death and gift taxes with the income tax. In the U.S. federal law, a transfer of property may be an inter vivos gift for gift tax purposes but not for income tax purposes; it is not evident, however, that complete uniformity is desirable. Another linkage arises with respect to capital gains. At present, a capital gain accrued at death is not made subject to the income tax, nor is a capital loss recognized. The heirs take over the property with a new basis for computing capital gain or loss on a future sale. This basis is the value of the property in the decedent’s estate. Accordingly, a capital gain on property held until death is never subject to the income tax, and a capital loss is never allowed. An attempt by the executive to persuade Congress to eliminate this combination of loophole and hardship in the Tax Reform Bill of 1963 failed. Property given during life, on the other hand, does not have its basis stepped up (or down) in this manner; this fact helps explain the reluctance to pass on appreciated property during life rather than at death.
No taxes have had a better reputation to less effect. Favorable comments on death and gift taxation can be found in the most conservative quarters, but these taxes remain minor and of little concern to politicians and voters. In certain academic circles some doubt is beginning to arise whether many of the aims of the estate and gift taxes could not better be achieved by a low-rate annual tax on individual net wealth, which would not be vulnerable to the devices now being employed to skip generations.
Carl S. Shoup
A Critique of Federal Estate and Gift Taxation. 1950 California Law Review 38, no. 1 (Special Issue).
Dalton, Hugh (1923) 1954 Principles of Public Finance. 4th ed., rev. London: Routledge.
Fiekowsky, Seymour 1959 On the Economic Effects of Death Taxation in the United States. Ph.D. dissertation, Harvard Univ.
Harriss, C. Lowell 1940 Gift Taxation in the United States. Washington: American Council on Public Affairs.
Harriss, C. Lowell 1949 Federal Estate Taxes and Philanthropic Bequests. Journal of Political Economy 57:337-344.
Harriss, C. Lowell 1954 Sources of Injustice in Death Taxation. National Tax Journal 7, Sept.: 289-308.
Harvard Law School, International Program In Taxation 1957 Taxation in the United Kingdom. Boston: Little.
Harvard Law School, International Program In Taxation 1963a Taxation in the United States. Chicago: Commerce Clearing House.
Harvard Law School, International Program In Taxation 1963b Taxation in the Federal Republic of Germany. Chicago: Commerce Clearing House.
Jantscher, Gerald R. 1967 Trusts and Estate Taxation. Washington: Brookings Institution.
Japan, Ministry OF Finance, Tax Bureau 1963 An Outline of Japanese Tax: 1963. Tokyo: The Bureau.
Palgrave, Robert H. (1894-1896) 1963 Death Duties. Volume 1, pages 490-493 in Robert H. Palgrave, Palgrave’s Dictionary of Political Economy. Rev. ed. New York: Kelley.
Pechman, Joseph A. 1950 Analysis of Matched Estate and Gift Tax Returns. National Tax Journal 3, June: 153-164.
Shoup, Carl S. (1950) 1960 Ricardo on Taxation: An Analysis of the Chapters on Taxation in David Ricardo’s Principles. New York: Columbia Univ. Press.
Shoup, Carl S. 1966 Federal Estate and Gift Taxes. Washington: Brookings Institution.
Shoup, Carl S. et al. 1949 Taxes on Gifts and Bequests. Volume 2, pages 143-155 in Carl S. Shoup et al., Report on Japanese Taxation. Tokyo: Supreme Commander for the Allied Powers.
Shultz, William J. 1926 The Taxation of Inheritance. Boston: Houghton Mifflin.
Shultz, William J.; and Harriss, C. Lowell (1931) 1959 American Public Finance. 7th ed. Englewood Cliffs, N.J.: Prentice-Hall. → First published as American Public Finance and Taxation, with William J. Shultz as sole author.
Smith, Adam (1776) 1952 An Inquiry Into the Nature and Causes of the Wealth of Nations. Chicago: Encyclopaedia Britannica. → A 2-volume paperback edition was published in 1963 by Irwin.
Somers, Harold M. 1958 Estate Taxes and Business Mergers: The Effects of Estate Taxes on Business Structure and Practices in the United States. Journal of Finance 13:201-210.
United Nations, Technical Assistance Administration 1954 Taxes and Fiscal Policy in Under-developed Countries. New York: United Nations.
U.S. CONGRESS, Joint Committee ON THE Economic Report 1956 Federal Tax Policy for Economic Growth and Stability. Hearings Before the Subcommittee on Tax Policy. Washington: Government Printing Office.
U.S. Department OF Health, Education AND Welfare 1963 Vital Statistics of the United States: 1961. Washington: Government Printing Office. → See especially Volume 2, part B, pages 9-78, Table 9-3.
Vickrey, William S. 1947 Agenda for Progressive Taxation. New York: Ronald Press.
Wheatcroft, G. S. A. (1953) 1958 The Taxation of Gifts and Settlements, by Stamp Duty, Estate Duty, Income Tax and Surtax. 3d ed. London: Pitman.
Wheatcroft, G. S. A. 1957 Anti-avoidance Provisions of the Law of Estate Duty in the United Kingdom. National Tax Journal 10, March: 46-56.
Wheatcroft, G. S. A. (editor) 1965 Estate and Gift Taxation: A Comparative Study. British Tax Review Guides, No. 3. London: Sweet & Maxwell. → A study of estate and gift taxation in Australia, Canada, Great Britain, and the United States.
This article is arranged according to the following outline:historical aspects
The Biblical Period
The Talmudic Period
The Post-Talmudic Period in General
Yardsticks of Tax Assessment
Place of Residence, Business, or Situation of Property
Date of Accrual of Liability
Tax Relief and Immunity
Methods of Tax Assessment
Adjudication and Evidence
Principles of Interpretation
Tax Collection Procedure
Ethics of Tax Payment
Halakhic Compilations of Tax Law
In the State of Israel
Special taxation imposed on the Jews by the state or ruler of the territory in which they were living has played a most important part in Jewish history.
It is self-evident that a section of the population of a country which pays special taxes must receive special organization and hold a special status (see *autonomy). On the other hand, the abolition of such special taxation implies an approach at least to parity of status and ultimate *emancipation. The state generally tended to impose the tax burden on the Jews by as simple and mechanical a means as possible – per capita, on houses, and the like. Hence the Jewish community body, which had the collective responsibility for the tax, usually tried to redistribute the amount to be paid on more equitable and less mechanical principles; this led to constructive social developments as well as tensions within the community.
Talmudic literature is filled with complaints against the severity of the taxation in Ereẓ Israel during the period of Roman domination. However intolerable this may have seemed, it was not discriminatory, and the pagan population of the area doubtless had similar complaints. On the other hand, the *Fiscus Judaicus introduced after the fall of Jerusalem in 70 c.e., diverting to the temple of Jupiter Capitolinus in Rome the half-shekel formerly paid voluntarily each year by every Jew to the Temple in Jerusalem, was definitely discriminatory, paid by no other than Jews. It was thus the forerunner of the discriminatory taxation of the Jews in Europe in the Middle Ages, and it was precisely imitated in the *opferpfennig poll tax exacted by the Holy Roman Emperors in Germany, as successors to the Roman caesars, from 1342. On the other hand, the Temple tax was in a way revived in the semi-voluntary *aurum coronarium levied by the Palestinian patriarchs from the Jewish communities to which their authority reached.
In the Dark Ages, especially in south Italy and Sicily, the Jews were so far identified with the dyeing industry that the special dye tax was known as the tincta judeorum, etc., implying that it was paid in effect only by Jews: this, which was claimed by the local bishops as their perquisite, thus became in effect a discriminatory Jewish tax. The Muslim world meanwhile imposed on the Jews, as on other nonbelievers, two special taxes – the *kharaj, a land tax in lieu of military service, calculated according to the productivity of the holding, and the jizya, a poll tax levied on unbelievers as the price of the free exercise of their religion. It is a moot point long discussed whether Jews paid special taxes in the Byzantine Empire. But when *Benjamin of Tudela was in Rome around 1169 he recorded as noteworthy that the Jews there paid no special tax to any authority.
With the development of Jewish finance in northern Europe the special taxation of the Jews entered on a new phase. One of the reasons for the toleration and protection they now received from the authorities was, precisely, their utility to the treasury. Every financial transaction was now subject to a tax in order to regularize it. Every phase in daily life – such as marriage or betrothal – required the royal license. Death duties ("reliefs") of as much as one-third were imposed on the estates of wealthy financiers. Fines were imposed on individuals, on communities, or on the entire body of Jews of a country to atone for misdemeanors, real or fictitious. In due course, in countries such as England, the system of "tallage" was introduced: theoretically an impost to meet some special contingency, it became, so far as the Jews were concerned, a regular source of royal revenue. Most detailed information regarding the method of exaction is available from England. The heads of the community were assembled and the royal demands intimated to them. The total amount would be divided among the various communities, which in turn would apportion the assessment among individuals. The so-called Jewish Parliament of *Worcester (1240–41) under Henry iii consisted of from two to six representatives of every community of England, convened to apportion a tallage of 20,000 marks imposed on them. With the development of the financial organization of the *Exchequer of the Jews, a preliminary to the imposition of a tallage would be the closing of the *archae, or chirograph chests, which would be sent to the Exchequer for their contents to be investigated and the capability of each individual to pay determined; on some occasions this would be accompanied by wholesale arrests among the Jews to forestall evasion.
The systematic cancellation of debts due to the Jews in return for some immediate monetary payment from the debtors, especially in Germany from the close of the 14th century, was in effect an indirect method of taxation. In the same country a special poll tax similar to that levied on animals, and included in the same list of tolls, had to be paid by Jews at the entrance to every town and state. Even when dead, there was a special toll to be paid at the city boundary on the way to the cemetery. In *Frankfurt, no fewer than 38 different imposts were levied on the Jews, mostly additional to those payable by the other townsfolk. Any Jew encountered on the highway could be compelled to pay the dice tax to atone for the casting of lots for the garments of Jesus at the crucifixion. The tolls on the road, known as the impôt du pied fourchu ("toll of the cloven hoof"), were abolished in the eastern provinces of France only in 1784.
In medieval Spain, taxation covering both payments due to the treasury and those for the maintenance of communal institutions was levied generally on incomes, estimated either by assessors (posekim) or by individual declaration under oath. As a result of complaints, in 1300 James ii of Aragon imposed the method of declaration in his dominion. Henceforth, all taxes both communal and royal were to be apportioned by a board representing the three economic strata of the community (manus) before whom every taxpayer was to declare his income under oath. Groups of small Spanish communities were combined by the treasury as a collecta for taxation purposes. For the system as it applied in a typical Spanish community see *Huesca.
In *Sicily there were a large number of special levies – apart from the poll tax (jizya) still retained from Saracenic times – on animals slaughtered in the Jewish fashion, on wine and cheese prepared for Jewish use, on cloth of Jewish manufacture, a "beam tax" on the sale of houses, a tax for permission to have musicians at weddings, and even a tax on childbirth. This was apart from the obligation to provide banners for the royal galleys and similar exigencies. A "Jewish Parliament," for the purpose of allocating taxation among the Jewish communities, similar to that held at Worcester in England in 1240–41, was convened at *Palermo in 1489 (Lagumina 754). In the ghetto period in Italy a graduated tax was originally levied on income or capital, it being left largely to the individual to assess the contribution he should make. In Venice, Padua, and other cities the assessments were made by a secret commission of transadori, whose identity was concealed from the contributors. At the close of the 17th century, a new system was widely introduced, known as the "cassella," or chest, in which the amounts were deposited at stipulated times in the presence of officials sworn to secrecy. A sermon would be delivered by the rabbi on the previous Sabbath emphasizing the moral duty of meticulous honesty. In some places money boxes were to be found also in certain buildings, where the prescribed percentage on brokerage could be deposited immediately. The conditions governing the system, which differed widely in details from place to place, were usually printed at intervals, in Italian or in Hebrew, for the guidance of the contributors. In Rome, in addition to the extraordinary impositions, regular taxes included a levy for the upkeep of the House of *Catechumens, another for the expenses of the carnival, and so on. Here as elsewhere in the Papal States the basis of the financial system was a tax not on income but on property, fixed for *Rome at 5 percent; at *Ferrara at 3 percent; at *Ancona at 1 percent, ultimately raised to 1¼ percent.
A meat or sheḥitah tax was very common throughout the Jewish world, sometimes payable not in currency but in tokens (see *medals). In effect, this was also in its way a tax graduated according to means, it being assumed that the wealthy ate more luxuriously than the poor. Where the system of voluntary assessment was used in Italy, it was reinforced by a ban of excommunication on any person who knowingly made a fraudulent declaration of his income, and he would thus bear a constant burden of sin of which he alone was aware. Throughout the Jewish world, rabbis and scholars were supposed to be exempt from communal taxation, this often leading to complications and internal disputes. The Council of the Four Lands in Poland-Lithuania (see *Councils of Lands) owed its origin to the need for having a recognized and authoritative body for the assessment of the state taxes on the Jewish population, and, formally, this was the sole function of the council in the eyes of the state. The overall sum was distributed among the "provinces" which in turn divided their quotas among the individual communities. In the first half of the 19th century special taxation, e.g., on kasher meat (*korobka) and the Sabbath candles (*candle tax), was used in Russia as an instrument to discourage traditional observances in the Jewish communities.
After the Resettlement of the Jews in England, various proposals were made for the separate taxation of the Jews for the benefit of the Exchequer. None however was implemented, and this was of great importance in establishing for the Jews the equality of status which was the preliminary to emancipation. The example of the mother country, with the same implications, was imitated in the American colonies; though in *Jamaica and the *West Indies special taxation of the Jews was the rule until the early 19th century. The abolition of special taxation was a corollary to the admission of the Jews to civil rights in France and elsewhere on the continent of Europe at the end of the 18th and beginning of the 19th centuries.
After the emancipation and the end of the special levies on the Jews, some sort of communal taxation remained necessary to defray the cost of communal institutions. The synagogues were generally maintained by membership dues, pew rentals, and voluntary offerings. In the Sephardi communities of northern Europe, etc., the system of finta assessed on estimated income by fintadores was widely used. The United Synagogue in London imposed a heavy levy on tombstones in order to defray the costs of education. In countries such as Germany and Italy, where the officially recognized Jewish communities were regulated by law, they had the right to impose taxation on all members, which was exacted by the governmental agencies, for the maintenance of essential institutions: refusal to pay hence became equivalent to withdrawal from the Jewish community. In *Argentina the Ashkenazi community paid a small due fee and most of the money for community affairs came from the high taxes on tombstones, whereas in the Sephardi community the percentage of intake was almost reversed. The situation was not much different in other South American communities.
For taxation in modern Israel see *Israel.
The Biblical Period
Although no detailed description has come down of the taxation system practiced during this period, various particulars of it can be gathered from a number of scriptural references to the subject. Thus the prerogatives enumerated in i Samuel 8:11–17 give an indication of the servitudes, levies, and obligations which the king was entitled to impose on the population, including the following: a tenth of the yield of the field and of the vineyard and the flock, a levy on the vineyard and the olive grove, and compulsory personal service. The biblical description reflects the fiscal system in operation in the Canaanite city kingdoms. The First Book of Kings (4:7–15) tells of King Solomon's division of the kingdom into 12 administrative units, each under the charge of an officer responsible for providing the king and his household with victuals for one month in the year.
Matters of taxation are mentioned in the Bible under a variety of terms, a number of which continued to be in use in later times. One of these, mekhes (Num. 31:28, 37–41), is mentioned in connection with the tribute paid to the priests from the spoil of the war with the Midianites. The like term in Akkadian, miksu, described both a tribute from the yield of the fields and a toll levied on travelers and their goods (em, 4 (1962), 964f.), and in the latter sense the term mekhes was employed by the sages of the Talmud (see, e.g., Kil. 9:2; Shab. 8:2, Sem. 2:9) and is still in use in modern Hebrew in the State of Israel. It is clear that a toll of this kind was levied by the kings of Israel on goods imported from abroad or those in transit (cf. i Kings 10:15). In the Bible the term mas (mod. Heb. for "tax") occurs in the sense of compulsory labor in the king's service (Ex. 1:11; ii Sam 20:24; i Kings 4:6 and 5:27), and is synonymous with the term mas oved (jps, "taskwork"). The main taxes imposed for the benefit of the Persian kingdom were the mindeh, belo, and halakh, which are mentioned in the letter of the Persian king to the scribe Ezra, exempting all the priests, levites, and other servants of the "house of God" from their payment (Ezra 7:24). The mindeh was a general tax payable in money, the belo a tax in specie, and the halakh apparently a tax on land. Besides the regular taxes, the king apparently from time to time imposed taxes on the people for special purposes, such as those exacted by Menahem and Jehoiakim for payment to the conquerors (ii Kings 15:19–20 and 23:35).
Some of the tax alleviations mentioned in the Bible include exemptions given to "the father's house" in reward for a person's act of special bravery (i Sam. 17:25), the general release granted in celebration of a special occasion – as in the case of Queen Esther's coronation (Esth. 2:18) – and the exemption given to the servants of the Temple. At times the tax burden weighed heavily on the people and the oppressive fiscal policy followed in the time of King Solomon was a cause of the rebellion against his son Rehoboam (i Kings 12) and led to the killing of Adoram, the officer in charge of the levy. In a sense the concept of tax, as an imposed duty to contribute toward the needs of an individual, or of the public, is reflected also in the laws relating to matters of *terumah ("heave offering"); ma'aser ("tithe"); *leket, *shikḥhah, and *pe'ah ("gleanings," "the forgotten sheaf," and "the corner of the fields," respectively); *ẓedakah ("charity"), the half-and third-*shekel; shemittah ("the year of the release"); and yovel ("*Jubilee").
The Talmudic Period
The Talmud discusses both those taxes imposed by the Jewish local authorities on the Jewish town residents and those imposed by the central governmental authority on the Jewish public. The material on the laws of taxation during this period is scant, but the laws discussed nevertheless formed the basis of a number of post-talmudic tax rules.
jewish municipal taxes
"The resident of a town may be compelled to contribute to the building of a [town] wall, doors, and a crossbar" (bb 1:5), and to the building of a prayer house, to the purchase of the Scrolls of the Law and of the Prophets (Tosef., bm 11:23), and to the hire of the town guards (bb 8a). Similarly, he may be compelled to contribute toward the cost of the town's water supply and drainage system, an expense which must also be borne by a person who owns a dwelling in the town even though he is not resident there (Tosef., bm 11:17 according to the Vienna ms; see also Yad, Shekhenim 6:3; Resp. Maharam of Rothenburg quoted in Mordekhai, bb 475; Sh. Ar., Ḥm 163:2). In the same way the townsmen have to contribute toward the cost of providing the poor with food and clothing and toward the communal charity box and ma'ot ḥittin (money for the poor to buy wheat on Passover; bbibid.; tj, bb 1:4, 12d). For the purpose of liability for some of these taxes – namely for repair of the wall or ma'ot ḥittin – a person is regarded in the Talmud (tj and tb, ibid.) as a resident if he has lived in a town for 12 months; if he has bought a dwelling there he immediately becomes liable; as regards certain contributions, e.g., to the charity box, he becomes liable upon shorter periods of residence (ibid., see also *Domicile; with regard to ma'ot ḥittin on Passover, see further Or Zaru'a, Hilkhot Pesaḥim, no. 255).
The amoraim of Ereẓ Israel discussed the principle of yardsticks for determining the rate of such taxes, deliberating whether a tax should be levied as a poll tax (according to the number of persons in the family), or according to financial means, or "according to the proximity of the dwelling" (that is according to the measure of benefit the taxpayer derived from his relative proximity to the wall), the first method being rejected in favor of one of the other two (bb 7b). The majority of the posekim held that these two yardsticks should be combined in such a manner that the rate of contribution would first be apportioned according to the financial means of each resident and then according to the measure of benefit derived from his relative proximity to the wall, so that "a poor man nearer the wall shall pay more than one further away; a rich man nearer the wall shall pay more than one further away, but a rich man further from the wall shall pay more than a poor man nearer the wall" (Tos. to bb 7b; Tur and Sh. Ar., Ḥm 163:3; for a different opinion, see Yad, Shekhenim 6:4 and R. Hananel, bbibid.). A similar problem is discussed in the Talmud in connection with a caravan in the wilderness threatened by a band of robbers and it is stated that: "the contribution to be paid by each [for buying them off] shall be apportioned in accordance with the amount of money which each has and not in accordance with the number of persons there"; but if they hire a guide to go in front of them, the calculation will have to be made "also according to the number of souls" in the caravan since a misstep could involve danger to life (Tosef., bm 7:13; bk 116b; in the tj, bm 6:4, 11a the word "also" is omitted before the words "according to the number of souls"); however all this only applies if the manner of apportionment of the contribution is not determined by local custom, since this always prevails (bk 116b; see also Tosef., bk, and tj, loc. cit.).
taxes of the central government
The tannaitic and amoraic sources mention various kinds of taxes imposed by the general government. Some of those imposed by the Roman authorities in Ereẓ Israel included the tributum soli, a land tax, the tributum capitis or poll tax, arnona, and a customs toll on the transit of goods, as well as a toll on highways and bridges (see Alon, bibl.). Among the taxes levied by the Persian authorities were the taska, a land tax, and the karga, a poll tax (see J. Newman, bibl.).
The Persian Government in Babylonia
The Babylonian halakhic scholars upheld the various taxes imposed by the governmental authorities, in reliance on the rule of *dina de-malkhuta dina ("the law of the land is law," bb 55a, et al.), even giving effect to certain acts which were valid under general law but not in Jewish law. Thus under Persian law a person's land became charged in the king's favor for payment of the taska, and if it was not paid the land could be sold by the royal officials to anyone paying the tax in the landowner's stead. The amora Samuel upheld the validity of such a sale on the basis of the above-mentioned rule (bb 55a; see also bm 73b); Similarly upheld was the rule of Persian law that not only the king could enslave a person who failed to pay the karga but anyone else paying the tax in the debtor's stead (Yev. 46a; bm 73b) – except that in Jewish law "he shall not treat him as a slave" (Yad, Gezelah, 5:16; Sh. Ar., yd 267:16).
The Roman Government in Ereẓ Israel
The scholars of Ereẓ Israel, however, looked upon the Romans as foreign conquerors whose rule should be rebelled against and whose taxes were an instrument of robbery and extortion leveled against the Jews. Hence tax evasion was customary in Ereẓ Israel (Ned. 3:4; tj, Sot. 5:7; bb 127b, R. Johanan) and there the tannaim discussed the question of whether or not it was permissible to avoid paying customs in certain circumstances (bk 113a). A certain change of attitude is manifest at the time of R. Judah ha-Nasi, who, like some other men, instructed his sons not to elude customs (lest they be detected and the authorities confiscate everything they had; Pes. 112b; cf. tj, Ket. 12:3). Regarded in a similarly unfavorable light were the gabba'im and mokhesim – Jewish officials and publicans who collected taxes and imposts on behalf of the Roman authorities – who were looked upon as robbers and disqualified from being witnesses or judges (Sanh. 25b), whose money could not be taken for charitable purposes (bk 10:1), and who were not acceptable as *ḥaverim (Tosef., Dem. 3:4; tj, Dem. 2:3). At a later time the opposition to Roman rule became less intense and the halakhot permitting customs evasion came to be interpreted as applying to customs dues imposed without any specified limit or those imposed without the authority of the ruling power (but by the customs collector himself) – in which case it was held that the rule of dina de-malkhuta dina did not apply (bk 113a; Ned. 28a). Customs evasion eventually became strictly prohibited: "a person who evades customs is as one who has shed blood – and not only shed blood, but also worshiped idols, committed acts of unchastity, and profaned the Sabbath" (Sem. 2:9). Similarly, it was laid down in the codes: "If the king fixes a tax of, say, a third or a quarter or another fixed measure and appoints to collect it on his behalf an Israelite known to be a trustworthy person who would not add to what was ordered by the king, this collector is not presumed to be a robber, for the king's decree has the force of law. Moreover, one who avoids paying such a tax is a transgressor, for he steals the king's property, whether the king be a gentile or an Israelite" (Yad, Gezelah, 5:11; cf. Sanh. 25b).
Just as the Persian rulers exempted priests, levites, and other servants of the Temple from the payment of taxes, so the sages of the Talmud laid down that talmidei ḥakhamim should be exempted from contributing toward the upkeep of the town guard – for the reason that they did not need any protection since the Torah was their guard (Ned. 62b; bb 7bff.). However, some of the sages did not exempt rabbinical scholars from such imposts (R. Judah ha-Nasi and R. Naḥman b. Ḥisda, bbibid.) and the fact that there were scholars who paid these is confirmed in several talmudic sources (see e.g., Yev. 17a; Sanh. 27a–b; Yoma 77a – expunged by the censorship and quoted in Ein Ya'akov and Dikdukei Soferim, Yoma 77a). Exemption of scholars from tax payments was known in other contemporary legal systems (see S. Lieberman, in: jqr, 36 (1945/46), 360–4) and was also a practice in later times (see below). It was laid down that rabbinical scholars must pay taxes levied for the upkeep of roads and streets (bb 8a; Yad, Shekhenim, 6:6; Sh. Ar., yd 243:2, and Ḥm 163:4). *Orphans (whose liabilities are lightened in a number of respects in Jewish law) must contribute taxes for purposes of the town guard, the digging of a well, the supply of water to the town and fields, and toward all other matters from which they derive benefit; if the expenditure fails to bring about the desired result, the orphans will be entitled to a refund of whatever they paid, since in the absence of a benefit such payment amounts to a waiver of their money, an act beyond their legal capacity (bb loc. cit. and Rashi thereto; Yad, and Sh. Ar., loc. cit.). In the case of an unemployed person who has no income (a pardakht) the town residents may approach the government tax collector to release him from his tax contribution; sometimes he is held liable like all other residents and sometimes released (bb 55a; see also Rashbam, Tos., Beit ha-Beḥirah and Shitah Mekubbeẓet thereto; Kohut, Arukh, s.v. "אנדיסק" and supplement thereto s.v. "פרדכש"; M. Beer, bibl., pp. 250f.).
The Post-Talmudic Period in General
The main development of Jewish tax law came in the post-talmudic period, both as regards the determination of general principles and detailed rules and as regards the volume and compass of the material. At the same time this development was an important factor in the evolution of Jewish public law and a number of basic principles in this field evolved from the discussions on the laws of taxation. Therefore a comprehensive discussion of the laws of taxation offers some insight into the evolution of Jewish public and administrative law (see also *Public Authority).
In the post-talmudic period the distinction between Jewish municipal taxes and those imposed by the government was maintained as the basis for discussion of the laws of taxation, and the great development in this branch of the law is mainly to be ascribed to two historical factors affecting the Jewish people, one internal, the other external. From the close of the geonic period onward, Jewish autonomy found its main expression in the various Jewish communal organizations or in a roof organization embracing a number of communities. Starting from this time Jewish life was molded by the new historical reality that hegemony was no longer exercised over the whole Jewish dispersion by a single center – as previously in Ereẓ Israel and Babylonia – and different centers, functioning alongside or in succession to one another, came into existence in Spain, Germany, North Africa, the Balkan countries, Poland, Western Europe, and so on. The result was the strengthening of the individual community and the development of its organizations, and this led in turn to great development in the fields of administrative law and communal enactment (see *Takkanot ha-Kahal), and to the creation of a proliferous collection of decisions concerning relations between the citizen and the public. The community provided various social services and maintained religious, educational, and judicial institutions, as well as its own administrative and governing bodies, all of which had to be financed through various methods of taxation.
The decisive external factor was that the central governments of the various countries of Jewish settlement in the Middle Ages imposed heavy taxes on the Jews (as "toleration money") in return for their right to live in these countries, and the halakhic scholars stressed their factual purpose so far as the Jewish community was concerned: "the various taxes are for the purposes of protection and they guard us amid the nations; for what reason would the nations have to protect us and to settle us in their midst if not for the benefit they derive by exacting taxes and imposts from the Jews?" (Resp. Ran, no. 2; Piskei ha-Rosh, bb 1:29). These taxes were not imposed on the individual directly, but collectively on all the communities in a particular area or on a specific community, and the authorities held the communal leaders responsible for payment of the overall amount. Thus "in all matters of taxation each community has been obliged to make a partnership of its members… since the king makes a general demand and not from the individual" (Resp. Rashba, vol. 5, no. 270). Normally the central authority periodically imposed a "fixed tax" of a comparatively reasonable amount. Sometimes however – on account of special circumstances such as war – an "unlimited tax" of a very large sum of money was imposed, and in these cases the scholars laid down different rules from those governing the regular tax (see illustrations below; on the two types of taxes, see, e.g., Terumat ha-Deshen, beginning of Resp. no. 341 and conclusion of no. 342). The fact that taxes were collected by the community both for its own purposes and on behalf of the central authority was instrumental in the development of a refined tax law system governing matters such as determination of the rate of contribution to the tax and tax classification, assessment adjudication and collection, and determination of tax alleviations and exemptions, a system which was evolved in close cooperation between the halakhic scholars and communal leaders.
legal foundations of the tax law system
In part, the tax law of this period was based on the legal principles determined by the scholars in talmudic times, but in the main it was derived from additional legal sources.
Dina de-Malkhuta Dina
This doctrine was relied upon and its application extended to meet the new and changing needs of the time. Thus, for instance, many scholars found it necessary to decide – contrary to the rule in the Talmud that the doctrine of dina de-malkhuta dina does not apply to an unlimited tax – that a tax exacted for the waging of war and "other costly needs" should be heeded even if it was an unlimited tax (R. Isaac the Elder, quoted in Haggahot Mordekhai, bb no. 659 end, and in Teshuvot Maimuniyyot, Gezelah, no. 9). This change resulted from the strong hand displayed by the ruling power, particularly in the case of German Jewry: "even if our taxes at the present time have no fixed rate but are imposed at the will of the ruler, it is necessary that they be paid and whoever fails to do so is liable to suffer punishment of death, plunder, or imprisonment… for in these times these are all called taxes" (Mordekhai, bk no. 190, in the name of Meir of Rothenburg; see also Resp. Ḥayyim Or Zaru'a, no. 253, and cf. his criticism, no. 110; Resp. Maharil, no. 71; Resp. Maharyw (Jacob Weil), no. 38). In Spain, too, in the 14th century, a similar opinion was expressed although in a different context: "all government decrees concerning Jews, even as regards a monetary fine, are a matter of pikku'aḥ nefesh" (Resp. Ribash, no. 460). From the legal standpoint this approach was justified by the scholars on the grounds that since it was known that the ruling power behaved in the manner described and that with that knowledge "we establish residence under them and take upon ourselves the hardships and burdens they impose, all of these shall henceforth fall under the rule of dina de-malkhuta dina" (Terumat ha-Deshen, Resp. no. 341; see also Resp. Maharam Mintz, no. 1; Resp. Maharik, no. 4; for further illustrations see below).
Tax Rules from the Talmudic Period
The principle that the town residents must contribute toward the costs of their security needs, the provision of social and religious services, sanitation, and so on, was applied and extended in post-talmudic times to the payment of various other taxes (Meir of Rothenburg, quoted in Mordekhai, bb, 478) and generally to "any matter of the town's needs" (Mordekhai, loc. cit.; Resp.Rosh, 6:22) so as to cover the whole spectrum of the community's requirements (Sh. Ar., Ḥm 163:1, and see below).
The Community as Partnership
In addition, the post-talmudic scholars applied to the legal relationship between different members of the community the law of *partnership, and by virtue of this deduced a number of conclusions pertaining to the field of tax law. Thus, for instance, they based the legal right to oblige a community member to swear that his declaration of taxable assets was correct (see below) on the rule that one partner may oblige his fellow to swear an oath even in the case of a "doubtful" plea (ta'anat shema; Terumat ha-Deshen, Resp. no. 341). The rule that a community member might not secure a personal tax waiver except through the mediation of the community was justified likewise on the principle of partnership law restricting a partner's right to enjoy personally a benefit which should be enjoyed by the whole partnership without the consent of his partners (Resp. Maharam of Rothenburg, ed. Prague, no. 918, 932). Similarly, the scholars followed the rule that partners are jointly liable for the whole of a partnership debt in laying down that all members of the community bore collective responsibility for the whole amount of the tax imposed (Resp. Rosh 5:9; for further illustration see, e.g., Mordekhai, Ket. no. 239; Rema, Ḥm 163:3, 6 and 176:25; Noda bi-Yhudah, Mahadura Tinyana, Ḥm no. 40, and see below).
Communal Enactments (Takkanot ha-Kahal) and Custom
The scholars found the methods outlined above insufficient to overcome the wide array of tax law problems with which they and the communal leaders were confronted. Application of the private law rules of partnership offered no comprehensive basis for solving the myriad tax law problems that arose and belonged, by their very nature, to the field of the public law – not only because partnership law offered no analogy for the overwhelming majority of tax law matters but also because a legal arrangement governing relationships between two or three partners was often unsuited to regulation of the legal relationships between all the different units comprising the community. They found the way to settling most of the laws of taxation through using the authority vested in the public to make enactments (see *Takkanot ha-Kahal), and by means of the legal source of custom (see *Minhag). A certain initial hesitation over the binding nature of a custom when it was contrary to "an established and known halakhah" of the Talmud on a matter of tax law (see the statement of R. Baruch of Mainz in the 13th century, quoted in Mordekhai, bb no. 477) was overcome, and every rule and usage deriving from communal enactment or custom was given full legal recognition. The fact that these two legal sources were instrumental in the development of most of the post-talmudic tax laws accounts, therefore, for the great diversity found in Jewish tax law, which reflects the takkanot and customs of the various Jewish communities.
The existence of this fact was constantly stressed by the halakhic scholars of all communities. Thus Solomon b. Abraham *Adret, leader of Spanish Jewry in the 13th century and one of the main formulators of Jewish public law, stated: "Nowhere are the tax laws founded on talmudic sanctity and everywhere there are to be found variations of such laws deriving from local usage and the consent of earlier scholars who 'set the landmarks,' and the town residents are entitled to establish fixed takkanot and uphold recognized customs as they please even if they do not accord with the halakhah, this being a matter of the civil law. Therefore if in this matter they have a known custom it should be followed, since custom overrides the halakhah in matters of this kind" (Resp. Rashba, vol. 4, nos. 260, 177; vol. 3, nos. 398, 436; vol. 5, nos. 180, 363, 270; vol. 1, no. 664, et al.). A similar view was expressed by R. *Meir b. Baruch of Rothenburg, a contemporary of Adret and leader of German Jewry: "tax matters are dependent neither on analogy from nor on express talmudic law, but on the custom of the land… since tax laws are part of the law of the land… and the product of many different customs" (Resp. Maharam of Rothenburg, ed. Prague, nos. 106, 995; see also the statements of R. Avigdor Kohen Ẓedek, quoted in Mordekhai, bb, 477). R. Israel *Isserlein added the following explicit remarks: "In all matters affecting the public, their custom shall be followed in accordance with the order they set for themselves, as dictated by their needs and the matter under consideration – for if they be required to follow the strict law in every matter, there will always be strife among themselves; furthermore, at the outset they allow each other to waive the strict law and make up their minds to follow the imperatives of their own custom" (Terumat ha-Deshen, Resp. no. 342). This idea was restated in a responsum of the 16th-century Greek halakhist, Benjamin Ze'ev (Binyamin Ze'ev, 293), who added: "a custom of the town residents overrides [a decision of] a court of talmudic scholars, even though it has relied on Scripture, and not merely the custom of scholars but also the custom of ass drivers is to be relied upon" (see also Resp. Maharashdam, Ḥm nos. 369 and 404; Noda bi-Yhudah, Mahadura Tinyana, Ḥm no. 40).
In the context of tax law, important principles pertaining to custom in general were laid down. These included the stipulation that a custom must be established and widespread: "that the town residents practiced the custom at least three times, for often the public reaches a conclusion according to need without intending to establish a custom at all" (Terumat ha-Deshen, Resp. no. 342). Similarly, it was decided that the established existence of a custom need not be proved in the formal ways prescribed by the laws of evidence: "although it is necessary to inquire whether a custom is established or not, the inquiry itself need not be overly formal and hearsay evidence as well as the evidence of disqualified witnesses is admissible" (ibid.). These principles were accepted as decided law (Darkhei Moshe, Ḥm 163, n. 7; Rema, Ḥm 163: 3). (For validity of a "bad custom" in the tax law field, see *Minhag.)
An exaggerated proliferation of local takkanot and customs was prevented by the fact that these were usually enacted for or adopted by all the communities in a particular region. Thus Solomon b. Abraham Adret relates that the Jewish community of Barcelona and its environs enacted uniform takkanot in the matter of taxes, their assessment and collection – "one chest and one pocket for us all" – and he describes how the community of Barcelona proper, the largest in the region, first consulted with all the surrounding communities on the takkanot to be enacted, although in other areas the main community sometimes neglected such prior consultation (Resp. Rashba, vol. 3, no. 412). Other regional enactments of this kind are evidenced in the takkanot of Vallidolid (of 1432) and those of the German communities (see Finkelstein, bibl.; also Halpern, Pinkas; Takkanot Medinat Mehrin; Pinkas ha-Medinah, bibl.; see further Resp. Maharam of Rothenburg, ed., Prague, no. 241; Massa Melekh, 5: 1, 1–3).
integration of tax law into the jewish legal system
The creation of tax laws in this manner carried with it the danger that the link between this branch of the law and the overall system of Jewish law, which was based on the talmudic halakhah and its evolution, might become weakened. This aspect was stressed by the halakhic scholars, and Solomon b. Abraham Adret, for instance, pointed out the diversity in tax laws and noted that this was because the communal enactments were not based on binding talmudic law, "for if so there would be one measure for all the communities, as there is in regard to all other laws of the Torah" (Resp. Rashba, vol. 5, no. 270; and see also vol. 3, no. 412). The scholars and communal leaders nevertheless succeeded in preserving the proliferous body of the tax laws that developed in the Diaspora during this period as an integral part of the Jewish legal system, mainly through adherence to the principles enumerated below.
Reliance on Halakhic Sources
The halakhic scholars were understandably anxious to establish a link between the various takkanot and customs and the strict law: "even though it has been said… that in tax matters custom overrides the law, it is at any rate desirable and proper to examine carefully whether we can reconcile all the customs with the strict law, and even if not entirely so it is yet preferable that we find support in the teachings of the scholars and substantiate them with the aid of reason and logic" (Terumat ha-Deshen, Resp. no. 342). Thus, for example, support in the form of several talmudic references, was found for the widely accepted custom that a person appealing against a tax assessment has first to pay as assessed before the legal hearing could take place, even though this custom was in contradiction to the Jewish law principle that the burden of proof is on the claimant (see below). Similarly, a takkanah aimed at extending the creditor's lien to cover also a tax debtor's money in the hands of a third party even when it was no longer held in specie – and contrary to a rule of the Talmud – was justified by R. Nissim by way of an interpretation which lent a specific legal character to a tax debt (see below). An interesting expression of this general trend is found in two responsa of the 17th-century German halakhic scholar Jair Ḥayyim *Bacharach (Resp. Ḥavvot Ya'ir, nos. 57, 58), who was consulted in both cases by the communal leaders on the procedure to be followed upon their discovery that the taxpayer's assets in fact far exceeded the amount on which he had been assessed. After giving a detailed exposition of the talmudic law and existing custom concerning tax assessment, Bacharach went on to describe his approach to the question of integrating law and takkanot in the field of taxation: "although certainly in assessment and related matters the community has authority to act as it thinks proper, and it is not necessary to hearken to the voice of a person who seeks to find the original approach of the law [on these matters], yet you should endeavor to examine the reasoning of our scholars and call it to your aid… and thereafter do as you see fit, keeping close to the law of the Torah." Having dealt with the attitude of the halakhah and with the existing takkanot and customs, Bacharach concluded by stating: "So my humble opinion tends to be like the decisions which are given by lay tribunals [piskei ba'alei battim; see *Mishpat Ivri] together with some measure of application of the strict law."
Legal Interpretation by the Halakhic Scholars
Another reason for the orderly integration of tax enactments and customs into the Jewish legal system was the fact that in most cases the problems and disputes arising from them were brought before the halakhic scholars. In answering these problems and in their interpretation of the various takkanot and customs, the scholars applied the accepted rules of interpretation as well as the general principles of Jewish law normally applied in the courts (see below) and a problem that fell outside the purview of an existing custom or takkanah was dealt with according to talmudic law and the codes (see, e.g., Resp., Rashba, vol. 4, no. 260; Resp. Maharam of Rothenburg, loc. cit., and further illustration below), since "in all matters that have not been explicitly stated [in communal enactments] we are obliged to adhere as close as possible to the law of the Torah" (Resp. Rama da Fano, no. 43; Resp. Maharashdam, Ḥm no. 442).
Principles of Equity and Justice
Also instrumental in the maintenance of an organic link between tax laws and the general system of Jewish law was the scholars' practice of scrutinizing customs and enactments and invalidating them when they were contrary to Jewish law principles of equity and justice. Thus a takkanah aimed at rendering the taxpayer liable for double taxation on the same property – both at his place of residence and at the place where the property was situated – was rendered null since "this is nothing but robbery, and it is not possible to stipulate contrary to the law of robbery" (Resp. Rasba, vol. 5, no. 178; vol. 1, no. 788; see also Resp. Maharam of Rothenburg, ed. Prague, no. 106). On the strength of the said principles the scholars also invalidated another takkanah which purported to lend a tax obligation retroactive effect, and further, excluded the possibility of combining two methods of tax assessment in a manner drastically increasing the taxpayer's burden (see below). Similarly, a tax custom whose purpose was "to extract vengeance from an individual or individuals" was held to be of no force and effect (Massa Melekh, Ne'ilat She'arim, Minhagei Mamon).
Accumulation of Tax Takkanot and Customs in Halakhic Literature
Another reason for the close link between the tax law and the general halakhic system is to be found in the fact that a very substantial part of tax customs and takkanot were quoted, often in full, and discussed in the vast responsa literature and other compilations of the halakhic scholars (see below).
Yardsticks of Tax Assessment
The problem of the yardstick to be applied in the assessment of an individual's tax liability continued to occupy the attention of the post-talmudic halakhic scholars.
This tax, apparently imposed throughout the post-talmudic period, was "a fixed per capita allocation" (Resp. Rashba, vol. 5, no. 220) and was often referred to during this period by its talmudic name, karga (Resp. Rashba, vol. 5, no. 178, et al.).
assessment according to financial means
Generally, most taxes were levied in accordance with the taxpayer's means, a principle the scholars regarded as fundamental to Jewish law. Thus it was decided that the individual members of the community should contribute according to their means toward a specified sum required for their own security needs, contrary to the practice in the case of an amount collected by the central authority: "and if at first, when the gentiles were appointed to be in charge of the guards, they departed from Jewish law in equating the poor with the rich, yet now that they entrusted this matter to ourselves we should not change the law of the Torah that in matters dependent on money the calculation must be made according to means… and it may not be said… that the rich shall not make increase, nor the poor decrease" (Mordekhai, bb no. 475 in the name of Maharam of Rothenburg, and no. 497). This approach was fortified by a legal explanation with an interesting historical background: "whatever new decrees and afflictions the gentiles may impose on Israel, even if they should be minded to afflict us by having us refrain from food and drink, yet all is collected according to financial means, for their main concern is the money" (Piskei ha-Rosh, bb 1:22; cf. also takkanot of the Saragossa community, in Dinur, Golah, 2, pt. 2 (19662), 366f.).
assessment in accordance with the tax purpose
Some scholars held that individual tax liability should be assessed in accordance with the purpose for which the tax was imposed. Thus if the purpose was to raise a specific sum in order to bribe the authorities to prevent riots against the Jews on the eve of their festivals, "the law holds that they should pay [tax] according to means as well as souls, since on these days both persons and property are endangered – all this in accordance with the need of the hour and the local situation." In the case of regular taxes imposed by the authorities, means alone was to be the criterion: "for the kings and governments only impose taxes on people with means, and they protect their means by payment of the taxes." If a specified sum was to be raised for the purpose of bribing the authorities not to forbid ritual slaughter or the sale of bread to Jews, assessment was to be according to souls alone, since in this case rich and poor would suffer equal harm. All these distinctions, however, were to remain subject to local custom and enactment (Resp. Rashba, vol. 3, no. 401). All were not consistently observed, and in another responsum Solomon b. Abraham Adret himself (ibid., no. 381) laid down that the cantor's emolument was to be paid out of the community chest; although he fulfills the duty for rich and poor alike the poor cannot afford as much as the rich, and in all matters of the public weal which are dependent on money the contribution must be made according to means. On the other hand, in a later period the opinion was expressed that in the case of the cantor's emolument, the assessment required a combination of two methods – one-half according to souls – for although the poor had as much need of the cantor as did the rich, yet the rich were prepared to pay more to a cantor with a better voice, and "therefore they made this compromise" (Sh. Ar., oḤ, 53:23 and Taz, ibid., no. 14). As a result of the multiplication of possible distinctions of this nature, it was laid down that these matters had to be decided "on the merits of each case, as the judges see fit" (Rema, Ḥm 163:3); "since these matters are not clearly dealt with in the halakhah as found in books only, but must be dealt with by the judges… in taking account of the abnormal and emergency situation and the decrees of the authorities" (Terumat ha-Deshen, Resp. no. 345). It was held that liability for tax existed even when the taxpayer had no need for the services financed thereby and therefore could not expect any return consideration. Thus it was decided that the cost of educating children – if this was beyond their fathers' means – should be borne by the whole community, each member contributing according to his means (Resp. Ramah, no. 241; Sh. Ar., loc. cit.); moreover, it was held to be the rule that all the needs of the town must be financed by the whole community, even if some were not in need of certain services, such as a wedding hall or ritual bath, and so on (Resp. Mahari Mintz, no. 7: Sh. Ar., loc. cit.). At different times when the rich sought to evade their tax duty, the halakhic scholars responded in various ways (see, e.g., Dinur, Golah, 2, pt. 2 (1966), 393–5).
The purposes for which taxes were levied during the post-talmudic period embraced a wide spectrum of municipal needs – such as maintaining the town guard, providing health, educational, and religious services, and for judicial and civil execution institutions, funds for combating informers, funds for charity to the poor, for hospitality, and for ma'ot ḥittin on Passover – in addition to various taxes, fixed or otherwise, imposed by the central authorities on the Jewish community and collected by the communal authorities from its members (see illustrations cited and see also Tur, Sh. Ar., Ḥm 163, and standard commentaries). These taxes were known by various names, some corresponding to those mentioned in the Talmud, and other taxes were called by the names customary in the various countries of Jewish settlement.
Taxes were mainly direct and based on income from property, movable or immovable: "for property which cannot be utilized and earned from is not properly taxable" (Resp. Ran, no. 2:21). Non-income-bearing property was subject to tax reduction in the case of a special property tax or a non-recurrent "unprescribed" tax imposed in a very large amount in the event of a special false accusation or other emergency. The increasingly severe fiscal burden imposed by the ruling power, particularly in the case of German Jewry, fostered the tendency toward imposing taxes on non-income-bearing property also, as will be detailed below.
"It was accepted in ancient times that taxes should not be imposed on land, for tax derives only from a business transaction" (Maharam of Rothenburg, quoted in Mordekhai, bb no. 481), and this continued to be the practice in 13th-century Germany although unsuccessful efforts had been made to bring about a change (ibid.). A land tax, in Meir b. Baruch's opinion (ibid.), could exist only in the event that "the land itself is tax-burdened," that is if the tax was expressly imposed as a property tax on land, or if the tax was imposed in a time of emergency when there was reason to fear "the plunder of courtyards and land, and the burning and destruction of houses" (Sh. Ar., Ḥm 163:3). Similarly, in the case of a person buying and selling land, "it is the universal custom that tax is payable on everything that a person may wish to sell, whether household articles or land… for anything that is for sale is like merchandise" (Resp. Maharyw, no. 84, and see below).
In the case of houses it was decided that local custom should be followed, and when there was no such custom the issue depended on the nature of the tax: if imposed to finance the expenses of the town guard the tax would extend also to houses, i.e., to owners of houses in the town even if they did not reside there (see below); however, if the tax "be like all other fixed taxes payable annually – to the ruling power or municipal authorities – on account of the income earned in the town, houses will not be subject to tax; yet if a person should own two or three houses, he must pay tax on them for this is no different to any other income, but he shall not pay tax on his own dwelling, save in the case of a tax in a large amount or when the ruler has determined that they shall pay tax on everything they own" (Maharam of Rothenburg, quoted in Mordekhai, bb no. 475 and see Resp. Maharyw, no. 84).
In certain areas of Spain in the 13th century, tax was payable on land even independently of its sale (Resp. Rashba, vol. 5, no. 182). In one case it was decided that on land and all else from which no income was derived, tax was payable at one-quarter of the regular rate (Teshuvot ha-Rashba ha-Meyuḥasot le-ha-Ramban, no. 184); this was apparently a property tax expressly imposed as such. On houses, however, no tax was imposed (Resp. Rashba, vol. 5, no. 179, 182).
vineyards and fields
The rule was established that even income-bearing movable property from which a loss could more commonly be anticipated than a profit – such as the yield from a field or vineyard – should not be taxable. Hence it was decided as early as the 11th century that a tax which the town residents sought to impose on a woman's vineyard was contrary to law because the great effort and expense involved in the vineyard's cultivation did not necessarily assure an income, and it was wrong that an asset should be consumed by the tax levied on it (Resp. Joseph Tov Elem (Bonfils), quoted in Resp. Maharam of Rothenburg, ed. Prague, no. 941 and in Mordekhai, bb no. 481; see also Takkanot Rashi, quoted in Resp. Maharam of Rothenburg, ed. Berlin, no. 866 and in Finkelstein, bibl., p. 149). However, in 15th-century Germany there was a change in the profitability of vineyards: "in these countries, in the main the people sustain themselves by their vineyards and derive their wealth from them." Thus a situation arose in which there was no possibility of exempting vineyards entirely from taxation yet frequent heavy losses from such property could nevertheless be anticipated. It was decided, therefore, that tax was to be assessed on one-half of the value of the property, but that no exemption was to be granted in the case of a "very large and exaggerated" emergency tax (Terumat ha-Deshen, Resp. no. 342). In Salonika, in the 17th century, tax was payable on the full value (Massa Melekh, 3: 2, 1).
money loaned on interest
This was an obvious category of taxable property: "there is no more convenient class of merchandise; since the lender holds his pledge and his money grows, he benefits without effort or strain, or any need to supervise, nor does he have any expense…" (R. Yom Tov Elem, quoted in Resp. Maharam of Rothenburg, ed. Prague, no. 941). In the course of time, when it became increasingly likely that money loaned to non-Jewish borrowers would never be repaid, it was decided that the interest was not to be taxed (as in the case of vineyards), except that exemption was not to be granted on the whole amount of the loan, for since "in our time we mostly earn our livelihood from lending money on interest, what other source of taxation is there?" If interest was reflected as capital and compounded thereon, the interest was to be regarded as capital and taxable (Terumat ha-Deshen, Resp. no. 342). A person was held to be liable for tax on income derived not only from his own property but also from the property of others held in his possession (Mordekhai, bb no. 481; Nimmukei Menahem of Menahem Merseburg, Din. 5; see also various opinions in Terumat ha-Deshen, Resp. no. 342 and Rema, Ḥm 163:3). It was held that a debt which the creditor despaired of recovering might be excluded from his list of taxable property provided that he assigned his right in the matter to the communal trustee; if the debt was recovered by the community, two-thirds of it had to go to the community and the remainder to the creditor (Terumat ha-Deshen, loc. cit.; for a different ratio, see Resp. Maharyw, nos. 84 and 133). In another takkanah debts were declared completely tax-free (Resp. Rama da Fano, no. 43).
money in deposit or trust
It was *Hai Gaon's opinion (quoted in Terumat ha-Deshen, Resp. no. 342) that money deposited with a trustee was not taxable, since no profit was derived from it by its owner. From the 13th century onward, the majority of the German posekim came to hold the converse opinion (Resp. Ḥayyim Or Zaru'a, no. 253; Terumat ha-Deshen, loc. cit.; Resp. Maharyw, no. 133; cf. the contrary opinion in Nimmukei Menahem of Menahem Merseburg, Dinim 10, 18), and it was stated: "Our custom is that a person is liable on all that he owns, whether openly or concealed" (Resp. Maharil, no. 121). In a special takkanah of the Mantua community in the 16th century, even a "hidden portion [maneh kavur] earning no income" was declared taxable. It was necessary to decide that no tax was payable for the period of the theft on a sum of money stolen and later returned to its owner, since the particularly stringent nature of the rule which – contrary to the general law and custom – rendered taxable such money "from which its owner certainly derives no income," required that it be narrowly interpreted and its operation confined to the case of an asset "guarded in the owner's possession" (Resp. Rama da Fano, no. 43; see also Rema, Ḥm 163:3).
rights and obligations
Some scholars held that a property right recoverable by action, such as a right to payment of a dowry, was taxable (Resp. Maharyw, no. 82), but not a right which its owner was uncertain of recovering; nor were the unpaid wages of a teacher, laborer, or employee taxable – even if already due – until they were actually paid (Terumat ha-Deshen, Resp. no. 342). A debt was held to be deductible from the amount of a person's taxable assets (Resp. Rashba, vol. 1, no. 1074, et al.), and apparently the deduction was allowed only after the debt had matured, although in 15th-century Germany it was allowed even before maturity of the debt (Terumat ha-Deshen and Rema, loc. cit.).
jewelry, gold, and other valuable articles
It was deduced from the statements of "some of the geonim" (quoted in Terumat ha-Deshen, loc. cit.) that no tax was payable on property of this kind since no profit was derived from it; an 11th-century takkanah nevertheless records the assessment of such articles at half value for tax purposes (Takkanot Rashi, quoted in Resp. Maharam of Rothenburg, ed. Berlin, no. 866), and in the 15th century it was the practice to assess these articles at their full value on account of the "swindlers" who used to invest the money they earned in precious stones and jewels in order to gain tax exemption (Terumat ha-Deshen, loc. cit.).
Solomon b. Abraham Adret ruled that book manuscripts which were of very great value, were taxable at one-quarter of their value, i.e., at the same rate as land, even though they were not income producing (Teshuvot ha-Rashba ha-Meyuḥasot le-ha-Ramban, no. 184); however the majority of the scholars exempted them entirely – both because books were not income producing and "lest in future people refrain from hiring scribes to write books" (Terumat ha-Deshen, loc. cit.).
meat and wine
A tax on the purchase and sale of wine and meat is mentioned in various medieval takkanot and responsa (Resp. Rashba, vol. 2, no. 213; Resp.Rosh, nos. 6: 14, 102:6; Resp. Ritba, no. 44; Takkanot Castile, in Finkelstein, bibl., p. 371).
At first it was considered that there was no ceiling on the amount of a person's tax liability: "it has been the custom since ancient times… that a person is liable for tax, however high the amount, on all of his business transactions" (Resp. Maharam of Rothenburg, ed. Berlin, no. 127). Later, in certain areas, such a ceiling was provided for, but was only applied in respect of regular taxes and not of those specially imposed in times of emergency or in other special circumstances (Massa Ḥayyim, Missim ve-Arnoniyyot, nos. 27, 61).
Property dedicated to the needs of the poor, or to religious and educational needs, and the like (see *Hekdesh) was regarded as exempt from tax on various grounds: since consecrated property was deemed to belong to the community it was not logical for the community to tax its own assets (Resp. Ran, no. 2); such property was not intended for profit-making purposes – a precondition to taxation (ibid.); and in order to encourage the consecration of property (to strengthen the hands of those "who perform a mitzvah" (ibid., Terumat ha-Deshen, Resp. no. 342). It was decided that the exemption only applied in respect of property that had already been dedicated and set aside at a particular place, but not otherwise, in order to discourage fraudulent acts (Resp. Rashba, vol. 5, nos. 142 and 141, 143; vol. 2, no. 57; Resp. Rosh. 13:6; Sh. Ar., Ḥm 163:3; for further particulars, see Massa Melekh, pt. 3).
Place of Residence, Business, or Situation of Property
It was laid down that tax was payable at the place where the taxpayer was resident. In general, a person was regarded as a resident of the town in which he had lived for a period of 12 months or more; a lesser period entailed the duty to contribute toward some of the town's needs, and a person immediately became the resident of a town in which he purchased a dwelling (see above). In the 12th century the posekim disagreed on the criteria of residence for purposes of tax liability. According to one view, "even if he has rented a house he is not to be likened to one who has purchased a dwelling there [in the town], since in the latter case the kinyan proves that he has made up his mind to settle, but if a dwelling is rented it may not be his intention to settle and he should not be held liable"; another opinion was that "a person who comes to dwell and settle there is like one who purchases a dwelling there" (opinions quoted in Mordekhai, bb no. 477 and in Resp. Maharyw, no. 124), and this latter became the accepted opinion (Terumat ha-Deshen, Resp. no. 342; Resp. Maharik, no. 17). It was held that at all events a fixed local custom to impose tax liability, even upon residence in the town for a period of less than 12 months, was to be followed (Mordekhai, loc. cit.), and in various places other periods were prescribed (see, e.g., takkanot of the Saragossa community, 1331, in Dinur, Golah, 2, pt. 2 (19662), 345f.; Resp. Rashba, vol. 3, no. 397; see also Sh. Ar., Ḥm 163:2; for further particulars, see Massa Melekh, pt. 1).
situation of property
A property tax was regarded as payable at the place where the property was situated regardless of the owner's place of residence (Resp. Rashba, vol. 5, 178; Resp. Ritba, no. 157). This principle was deduced from the talmudic rule that a person owning property (a haẓer) in a town of which he is not a resident must contribute toward the costs of the town's water supply (Maharam of Rothenburg, quoted in Mordekhai, bb no. 475, on the authority of Tosef., bm 11:18). Meir of Rothenburg's reasoning in this matter is interesting. Starting from the mishnaic halakhah that "the [upkeep of the] water channel, the city wall, and the towers thereof and all the city's needs… were provided from the residue of the shekel-chamber" (i.e., from the money of all Israel; Shek. 4:2), he poses the question, "and why shall the city not be built by the Jerusalemites themselves, on their own?" His answer is "because no tribal division was made of Jerusalem and it is a dwelling place for all the house of Israel, therefore the funds come from the residue of the shekel-chamber, contributed by all Israel" (ibid.).
place of business transaction
Tax on profits derived from a business transaction was likewise held to be payable at the place where the business was transacted and the profit made (Resp. Rashba, vol. 5, no. 263), for the reason of dina demalkhuta dina, since according to the general law of the land the king may "decree that no person shall carry on business in his country unless he pay so-and-so much" (Resp. Rashba, vol. 3, no. 440; vol. 1, no. 664; vol. 5, nos. 263, 286); even talmudic law entitled the residents of a town to call upon a person not to carry on his business there "in order not to diminish their profit" unless he paid them tax on his profits, and his refusal to do so gave the townspeople authority to restrain him from carrying on business in their community (Resp. Rashba, vol. 5, no. 270; see also Resp. Ritba, no. 157). The community was at all events held to be entitled to enact a takkanah that anyone carrying on business in their town should pay them tax on this, since "on this matter all communities have rules and takkanot not derived from talmudic law" (Resp. Rashba, vol. 3, no. 397). Moreover, even people coming to a particular town in circumstances of *ones, for instance when fleeing from the enemy, with the intention of returning to their own town once the danger had passed, could be liable to contribute toward the taxes of that town after they had sojourned there for more than 12 months and transacted business like the townspeople, although perhaps not at the same rate as the permanent residents of the town (Binyamin Ze'ev, no. 293, with detailed discussion and quotation of different opinions; for further particulars, see Massa Melekh, 1:2, 1–2).
It was held to be clear that a person who was not resident in the town where he transacted business could only be taxed by that community on business transacted locally and not on business transacted in the town of his residence or on property he owned there (Resp. Rashba, vol. 3, no. 440). Furthermore, even the community where he lived could not tax him on business transacted in another community, "for if this be permitted an injustice will be done in that he is made to pay twice" (ibid.), and it was an important principle that "the same asset cannot be taxed in two different places" (Resp. Rashba, vol. 5, no. 270). In one instance the leaders of a certain community sought to enact that a resident of the local community was to be taxed also on his property situated in the area of another community because "the community has authority to make enactments and rules so that no one shall escape liability." Notwithstanding the right of a community to make enactments in tax matters even if they were contrary to a rule of the halakhah, Solomon b. Abraham Adret rejected the validity of this takkanah because it was "nothing less than robbery and it is not possible to contract out of the laws of robbery… for the community has no right to rob an individual of his money and take it for itself" (Resp. Rashba, vol. 5, no. 178). This decision of principle led to the enactment, in certain communities, of takkanot aimed at one and the same time at avoiding double taxation while minimizing, as far as possible, loss of tax income to the community in which the taxpayer resided. Thus the takkanah of a certain community rendered local residents liable for tax even on their property situated elsewhere, but as they were allowed first to deduct from their tax assessment the tax payable to the other community and the balance went to the local community, the takkanah apparently brought little benefit to the local community (Resp. Rashba, vol. 5, no. 282, also no. 178). This distinction between property situated at the taxpayer's place of residence and property situated elsewhere naturally also influenced the laws concerning the declaration of assets for purposes of tax payment. Thus it was laid down that a taxpayer owning property in another country where he also had a creditor was to deduct the debt in question from the property declaration he submitted to the foreign country and not from the declaration he submitted to the authorities at his place of residence (Resp. Rashba, vol. 1, no. 1074).
The objection in principle to double taxation was apparently not always generally accepted in the Jewish community in Germany. In the 14th century it was stated: "some hold that money which is retained by a person outside the town of his residence… is tax exempt… and others say that a person who has money outside his town, even abroad, must pay tax on all his money, and must also pay tax in the other place on the same money, even if the money has never come into his hands, and this is the custom of the majority of the people" (Menahem of Merseburg, quoted in Resp. Maharyw, no. 133). This was still the case in the 15th century: "It is the custom in all these countries that taxes and impositions are payable also on property that has always remained outside the country, and I am accustomed to dealing accordingly" (ibid.).
Date of Accrual of Liability
The halakhic scholars were much occupied with the question of whether liability for a tax obligation accrued on the date when the basis for its existence came into being or on the date when the tax payment became due for collection. The difference related mainly to two events of common occurrence in daily life: firstly, when a resident left or joined a community after imposition but before collection of the tax; secondly, when the taxpayer's financial position changed between the time of imposition of the tax and the time of its collection.
leaving or joining the community
Leaving the Community
A minority opinion held a person to be exempt from paying tax to the community which he left after the imposition but before the collection of such a tax (R. Tam, quoted in Mordekhai, bb nos. 475–476 and in Resp. Maharik, no. 2; see also Massa Melekh, 1:2; 3:2). However, the majority of the posekim disputed this view: "It seems to me to be as a law of the Torah that when the king has called for a tax… everything that one possesses becomes charged in the king's favor, and, even if one should run away before collection of the tax, everything is already so charged – for the law of the land is law and even the measure that is within the jar becomes charged in favor of the karga" (Isaac the Elder, quoted in Mordekhai, bb no. 476 and in Teshuvot Maimuniyyot, Gezelah, no. 9; Judah of Paris, quoted in Mordekhai, bb no. 659); similarly, "the geonim of France decided that when a man leaves his city, he must pay the tax imposed on him" and, in any event, "such is the custom in all the communities that a person cannot, upon leaving the city, gain exemption from a tax for which he has already become liable" (see Mordekhai, bb nos. 656 and 476).
This question was also disputed in Spain in the community of Solomon b. Abraham Adret, and there the matter was decided in accordance with the above-mentioned principle, after "they investigated and inquired from other communities and ascertained from all the communities and their leaders that they follow the opinion of those who exempt persons who come into the community [after imposition of the tax] and hold liable those who leave the community; since then the dispute has become resolved and in accordance with this we apply the law in all the communities in our area" (Resp. Rashba, vol. 5, no. 179). In other places takkanot were enacted to the express effect that anyone intending to leave the city had first to pay all the taxes for which liability had already accrued (ibid., vol. 3, no. 406; see also vol. 3, no. 405 and vol. 4, no. 260) and the halakhah was thus decided in all later periods: "The law obliges him to pay in full, on all his property, the taxes that have already been imposed, along with all the expenses involved, since he has already become liable for them as one of the taxpayers and he cannot rid himself of them by departing from the city" (Resp. Ritba, no. 157). A similar decision was given by Joseph Colon in Italy in the 15th century: "The prevailing halakhah among the Jewish people is that those who run away after imposition of a tax are not thereby exempt from paying their share of the tax" (Resp. Maharik, no. 2); moreover, "anyone escaping from the tax so as not to contribute along with his neighbor will not in the long run, if he returns to the country, derive any reward from his action" (Leket Yosher, oḤ, p. 139; see also Sh. Ar., Ḥm 163:2). Since a person leaving a city was liable for the payment of his share of the tax, it was held, in a certain case where the authorities refunded part of the tax collected to residents of the community that such person was also entitled to claim his share of the amount refunded by the authorities (Resp. Rashba, vol. 3, no. 405).
In the German community the scope of tax liability of a departing resident was even extended. It was laid down that the tax liability existed not only if the amount payable had been finally determined at the time of the resident's departure, but it sufficed if it had been known that a tax was going to be imposed, even though the amount had not yet been settled between the community and the authorities (Resp. Ḥayyim Or Zaru'a, no. 80). In the 15th century the matter was more precisely defined: "A person leaving the city or the country to settle in another country must share equally with the residents of his former place of domicile the burden of any new tax imposed on them within 30 days of his departure" (Terumat ha-Deshen, Resp. no. 342); this was because it had to be assumed that the tax had been "under preparation" for some time prior to its imposition, at which time the departing resident was included in the reckoning, and also that the tax was under discussion in the community for some time prior to its imposition; therefore to exempt from such a tax any person leaving the city a few days before the imposition of the tax would amount to encouraging many to evade taxes by leaving the city and returning there in due course (ibid.; see also Rema, Ḥm 163:3; Massa Melekh, 1:2, 3–4).
Joining the Community
The natural corollary of this rule was to exempt a person from liability for a tax imposed before he had joined the community even though the tax fell due for collection after his arrival, "since it is not possible to burn the candle at both ends by holding newcomers liable at the time when the tax is collected and departing residents liable at the time when the tax obligation is created" (Resp. Rashba, vol. 5, no. 179). This was also the custom followed in various other communities ("the custom of the community in Crete is not to reduce the tax for the departing resident nor to exact it from the newcomer," quoted in Mordekhai, bb no. 656). It was further decided that a community could not demand that a newcomer contribute toward the payment of any particular tax imposed for a reason clearly connected with an event preceding his arrival – as in the case of a tax imposed by one authority because the community had made a similar tax payment before to another authority, at a time when the newcomer was not yet a resident of the community (Resp. Rashba, vol. 4, no. 260).
Retroactive Tax Liability
The majority of the halakhic scholars held that the imposition of retroactive tax liability – that is imposition of liability on a person not resident in the community at the time of creation of the underlying tax obligation – -was invalid even though it was sanctioned by custom or express takkanah. In a certain case it was held that a tax imposed by the community for the purpose of repaying an existing loan could not be exacted from a person who came to live in that community after the loan had been taken, even though he came there before the imposition of the tax: "for why should he repay that which he has not borrowed and how shall he restore that which he has not himself taken ['robbed']?" (Rashba, quoted in Resp. Ribash, no. 477). Moreover, this principle could not be set aside even by an express communal enactment, since "the community cannot make any law or takkanah to the detriment of an individual member and contrary to the accepted law, except with the latter's consent, because the community cannot stipulate to 'rob' others" (Ribash, ibid.; see also Resp. Rashba, vol. 3, no. 412). On the other hand, the German scholars regarded as valid "a takkanah that anyone coming to live with us in the city within a given year shall pay retroactively the tax paid by the others at the beginning of that year" (Resp. Ḥayyim Or Zaru'a, no. 226; in this particular case the individual concerned was exempted because he came to live not in the city itself but in a nearby village; cf. however Resp. Rashba, vol. 4, no. 260 where the validity of an express takkanah of the type mentioned above was apparently recognized in certain cases).
change in the taxpayers' financial position
In principle, the date of creation of the underlying tax obligation was recognized as the crucial time for the purpose of determining the measure of individual liability for the tax. Hence the taxpayer had to be assessed according to his financial position at that time, regardless of any change in his financial position at the time of collection of the tax. The halakhic scholars justified this rule by likening the residents of the community to partners, who remain liable for repayment of the debt according to the rate of individual participation in the original obligation and not according to their respective financial positions at the time of repayment. However, while the community had no authority to determine by takkanah that the time of the collection of the tax and not the time of its imposition was to be deemed the crucial date for purposes of the essential liability for the tax obligation, it was held that so far as the measure of individual contribution toward the tax was concerned the community was entitled to enact by takkanah that the individual taxpayer be assessed according to his financial position at the time of collection, and this was the practice followed (Rashba, quoted in Resp. Ribash, no. 477). This takkanah was explained on the basis of the difference between the rules of private law concerning a loan taken by individual partners and the rules of public law concerning a loan taken by the community: "for the community that borrows for communal purposes is not like those who borrow for themselves personally, but it borrows for the community chest" (tevat hakahal; for particulars of this concept, see Resp. Rashba, vol. 3, nos. 400, 411; vol. 4, no. 309 and other references to it in this article), "and this debt it has to repay from whatever is available in the chest at the time of payment; such is the custom all over, and neither the poor who have become rich nor the rich who have become poor… pay except according to their means at the time of payment; this is also our practice and in any event it is impossible to do otherwise" (Resp. Rashba, vol. 3, no. 412; for particulars of this development from private to public law, see Public Authority; Takkanot ha-Kahal). However, it was pointed out that this explanation lacked validity in the case of a person who was not a resident of the city at the time when the loan was taken, since he could in no way be said to have borrowed "for the community chest" (Rashba and Ribash, loc. cit.).
Other scholars determined the crucial date for purposes of tax liability according to the substantive nature of the tax in question. Thus, in the case of a tax of the kind that was regularly imposed from year to year by the authorities, it was held that a person coming to live in the community in the middle of the tax year should be liable for payment of a share pro rata to the remainder of the tax period, since for the duration of that period he would benefit on account of the tax imposed; hence there was all the more reason why a resident who became rich in the course of the tax period had to contribute in accordance with his current means. However, in the case of a nonrecurring tax only those who were resident in the city at the time it was imposed had to contribute (Resp. Rosh 6: 12; see also Rema, Ḥm 163:3).
Tax Relief and Immunity
Tax relief on a personal basis is recognized in Jewish law, sometimes for financial reasons and sometimes for social or demographic reasons.
persons of limited means
It was held that the poor had no obligation whatsoever to pay tax (Resp. Rosh, 6:4, 12), neither on their income from business transactions nor in the form of a poll tax (see takkanot of the Saragossa community in Dinur, Golah, 2, pt. 2 (19662), 366f.). Elsewhere it was laid down that widows, unmarried orphans, and the disabled were not to be taxed unless their property exceeded a certain amount, and then on the excess only (Takkanot Castile (Finkelstein, bibl. p. 371)). A 15th-century German takkanah exempted from tax all persons who owned less than a certain amount, but rendered those who owned more than the specified amount liable for tax on all their property (Terumat ha-Deshen, Resp. no. 342). In 13th-century Germany it had been the practice to exempt orphans until their majority and marriage (Or Zaru'a, quoted in Terumat ha-Deshen, loc. cit.), but in the time of Israel Isserlein orphans also were taxed in accordance with their financial means, on account of the increased tax burden and because tax payment was a matter of safeguarding the security of the community, an obligation regarded as devolving on orphans also (ibid.); however, it was laid down that orphans were exempt from the duty of contributing toward the building of a synagogue (Rema, Ḥm 163:4).
In cases where persons of limited means were held liable for tax, the communal leaders and halakhic scholars sought legal ways to ease their burden (see, e.g., Resp. Rashba, vol. 5, no. 220). An interesting illustration of this can be found in the takkanot of the Huesca community of 1340. These prescribed a detailed and onerous list of diverse taxes, apparently aimed at financing communal services as well as raising the amount levied by the crown. The list included poll tax; property tax on houses, vineyards, fields, and gardens; a business and profits tax on wine and various other commodities; and taxes on leases and loans, on gold and silver jewelry, expensive garments, and the like. At the same time, "50 Jews who do not today own property to the value of 50 solidos" were exempted from the poll tax; also exempted were "those who study day and night and have no other occupation" (Dinur, loc. cit., pp. 349–53, and see below with reference to exemptions granted to scholars). On the other hand, the scholars were opposed to exempting a person from tax liability on the grounds of alleged straitened financial circumstances when in fact there was no more at stake than the interests of a man of means under whose patronage such a person was working. Thus Isserlein mentions that in Germany in the 15th century "some of the ba'alei battim ['householders'] have to some extent been forcing the custom of having their servants made exempt even though they have money on which they earn, because they eat at the table of the ba'alei battim." Criticizing this custom, he declared "that it ought not to be followed" (Terumat ha-Deshen, Resp. no. 342; for further particulars, see Massa Melekh, 4:4; as regards tax liability and exemption of "an idle person transacting no business in the city," see Tur and Sh. Ar., Ḥm 163:6 and standard commentaries; Massa Melekh, 1:1, 4; this case was one that had become of little practical importance, "to be in the position of an idler is something that is not so common – I have skimmed over it" (loc. cit.)).
encouraging settlement in ereẒ israel
In Germany in the 12th century it was decided that a person remained liable for a tax imposed before he left his place of residence, even though he intended to settle in Ereẓ Israel, since "the upholding of life (pikku'aḥ nefesh) is a more important mitzvah than settling in Ereẓ Israel… and the tax for which he is liable should not be imposed on the public for the sake of the mitzvah of settling in Ereẓ Israel" (quoted in Mordekhai, bb no. 656). It is possible that in this case the tax was required in circumstances of special urgency. On the other hand, it is mentioned that in the Turkish countries in the 16th century – the period following the expulsion from Spain and the mass immigration to and consolidation of the Jewish settlement in Ereẓ Israel – it had been the fixed custom for many years in the city that "anyone migrating to Israel to take up residence there had his property exempted from all kinds of taxes, even if it was left behind in that city" (quoted in Paḥad Yiẓḥak, s.v.Missim zeh Yammim). In one case the residents of the city sought to abrogate the custom in question by an express takkanah, but it was decided that they had no authority to do so "especially because by enacting such a takkanah they would deter the public from fulfilling the mitzvah of living in Ereẓ Israel" (Paḥad Yiẓḥak, loc. cit.; Massa Melekh, 1:2:3, 4; 5:2, 6; see also Massa Ḥayyim Missim ve-Aroniyyot, no. 2).
Another kind of tax exemption was that granted to "a person who has 12 children" (quoted in Paḥad Yiẓḥak, s.v.Missim, Mi she-Hayu Lo). In a certain case in Italy it was decided that the father of such a large family was to be entirely exempted from tax payment and that the tax collected from him had to be returned, "since this is not something decreed by the king contrary to law, but it is the law of the land" (ibid.). This exemption apparently had its roots in the general law of taxation in Italy.
talmidei Ḥakhamim (halakhic scholars)
The circumstances of a scholar's immunity from taxation, based on the talmudic halakhah (see above), remained a subject of much discussion in post-talmudic times. As in talmudic times, there continued to be a measure of reciprocity on this subject between Jewish law and the surrounding legal systems. Influenced by Roman law, tax immunity was customary in the case of scholars and the Catholic clergy and such immunity was also extended in the Muslim countries, although in a more restricted manner (see Baron, Social2, 5 (1957), 76; idem, Community, 2 (1942), 14f., 274; cf. Tashbeẓ 3:254).
In the geonic period it was laid down that rabbis were to be exempted from taxes imposed on the community by the king and his ministers (Zikkaron la-Rishonim … 1, pt. 4 (1887), ed. Ḥarkavy, no. 537), an exemption which apparently extended to all kinds of taxes. Starting from the tenth century, some of the scholars greatly reduced the scope of this exemption in holding that it should apply only in the case of an inclusive tax imposed on the community as a whole; a tax imposed on an individual basis was to be borne by halakhic scholars also and the community had no obligation to pay for them (R. Hananel, quoted in Nov. Ramban, bb 8a; Beit Yosef, Ḥm 163:11). Notwithstanding his earlier ruling, which ran counter to the view prevailing in his day that a scholar was forbidden to seek sustenance from the public in order to devote himself to study (as this amounted to a profanation of God's Name), Maimonides decided that in the matter of taxation, "the Torah has exempted all talmidei ḥakhamim from all governmental dues, such as a levy, arnona, or special personal tax… which must be paid for them by the community, including [a tax for] the building of a wall and the like; and even if the talmid ḥakham be a man of great financial means he is not to be held liable for any of these" (Comm. Avot 4:5). To exact a tax payment from a talmid ḥakham would amount to "robbing" him (idem, Resp. (ed. Blau) no. 325; cf.Yad, Talmud Torah, 6:10). Many of the scholars followed the opinion of R. Hananel (Nov. Ramban, Beit ha-Beḥirah and Nov. Ran, bb 8a), but others accepted Maimonides' view (Yad Ramah, bb 8a; Sefer ha-Ḥinnukh, no. 222), as did the majority of the posekim (Resp. Rosh 15:7–8; Tur and Sh. Ar., yd 243:2–3; Ḥm 163:4–6; R. Jeroham, Sefer Meisharim 32:2). Asher b. Jehiel averred: "In these generations I see the need, a fortiori, to apply this rule; in the time of the talmudic sages, talmidei ḥakhamim – of whom there were thousands – were exempt from various burdens and taxes; all the more reason in these generations – when it is hard to find one in a city and two in the same family – to exempt them from such burdens" (Resp. Rosh, loc. cit.). This was indeed the practice followed and even where the most onerous tax burden was imposed, "those who study day and night and have no other occupation" (Takkanot Huesca of 1340, in Dinur, loc. cit. p. 349) were exempted even from poll tax. In the Castilian takkanot of 1432 the widows of certain scholars and communal leaders were also exempted from tax, a concession partly based on the rule that "the wife of a ḥaver is as a ḥaver himself" (Av. Zar. 39a), and because the widow of a ḥaver remained entitled to some of the rights formerly enjoyed by her husband (Finkelstein, see bibl. p. 369).
"The Torah is his Occupation" (Torato Omanuto)
In the Talmud the term rabbanan, in the context of tax exemption, is employed without qualification, but the geonim established the requirement of "torato omanuto" (quoted in Terumat ha-Deshen, Resp. no. 342). Differing opinions were expressed on the interpretation of this phrase. One view was that it meant, "they fulfill ve-hagita bo yomam va-laylah with all their strength and ability, and do not leave off studying the Torah except to fulfill a mitzvah, to seek a livelihood and sustenance for themselves and their families" (Responsum of Meir ha-Levi in: Sefer Kol Bo, 108b; see also Naḥmanides and Piskei ha-Rosh, bb 1:26; Terumat ha-Deshen, Resp. no. 341; Resp. Israel of Bruna, no. 102). Other scholars held it to be a precondition of the exemption of a talmid ḥakham that "he is not occupied at all with worldly needs" (Beit ha-Beḥirah, bb 8a; Sefer Ḥasidim, no. 293; see also takkanot Huesca, above).
The Role of Custom
It was decided that although the law concerning a talmid ḥakham was no longer practiced with regard to certain matters (e.g., the special fine imposed on a person who shamed him), it still remained in effect as regards his exemption from taxation (Terumat ha-Deshen, Resp. no. 341). The exemption was taken to apply not only to a scholar holding office as a rabbi or head of a yeshivah, but also, as appeared from the talmudic source from which the exemption was derived, to scholars who "'trudge from city to city and from country to country'… those are scholars who go from yeshivah to yeshivah, because it is not customary for one who is qualified to be at the head to trudge from city to city" (Terumat ha-Deshen, Resp. no. 342; Resp. Maharit, vol. 2, Ḥm no. 59 et al.). However, by the 15th century there were places where no scholars except those serving as the heads of yeshivot were exempt from taxation (Terumat ha-Deshen, loc. cit.) and, in consequence, the halakhah was decided that "there are places where it has been the practice to exempt talmidei ḥakhamim from taxation and other places where the practice has been not to exempt them" (Sh. Ar., yd 243:2).
Cantor of the Synagogue
Differences of opinion were also expressed concerning the position of a synagogue cantor, who usually also served as teacher of the children and therefore could be regarded, to some extent, as a scholar. Isaac b. Sheshet Perfet held that he was exempt from tax but other scholars disagreed (Resp. Ribash, nos. 475–7); Isserlein testifies that "in no community have I found them to hold their cantor liable for tax, even if he should have some means, and this is a worthy and proper custom" (Terumat ha-Deshen, loc. cit; see also Rema, Ḥm 163:5).
In the State of Israel
The tax liability of a talmid ḥakham has been discussed under existing circumstances in the State of Israel. It was held that since rabbis and heads of yeshivot receive full salaries and a substantial proportion of the taxes of the state went toward the provision of various services to which talmidei ḥakhamim also had to contribute, and since tax exemption was a matter of custom, it was necessary that "the custom be upheld to exact tax, at the appointed rate, from rabbis, heads of yeshivot, and talmidei ḥakhamim who earn salaries" (see K.P. Tekhorsh, bibl., p. 279. For further particulars concerning taxation of scholars, see Massa Melekh, 4:1–3; 5:2, 5).
governmental or communal exemption
A common problem in post-talmudic Jewish life was that which arose when individuals, generally those who were influential in governmental circles, gained for themselves a personal tax immunity from the authorities. The halakhic scholars and communal leaders fought against this phenomenon although German and Spanish Jewry differed in their approaches to the matter.
Governmental Exemption in Germany
As early as the 11th century a German takkanah decreed, on pain of ban, that "no local male or female resident shall be entitled to secure his/her exemption from the public burden" (Takkanot Rashi, quoted in Resp. Maharam of Rothenburg, ed. Berlin, no. 866). A 13th-century takkanah laid down that "no person shall secure exemption from the tax because he moves in the royal court" (Finkelstein, bibl., p. 226). In one of his responsa, R. Simḥah of Speyer – after discussing the tannaitic halakhah concerning a customs waiver granted to partners (Tosef., bm 8:25–26) – laid down that as far as the community was concerned any governmental exemption had to be shared equally between all its members (as was the custom followed by his uncle, Kalonymus b. Meir), since "all Israelites are sureties for each other to accept the burden of their exile and will share with each other in their comfort and redemption" (quoted in Or Zaru'ah, bk no. 460, and in Resp. Maharam of Rothenburg, ed. Prague, no. 932). Similarly, the case was cited of "R. Eliakim, who was close to the royal court and shared with the community any exemption given him by the king" (Resp. Maharam of Rothenburg, ed. Prague, no. 930).
Meir of Rothenburg strongly criticized those who secured any form of tax relief without sharing the benefit of this with the community. In a case where a person acted on his own initiative and came to an arrangement with the authorities "to pay tax independently [of the community]" he laid down that all members of the community had to be regarded as partners for all tax purposes, and a partner could not enjoy personally a benefit due to the whole partnership without the approval of his other partners even if this was not the law of the Torah, "since it has been the custom in the whole kingdom for them to be partners, they are not entitled to act separately, for if everyone were to do so it would lead to evil consequences because everyone would throw off the burden from himself and impose it on his neighbor and endless quarrels shall come about… therefore it is necessary to protest against Reuben who saw fit to act separately" (Resp. Maharam of Rothenburg, ed. Lemberg, no. 108). In a similar case he added that the consent of the authorities was of no effect because "it is not dina de-malkhuta but gezelah de-malkhuta, like a tax collector exacting a tax in an unspecified amount… since it is the custom in the city for all the Jews to participate in the tax"; he held that the person who made the separate arrangement was to return to the authorities and explain that it was the law of the Jews not to act separately but to carry the burden jointly, that all his fellow-Jews were quarreling with him on this account, and that he no longer wished to pay tax independently. In R. Meir's opinion it was necessary to take a more stringent approach in such matters, even if there was no support for this in the Talmud (Resp. Maharam of Rothenburg, ed. Cremona, no. 222; idem, ed. Prague, no. 915). At the same time he ruled that the prohibition was only to apply when the individual was granted an exemption prior to the final determination of the amount of the tax imposed on the community, for in this case it could be assumed that the reduction granted to the individual would have to be made up by the community in general; if, however, an individual exemption was granted after the final determination and it was known that this fact had in no way increased the amount of the tax for others, the individual concerned could not be required to participate with the others (Resp., ed. Prague, no. 134; ed. Lemberg, no. 358; Mordekhai, bk no. 177; Teshuvot Maimuniyyot, Kinyan, no. 1). This distinction of principle was accepted, with slight modifications, by the majority of the posekim (Resp. Ḥayyim Or Zaru'a, nos. 80 and 206; Resp. Ribash, no. 132; Resp. Maharil, no. 71; Resp. Maharyw, no. 38; Terumat ha-Deshen, Resp. no. 341 and ibid., Pesakim u-Khetavim, no. 144).
Governmental Exemption in Spain
The Spanish halakhic scholars apparently took a less stringent view of personal exemption from taxation. In one case Solomon b. Abraham Adret dealt with the scope of a tax exemption granted to an individual by the authorities and concluded that it did not extend to taxes connected with the protection and security of the Jewish public; on the question of individual tax exemption itself, he stated: "I do not put myself forward in the matter – this has been and remains a disputed topic – until the court asks for my opinion" (Resp. Rashba, vol. 5, no. 183; vol. 1, no. 644; but cf. vol. 5, nos. 279, 281). A 14th-century takkanah of the Alcolea community ruled that a ban of one year could be imposed on any person seeking from the authorities exemption or relief from taxation, and this was also applicable to a person availing himself of such a privilege which had been arranged by a friend, "even without his knowledge" (Resp. Ribash, no. 460; see also Rema, Ḥm 163:6; for further particulars, see Massa Melekh, pt. 2; 4:8).
Exemption by the Community
Clearly, the reasons for objecting to a personal tax privilege granted by the authorities had no relevance in the case of a personal exemption granted by the community itself. The scope of this kind of exemption, however, was discussed in a number of instances (see, e.g., Resp. Rashba, vol. 1, no. 967; vol. 5, no. 281; Resp. Rosh, 6: 19). In these cases the problem of the legal validity attaching to the act of waiver arose and it was ruled that the matter depended on local tax usage (Resp. Rashba, vol. 5, no. 180). It was decided that since a waiver of this kind was effected by the public, it had to be regarded as fully valid: "all matters agreed to by the community or its duly appointed representatives require no kinyan or deed, but the statements of the former are regarded as written and delivered" (Resp. Rosh, 6:21; see also Rema, Ḥm 163:6; *Public Authority; *Takkanot ha-Kahal; for further particulars, see Massa Melekh, 5:1, 4–8).
Methods of Tax Assessment
The halakhic scholars were greatly preoccupied with the problem of the method of assessing the taxpayers' assets, which formed the subject matter of many communal takkanot. Two principal methods were followed: the first based on a declaration of assets submitted by the taxpayer, called a hoda'ah, and the second on an evaluation of assets by communal assessors or trustees, which was called a pesak, the assessors being referred to as posekim (for a comparison, see, e.g., Resp. Rashba, vol. 3, no. 411, and Resp. Ribash, no. 457). These two methods had much in common and other variations were also in use (Ribash, loc. cit.).
declaration by the taxpayer (hoda'ah)
Detailed descriptions of this method of assessment are to be found in a number of responsa. In Spain a date was fixed for submission of the declaration to the trustees (ne'emanim; for particulars of this office see below), as well as a later date for submission of a supplementary declaration (Resp. Ritba, no. 114). In another Spanish responsum it is indicated that the community used to appoint 12 persons to determine procedure and supervise submission of the declaration. Among their tasks was determining the date, place, and person to whom the declaration had to be submitted, and in what language it should be made. These 12 persons were given authority to make occasional changes in the details concerning completion and submission of the declaration, but not to change the essential method itself: "they may not change from the method of the hoda'ah to that of the pesak or to any other method" (Resp. Ribash, no. 457, also nos. 458, 459). The taxpayers (pore'ei hamas) were required to set out in the declaration full details of their property, business transactions, debts, pledges, and the like (Resp. Rashba, vol. 3, nos. 383, 396, 399, 408; Resp. Ribash, loc. cit.).
It was required that a reasonable and uniform period be prescribed for completion and submission of the declaration, "since some may arrange this in a day and some need ten days or more" (Resp. Ribash, nos. 458 and 459). The taxpayer would bring his declaration form (pinkas hoda'ato) to the trustees for them to examine its contents in his presence and then to record the total amount declared in the communal register (pinkas ha-kahal); they then returned to the taxpayer "a token of his declaration" (mazkeret hoda'ato; Resp. Rashba, vol. 1, no. 1074; vol. 3, no. 383). The amount that each individual had to contribute toward the tax could be ascertained from the communal register; the names of those who did not have to pay were followed by a blank space and no mention of any amount (Resp. Rosh, 5:9; 6:4). From time to time a new declaration of property had to be submitted and, in case of increase, tax had to be paid on the increment (Resp. Rashba, vol. 3, no. 407); in the event that there was a large decrease as compared with the amount previously declared, the trustees would inquire into the matter, which often led to acrimonious dispute (Resp. Ritba, no. 114).
evaluation of assets by tax assessors
There is early testimony that the community appointed trustees for the purpose of faithfully assessing each member of the community, so as to avoid complaints of an unjust apportionment of the tax (Yom Tov Elem, quoted in Resp. Maharam of Rothenburg, ed Lemberg, no. 423). These had to be "knowledgeable in the tax" so as to assess each individual according to his assets (Teshuvot Ge'onei Mizraḥ u-Ma'arav, no. 205). Sometimes the city elders and judges who were knowledgeable in all local transactions would prepare a "deed of comparison" (shetar hashvayah) so as to "compare between them and see how much tax or charity each would have to pay and thereby avoid dispute among the taxpayers" (Sefer ha-Shetarot of Judah b. Barzillai, ed. by S.J. Halberstam, p. 137f.). After assessment of the tax a shetar pesika would be written to the effect that the communal leaders had determined that X was to pay so-and-so much tax each year and that no one, not even the court or the communal leaders, should have the authority to vary such a determination (ibid., p. 75).
In various responsa of a later period details are given of the functions of these assessors (posekim) and of the pinkas ha-pesika they kept (see, e.g, Resp. Rashba, vol. 5, no. 279, 281). The assessors recorded the assessed amount of each taxpayer – based on their estimate – in the communal register (pinkas ha-kahal; Resp. Rosh, 6:4). Without doubt this assessment too was based on various particulars available to the assessors, although at times they erred grossly in their estimates (Resp. Rosh, 6:4) and on occasion their assessment was followed by protracted argument with the taxpayer which occasionally ended in a very substantial correction of the original assessment (e.g., from 800 zehuvim to 150: Resp. Maharyw, no. 124). When a person was assessed as having no taxable assets, a blank space was left beside his name in the communal register (Resp. Rosh, 6:4).
The number of tax assessors (called trustees and by several other names) varied from place to place (the responsa collections of various scholars mention the figure of three, four, ten, and so on) and they were generally chosen by lot from a number of candidates (Resp. Rashba, vol. 3, no. 417). They were required to have expert knowledge of the tax system and to perform their duties faithfully: "and it is the custom in the communities that they appoint the shrewd… they examine minutely to impose justly on everyone, according to the efforts and activities of each, and they must judge others as they would themselves as it has been said (Shab. 31a) 'do not unto your neighbor that which is hateful to you'" (Joseph Tov Elem, quoted in Resp. Maharam of Rothenburg, ed. Prague, no. 941). Those who assessed the tax liability of each according to evaluation of his assets were warned "to guard against favoring one who is liked or dealing onerously with one who is disliked, in order not to be disqualified from testimony or the oath" (Or Zaru'a, quoted in Resp. Maharashdam, Ḥm 442).
Generally, such an appointment was looked upon as an honorable one: "all families in the city would like one of their members to be appointed, for the honor of the family alone" (Resp. Rashba, vol. 3, no. 399), but there is no doubt that such an appointment also served personal economic interests. In a case where the wealthy families insisted that their interests be represented by two of the five appointees, Israel Isserlein saw fit to accede to their request since the other three would still compose an impartial majority; also, letting the rich have their representatives would show them that their contentions were being taken into account and they would therefore refrain from strictures and appeals; this was possible, however, only if the two men chosen by the rich were "men of truth, certainly not those reputed to be swindlers and cunning men" (Terumat ha-Deshen, Resp. no. 342). Sometimes a candidate for election would give notice of his unwillingness to accept the position, and in a case where such a person was nevertheless elected, Solomon b. Abraham Adret held that "his withdrawal from the assent is of no effect, and he is obliged to take up his trusteeship since the community has seen fit to disregard his wishes" (Resp. Rashba, vol. 3, no. 417; see also vol. 4, no. 309). At times an appointee sought to be released from his position after having served for a period (Resp. Ribash, no. 461).
This dual attitude toward appointment as a trustee found legal recognition in the determination that the trustee's liability for any damage he himself caused had to be equated with that of a gratuitous bailee and not a bailee for reward (see *Shomerim; Resp. Rashba, vol. 5, no. 10). Cases of refusal to accept appointment as a trustee are mentioned in particular in circumstances where the central authorities imposed special emergency taxes on the community – e.g., for the purpose of waging war – and the latter found itself unable to bear the burden of the tax and the means employed for its collection (as in the case of the tax imposed in Prague in 1751: see Elon, Ḥerut ha-Perat, pp. 221f.).
In a case where one of the three trustees was unable to read the contents of the declarations, he was nevertheless held to be fit for his position on the ground that the other two could read the contents to him and that they could be trusted to do so without distortion; since the main task of the trustees was to apply the same standards to all, it was held that the trustees who could not read remained as competent as the other two, and sometimes more so, as far as expertise in matters of collection, payment, loans, and the accumulation of other related knowledge was concerned (Resp. Rashba, vol. 3, no. 399). This was an expression of Solomon b. Abraham Adret's general objective of involving all members of the public in communal administration; elsewhere he added: "in many places individuals are not so literate, yet they are appointed along with those who are knowledgeable" (a similar view was taken with regard to signature by the town scribe in place of a witness who could not sign his own name: Resp. Rashba, vol. 2, no. 111; the same held good even for the appointment of a judge from among the residents of a village where "there is no one who knows even one letter" if the man was accepted by the public: ibid., no. 290). The trustees were enjoined to observe total secrecy concerning details which came to their knowledge in the execution of their duties (Avodat Massa, no. 1:2). Apparently this office led to the emergence, in the course of time, of special experts in tax matters. Thus in one of his responsa Asher b. Jehiel mentions that he was asked to give his decision "after consulting with tax specialists" and that he saw fit to do so and to uphold their conclusion (Resp. Rosh, 6:4). This phenomenon is probably to be attributed to the fact that the tax laws were based largely on the various takkanot and customs in this field, an area in which the experts had gradually acquired special knowledge.
In various takkanot provision was made concerning the right or otherwise of the assessors to demand documents from the taxpayer. In one instance it was laid down that the ten trustees were sworn "to act faithfully and truthfully to the best of their knowledge and not to seize the records (kitvei zikhronot) of any individual" unless it was agreed by a majority of the ten "to inquire into the affairs of such an individual and to punish him" (Resp. Rashba, vol. 5, no. 126; vol. 3, no. 411).
Asher b. Jehiel held that in the case of error, even gross error, made by the assessors in the taxpayer's favor – for instance "if they taxed Reuben on 1,000 zehuvim,… and later ascertained that he had 10,000 zehuvim" – the taxpayer was to benefit from the erroneous assessment and did not have to add to it since he had paid according to the estimate and "had divine assistance" (Resp. Rosh, 6:4). Samuel di Medina, the 16th-century scholar of Salonika, found this decision difficult to comprehend but followed it nevertheless, out of high regard for his predecessor (Resp. Maharashdam, Ḥm 442). Around 100 years later a different decision was given in Germany in a case where an assessment of property had been made for tax purposes, and on the taxpayer's death two years later "many times this amount was found in his estate" (Resp. Ḥavvot Ya'ir, no. 57). The question that arose was whether to deal with the matter in a manner favoring the assessed party "and say that during the two years in question he had prospered greatly or had an unexpected windfall," or to hold that he had "deceived" for purposes of the assessment and therefore additional tax had to be exacted from him. In his decision Jair Ḥayyim Bacharach reviewed at length the halakhah and contemporary customs concerning tax assessment and laid down that the decision in a matter of this kind had to take into account a number of factors, such as the nature of the business carried on by the assessed (that is, whether or not it allowed for the possibility of such sudden enrichment), his previous conduct in tax matters, and the general position as regards the prevalence of tax fraud and concealment. (The same approach was followed in another case, ibid., no. 58.)
Information under Oath and Ban
In order to ensure the veracity of the taxpayer's declaration, it was customary in many places to impose a ban on a person filing an inaccurate declaration, or to require the taxpayer to take an oath on the truth of his declaration. Solomon b. Abraham Adret decided that in strict law an individual could not be compelled to swear to the truth of his declaration: "as in the case of a debtor pleading a lack of means to pay his creditor, when the court cannot, in law, ban or compel him to take an oath, and instead tells the claimant: 'go seek him out and recover from him'!" However, in the same way as it had been ordinated that a ban could be imposed on a debtor pleading a lack of means (ein li: see *Execution (Civil); Yad, Malveh, 2:2), in this case too "the ban may be imposed without any qualification… so that everyone who has some means shall pay his proportional share to the community chest." Since the geonim had ruled that a debtor pleading a lack of means could be made to take a solemn oath to this effect, "it is possible that in this matter too [i.e., the taxpayer's declaration] the same may be done on the basis of a takkanah" (Resp. Rashba, vol. 3, no. 392).
The practice of swearing such an oath in accordance with various takkanot came to be expressly recognized by Solomon b. Abraham Adret (see, e.g., ibid., no. 408). Asher b. Jehiel was opposed to an individual's swearing an oath of this kind in tax matters, distinguishing between such an oath and that which one partner could require from his fellow partner even in the case of ta'anat shema ("doubtful plea"; see *Oath); he was only prepared to recognize the custom whereby in communal enactments of this kind, "they impose a ban on the whole community to observe them, but do not require an oath from each individual" (Resp. Rosh, 6:13). This ban was imposed in general terms in the presence of all persons above the age of 15 who were called upon to make payment honestly (Resp. Rashba, vol. 5, no. 222). However, Asher b. Jehiel's opinion was not accepted and in the 15th century Isserlein based the community's right to require an individual to swear an oath to the truth of his tax declaration on the premise that the members of a community were comparable to partners and one partner could require an oath from his fellow even on a ta'anat shema (Terumat ha-Deshen, Resp. no. 344 and see below). This was also the decision of Isserles (Rema, Ḥm 163:3) and of later posekim (see, e.g., Noda bi-Yhudah, Mahadura Tinyana, Ḥm no. 40). Bacharach expressed the opinion that after the conduct of the taxpayer and the general position as regards honesty in tax payment were taken into account, it was in the absolute discretion of the community "to prevent one from taking an oath even if he should wish to do so, and to require an oath, according to their discretion, from one who should wish to do so; and no explanation is called for, provided only that their hearts shall be turned toward heaven" (Resp. Ḥavvot Ya'ir, no. 57 and see particulars cited there of cases in which the oath was taken).
alternating between different tax methods
It was held that where it was customary for the whole community to follow the self-assessment method (i.e., by way of a declaration) an individual had to be refused a request that his liability be assessed by assessors: "impose on me as you see fit, and I shall do as you wish" even if he made his request because "I am afraid I shall not on my own be able to do as required by law." The reason for this was that an individual was not entitled to choose his own method but had to follow the one agreed upon by the public (Resp. Rashba, vol. 3, no. 392). The trustees too were held to have no power "to change from the method of declaration to that of assessment pesak or to any other method" (Resp. Ribash, no. 457); only the community itself could do so (Terumat ha-Deshen, Resp. no. 343, and see below; Rema, Ḥm 163:3) and sometimes it exercised this power. This fact is illustrated, for instance, in the extant records of the tax system practiced in the Mantua community from the end of the 16th century until the beginning of the 18th. The tax code of this community, the "order of assessment" (seder ha-ha'arakhah), dating from the end of the 16th century, deals in detail with the various kinds of taxable property and income, and sets out the order of assessment of property and tax by the assessors, the manner of their election, and so on. Yet it appears that from the end of the 18th century this community practiced the casella system – named after the case or box into which the tax payment was deposited – which introduced many changes into the tax collection procedure, mainly a changeover to the method of individual self-assessment (see Simonsohn, bibl. vol. 1, pp. 272–301).
The community, however, was not entitled, when it varied the tax method, to adopt indiscriminately the stringencies of different methods in determining the taxpayer's liability: "so far as concerns the wish of his community to do something that is new and completely unheard of, namely to combine the stringencies of two systems by both assessing and imposing a ban, and then not allowing him any reduction in the assessed amount while obliging him to pay the difference (if he be under-assessed at a time when he himself knows that he owns more than the assessed amount) this is robbery and extortion, and a person is not put to death in two ways… we must not innovate further stringencies and once they have made their assessment they cannot any more impose a ban on him and there is no substance in the statements of those who would insist on combining the stringencies of both systems" (Noda bi-Yhuda, loc. cit.). This is one more illustration of a restriction on the community against departing from the general principles of equity and justice (see above).
tax methods and socio-economic class dispute
To a large extent both the choice of tax method and the desire to change from one to the other were an outcome of communal dispute of a social and economic nature, and it was no easy task for the halakhic scholars to conciliate between the conflicting class interests. Isserlein, who in a certain case saw fit to uphold the demand of the wealthy that two out of the five trustees be their own representatives (see above), gives a further interesting description of the manner in which the actual tax method was determined (Terumat ha-Deshen, Resp. no. 343).
A "heavy tax" had been imposed on the community; for the purpose of its collection, the community prescribed the method of individual self-assessment, by declaration, the latter to be affirmed under oath. A wealthy section of the community (ba'alei kissin) objected to this method and demanded that the assets and tax liability of each be determined by assessors, "as has been the custom for some years." Alternatively, they demanded that even if the declaration method was applied the taxpayer should not be required to detail all particulars of his assets in the declaration: "out of concern for the fact that this might cause them harm in a number of ways"; instead the taxpayer should merely have to specify the general amount at which he assessed his assets and affirm under oath that he had no more. This time Isserlein rejected the demands of the wealthy. As regards the first, he held that the community members had to be regarded as partners and since each partner had the right to require an oath from his fellow partner even on a doubtful plea (because otherwise a partner would permit himself to depart from the truth by reason of his activity on behalf of the partnership business), therefore there certainly existed grounds for the same reasoning in respect of the wealthy members of the community, who were likely to permit themselves an untruthful declaration because they were active on behalf of the community and represented it before the authorities, and because each of them would assume that none of the others submitted a truthful declaration. Furthermore, if assessment were to be made by assessors without the oath of the taxpayer, it would be impossible to ascertain the true state of affairs: "human beings are not prophets who are able to know what the next man has in his money-box… a person may become rich unbeknown to anyone else… and people are likely to conceal their assets so as to avoid being regarded as having reached satiety." So far as the alternative demand was concerned, Isserlein held that it was indeed proper according to talmudic law, but that it had already been laid down by the geonim and later scholars that a person taking any oath was required to give details of the matter sworn to, so as to avoid error or deceit; this was all the more so in tax matters, when "people are in the habit of employing all kinds of stratagems to evade payment." Therefore if the taxpayer were allowed a general oath without providing details, it would open the way to error and abuse: "hence it is necessary to set out in detail and explain clearly all the assets, their quality and substance… and this has been the practice since long ago in all our borders."
It may be noted that this reasoning provided a basis not only for the determination of a method of tax assessment where none had previously existed, but also for the variation of a method of tax collection practiced for some time (this was also the conclusion of Rema, Ḥm 163:3. For further particulars of tax assessment methods, see Massa Melekh, 5:2).
The communal fiscal system allowed for the taxpayer to appeal against his assessment to a higher instance, on both the amount and questions of law. In many communities there were special tribunals for this purpose (e.g., in the Mantua community: see Simonsohn, bibl., vol. 1, pp. 283f.) and often appeals of this nature would be aired before the halakhic scholars, who dealt with the matter at issue according to the halakhah and the pertinent customs and takkanot.
presumption of possession (din muḤzak) in favor of the community
In this connection a fundamental problem with an important bearing on the relationship between the community and the individual in Jewish law was discussed. A takkanah attributed to R. *Gershom b. Judah laid down that a person could not object before the courts in respect of a tax imposed on him, "until he pays what was imposed on him, either in cash or in pledges." This rule was equated with the general rule applicable to all appeals against a judgment, namely that payment is not to be delayed until the appeal is heard (Binyamin Ze'ev, no. 295; cf. Takkanot Medinat Mehrin, no. 214). It was laid down that only in the event that the city elders agreed with the individual that the tax imposed on him was unlawful would the legal hearing have to be disposed of first (takkanah quoted in Resp. Maharik, no. 17 (cf. also nos. 1, 2) and in Binyamin Ze'ev, no. 295). Meir of Rothenburg thought that this presumption in favor of the community had no talmudic basis, but on further consideration he concluded that this was "a custom according with the Law of the Torah." On the basis of the doctrine of dina de-malkhuta dina (bm 73b; and see above), he held that the king was "presumed to be in possession of [muḥzak] the tax [demanded] of each individual" and therefore "also the community wishes to be presumed in possession, to be defendants and not plaintiffs… with regard to the rule that the burden of proof is on the person who seeks to recover from another… for thus it will at all times have the upper hand" (Resp. Maharam of Rothenburg, ed. Prague, nos. 106, 915; ed. Lemberg, no. 371). He also held that his reasoning contributed to the good order of the public, "for if we were to hold otherwise, everyone would reply to the community, saying: 'I am exempt from the law' or 'I have already paid my tax'… everyone would do wrong and think in his heart 'who shall sue me?'… since a shared pot is neither hot nor cold" (see bb 24b). In his opinion this additional substantiation could also be based on various analogies from the talmudic law (idem, ed. Prague, no. 106; Mordekhai, bb no. 552). However, the presumption only operated in the community's favor in case of doubt about the true legal position; if prima facie it appeared that the law was against the community, the individual would not have to comply except after conclusion of the legal hearing: "justice shall not be perverted against the individual for the sake of the public, nor is robbery permissible because it is committed by the public" (Maharam, loc. cit., and cf. bb 100a). Therefore, if the individual pleads, "this is the law of the community and this has been their practice until now," while the community contends otherwise, and the matter is uncertain, "then why should the community be in a stronger position? And the position of the claimants is not worsened even if they are not many, since they are representative of the community" (Nimmukei Menaḥem of Menahem Merseburg, Din 37).
Solomon b. Abraham Adret reached the same conclusion, except that he emphasized that in law the principle which placed the burden of proof on the claimant was also applicable between the community and the individual; however, "it is an ordinance for the sake of good public order, that it shall not be possible for every person to say, 'I shall not pay until adjucation of my plea that I am not liable,' otherwise everyone shall do so with the result that the tax will never be collected, and only the swindlers shall be encouraged. We here [in Barcelona] have also ruled that any person who denies liability must first make payment before the matter can be adjudicated upon." In such a case it did not suffice for the individual to provide a surety for the amount in dispute (Resp. Rashba, vol. 3, nos. 398 and 406).
presumption and the rights of the individual
Later the scholars became concerned that this presumption, which was necessary as an effective deterrent against tax evasion, should not prejudice the rights of the individual in disputes with the community. Thus, for example, it was decided that in a case where there were two differing halakhic opinions, one rendering the individual liable for tax and the other exempting him from it, the law had to be applied in favor of the community which is presumed to be in possession – as is the law in any other case of actual possession (see *Extraordinary Remedies; also *Codification of Law, s.v. the plea of kim li; Resp. Maharyw, no. 133). Similarly, it was decided that in a dispute between the individual and the tax trustees concerning the statements made by the former in his deliberations with them, the trustees had to be believed because they were representatives of the community, "and the community is [presumed to be] in possession… and because of this they are believed" (Resp. Maharyw, no. 84). Concern that the operation of the presumption might prejudice the rights of the individual was particularly real because, theoretically, the justification for affording the community a favored status in this respect was capable of being applied in every case of dispute between the community and the individual and not necessarily in tax matters only, as in fact could be deduced from the talmudic sources quoted as an analogy for the presumption (see Terumat ha-Deshen, Resp. no. 341).
limiting the scope of the presumption
As a way of safeguarding the rights of the "defenseless" individual in disputes with the "powerful" community, the scholars laid down several material reservations, by means of which the presumption that the community was in possession was restricted. First was that the presumption only operated in favor of the community in respect of a tax imposed by the ruling power and "all other payments for governmental purposes" embraced within the rule of dina de-malkhuta dina, so far as "all other public matters and needs" was concerned the presumption did not apply. With a view to safeguarding the interests of the public, it was held to be sufficient if the individual gave a *pledge for the amount in dispute, "so that he shall be the plaintiff and the one in pursuit of justice, and the public not be occasioned loss." It was also laid down that the presumption could not be held to operate in favor of the public with regard to the plea of kim li (see above; Terumat ha-Deshen, loc. cit.). Secondly, since the explanation for the presumption in favor of the community was based on the theory that the king was presumed to be in possession of the tax by virtue of the rule of dina demalkhuta dina (the community being the agent of the king), therefore if the community had already paid the tax to the government and then sought to collect the tax from individual members of the community, it could no longer rely on the operation of the presumptions in its favor, since on making payment to the king it had ceased to be his agent (Nimmukei Menaḥem of Menahem Merseburg, Din. 37). On the basis of this distinction Joseph b. Ezra, the 16th-century scholar from Salonika, concluded: "accordingly we learn at this time, when the communities do not distinguish between the king's taxes and other taxes, that there is no room for presuming in favor of the public unless there is a custom to this effect and such custom is not called into question" (Massa Melekh, pt. 6, 3rdTenai). Thirdly, if there was still time for it the individual was entitled to have the legal hearing take place prior to the due date of the tax payment and in this event no pledge was to be taken from him (Massa Melekh, pt. 6, 3rdTenai; see also Terumat ha-Deshen, Resp. no. 341). Fourthly, in the 16th century it was concluded, from the thesis that the community acted as the agent of the government, that in circumstances where it could be assumed that the community made its plea in order to safeguard its own interests and because it acted as the agent of the government, the presumption would not avail the community: "and there is no distinction between the kings' due and other public needs – they [the community] are the ones who claim and seek to cover payment and the burden of proof is theirs." The only difference between the community and the individual, in case of a dispute between them, lay in the fact that the former could demand a pledge from the individual in order to ensure a legal hearing of their dispute (Resp. Menahem da Fano, no. 43; already in R. Gershom's takkanah the matter of taking a pledge was mentioned, although apparently in satisfaction of the debt and not only for the purpose of securing its repayment. For further particulars see Massa Melekh, pt. 6).
Adjudication and Evidence
The special circumstances which formed the background to the development of the tax law system led to the appearance of takkanot and customs which introduced into this field of the law far-reaching changes that also affected matters of adjudication and the laws of evidence. Apart from the fact that special tax courts, composed of communal leaders adjudicating "in accordance with their own custom" (Resp. Rosh, 7:11; and see below), existed in many places, significant changes were introduced into the halakhah concerning dayyanim and witnesses even in the courts presided over by the halakhic scholars.
disqualification of witnesses and judges
Jewish law lays down stringent requirements governing the competency of *witnesses, and disqualifies relatives of the litigants as well as other interested parties from acting as witnesses in a suit (Tur and Sh. Ar., Ḥm 33 and 37 and standard commentaries). Hence in strict law the testimony of a member of the community was inadmissible in any matter connected with local taxes, since any tax ruling for or against an individual member of the community inevitably affected the tax rate for the rest of the community also. According to talmudic law, a town resident was disqualified from testifying in a matter concerning the property common to the residents in his town, such as the public baths, unless he renounced all benefit from the particular property (bb 43a; Sh. Ar., Ḥm 37:18ff.). In post-talmudic times, however, the existing realities of Jewish life made the strict observance of this rule impossible, certainly as regards a number of public matters (see *Takkanot ha-Kahal), particularly the adjudication of tax disputes. As late as the 12th and 13th centuries it was still decided in Germany that the testimony of communal leaders to the effect that a person had made a declaration before them in regard to a tax matter was not to be admitted, "as long as they [the communal leaders] have not paid their share of the tax," in view of their interest in the matter (Mordekhai, bb no. 483, in the name of Avi ha-Ezri and of Meir of Rothenburg). In one instance Asher b. Jehiel decided that a member of the community was not competent to testify unless he "genuinely" renounced all personal benefit in the matter concerned (Resp. 58:1, 3), and in another case he went to the extent of holding that so far as tax was concerned, it was quite inconceivable for a member of the community to renounce effectively (or exclude himself from) all benefit deriving from his testimony: "for this matter of tax payment will ever be customary, and it is impossible for them to effect a renunciation in such manner as never to benefit from the tax that will be paid" (ibid., 6:15, also 6:21). In addition, the question of the disqualification of witnesses on the grounds of their kinship with one or other of the parties, or with the judges, often presented problems, since members of the community intermarried and created ties of affinity with each other. For all these reasons judges themselves were often in a similar position of being disqualified by law from hearing a matter (bb loc. cit.; Tur and Sh. Ar., Ḥm 7:12; Beit Yosef and other standard commentaries).
abrogation of disqualifications
The problems outlined above were overcome by means of communal enactments which expressly qualified members of the community as witnesses and judges in matters concerning their fellow-residents. The question of the validity of a takkanah of this kind was raised before Solomon b. Abraham Adret, and answered in the affirmative: "This too is clear, that the enactment of the community is conclusive; in tax matters it has been the practice of all the communities to adjudge the town residents and to gather testimony from them, even though they be relatives of the judges or the litigants; moreover, it may be that the interests of the court and of the witnesses are at stake in their judgment and testimony, but they nevertheless testify for themselves; all this derives from the law of communal enactment" (Resp. Rashba, vol. 6, no. 7). He held that a takkanah of this kind was vital for the proper administration of justice in tax matters in particular and in matters of the public domain in general, "for otherwise you annul all communal enactments, yet the custom of the communities is law and in all matters of this kind it must be held that custom overrides the halakhah" (ibid., vol. 5, no. 286); furthermore, takkanot of this nature were common "and no community has ever called this matter into question" (ibid., no. 184; cf. the like opinion in Resp.Rosh, 6:15).
The impact of these takkanot became part of the fixed law: "Tax matters are not dealt with by the local judges, since they and their relatives have an interest therein… but if they have made a takkanah or the local custom is that the local judges deal also with tax matters… then this is the law" (Sh. Ar., Ḥm 7:12); likewise as regards witnesses: "in these times it has been the practice to accept witnesses from among members of the [local] community… in regard to all their matters, and they are competent even in matters involving their relatives, for the reason that they [the communities] have accepted this for themselves" (Ḥm 37:22). This halakhah became so widely accepted that at the beginning of the 20th century it was stated: "In our time we have never seen or heard that a matter affecting the community shall not be adjudged by the local dayyanim … and the local dayyanim are competent to deal with all matters of the community" (Arukh ha-Shulḥan, Ḥm 7:22. For further particulars see *Minhag; *Takkanot ha-Kahal; Massa Melekh, pt. 7.).
Principles of Interpretation
The fact that a substantial part of the Jewish tax law system became based on written takkanot enacted in the various communities, contributed toward great creativity in the field of the interpretation of laws. In tax disputes between the individual and the community, and between different communities, the halakhic scholars were frequently called upon to interpret these takkanot and in so doing they not only decided the concrete matter before them, but also established guiding principles of interpretation of importance to Jewish law in general (see *Interpretation). It may be noted that the scholars based the principles they applied in the interpretation of the communal enactments on a wide discussion of and reliance on various analogies from talmudic law, as can be seen from the responsa mentioned below.
interpretation of communal enactments
Interpretation of the communal enactments was, in the main, the task of the halakhic scholars before whom a particular matter was brought, and very many of the responsa concerning tax matters include detailed discussions on such interpretations (see, e.g., Resp. Rashba, vol. 5, nos. 277, 279; Resp. Ritba, nos. 114, 120; Resp. Maharyw, no. 84; and see illustrations below). Sometimes, however, a takkanah included an express provision that any doubt concerning the meaning of a matter mentioned in it was to be resolved by the interpretation of the incumbent communal leaders (called muqaddimūn or berurim), and the scholars decided that in this event the interpretative authority was entrusted to the aforesaid leaders (Resp. Rashba, vol. 3, no. 409; vol. 5, no. 221). Notwithstanding such an express provision there remained the possibility that in certain cases the issue had to be left to the decision of the halakhic scholars. This happened, for instance, in a case (Resp. Ritba, no. 134) which arose from a takkanah laying down that a person giving in marriage "a daughter or sister" to someone who did not pay tax in that community was liable, in certain circumstances, to pay tax on the amount given as a dowry. A resident of the community gave his granddaughter in marriage and the community demanded tax from him, contending that this case too was covered by the takkanah since "grandchildren are as children." The grandfather challenged this demand, pleading that such a construction was valid "in the language of the Torah" (see, e.g, Yev. 62b with reference to the mitzvah of procreation), "… but in human parlance and dealings, grandchildren are not called children," and therefore when a person bequeathed his property to his "children" his grandchildren were not included in the bequest (bb 143b). The communal leaders rejected this plea and, on the basis of the provision that anything in the takkanah whose meaning was doubtful must be interpreted as the communal leaders saw fit, contended that their own interpretation was binding. In his responsum Yom Tov b. Abraham Ishbili (Ritba) proved from talmudic law that in all matters concerning business transactions, vows, and communal enactments, the standards of "human parlance" had to be applied, and by these standards grandchildren were not to be equated with children (cf. also Yad, Nedarim, 9:23; Sh. Ar., yd 217: 46). On this basis he held that there was no further room for the communal leaders to interpret the term under dispute, "since the language used is not doubtful but clear" and the communal leaders' interpretative authority was confined solely to a case where doubt existed about the meaning of a particular term.
ambiguity in tax enactments
In a case of conflicting provisions in a takkanah dealing with tax liability, it was held that the takkanah in question had to be interpreted in favor of the taxpayer (Resp. Rashba, vol. 5, no. 281) and so too if the text of the relevant provision allowed for alternative interpretations. The basis for this statement was as follows: since the takkanah purported to impose on the individual a payment for which he would not otherwise be liable, therefore "everything that falls outside the ambit of the strict law cannot be made to apply to him except when this is clearly justified, and until this is so talmudic law has to be applied… because the burden of proof is on the plaintiff" (Resp. Rashba, vol. 3, no. 397; Ritba, no. 157). For the same reason an ambiguity in the text operated to the disadvantage of the individual if in strict law he was liable for the tax. In a case where the community had agreed to grant one of its members a tax exemption without specifying the period of its duration, Asher b. Jehiel rejected the member's plea that his had been an exemption for life and held that the law was in favor of the community if it pleaded that the exemption had been intended for one year only: "since he is obliged to pay along with the others but seeks to escape liability on the plea that he was granted an exemption, therefore he is at a disadvantage… and since he was given an undefined exemption, we have to interpret this exemption as restricted to the minimum that we have to adjudge him" (Resp. Rosh, 6:19).
language of the takkanah and intention
It was held to be a basic principle that a takkanah must be interpreted in accordance with the knowledge and understanding of those who had authority to do so – the halakhic scholars or the communal leaders (muqaddimūn), as the case might be – and not according to "the intention of those who enact the takkanah" (Resp. Rashba, vol. 3, no. 409; in this particular case authority was entrusted to the muqaddimūn). However, exaggerated adherence to this principle was to be avoided, since "at all events there are times when the intention is common knowledge and is like a stake that cannot be uprooted, so that all know that a certain condition or matter was instituted, beyond any doubt, with a specific intention, even though the language allows for a contrary interpretation" (ibid.). This rule was illustrated in a dispute involving the interpretation of a takkanah stating that tax declarations had to be brought to the synagogue on a particular day of the week. In actual fact, however, the tax trustees sat in the courtyard (ḥaẓer) in front of the synagogue and on one of the upper floors (aliyah) but not inside the synagogue itself. Therefore it was averred that this was not in keeping with the language of the takkanah since places such as the ḥaẓer, aliyah, azarah, and so on had their own separate names and identities. This contention was rejected out of hand by Solomon b. Abraham Adret, for the reason that the relevant text had to be interpreted, in each case, in its own substantive context; thus if the takkanah in question had been concerned with prayer, the intention would have been to refer to the synagogue itself, that is the place where the congregation was led in prayer, but in a takkanah concerned with the submission of tax declarations, "the intention was not that they should actually be inside [the synagogue], for what need is there for them to be inside? On the contrary, no more was intended than that they should be in one of its areas, so as to be available to all" (Resp. Rashba, vol. 5, no. 222).
Various kinds of formalistic sophistry in interpreting the text were rejected. A certain takkanah stated: "If at the time of accounting it shall be found that a person shows an increase in his capital and money and all his property, beyond what was shown at the time of accounting in the previous year, he shall pay so-and-so much on such increase." A member of the community who showed an increase in respect of some items but not in respect of "all his property" therefore contended that his case fell outside the ambit of the takkanah. Again Solomon b. Abraham Adret rejected this as "an idle plea… devoid of all reason or substance," since the meaning of the takkanah was not that the taxpayer had to show an increase in everything actually mentioned, but merely in one or other part of his assets, "and it is the way of the world to speak in this manner… the intention is plain, that everyone shall every year supplement his account with the increase over the previous year" (Resp. Rashba, vol. 3, no. 407). In the case of another takkanah, enforced by ban, it was provided that the taxpayer had to submit an annual declaration affirmed under oath, "and he shall not add thereto nor detract therefrom in any event whatever," until submission of the next annual return. A member of the community discovered in the middle of the year that he had forgotten to declare a certain asset but voiced his fear of rectifying the matter in view of the ban accompanying the stated provision. Solomon b. Abraham Adret replied that it was inconceivable for a person to escape tax liability on account of his own forgetfulness: "this is something which the ear, the heart, and reason all reject," hence the said condition could not reasonably be given its plain meaning, namely that nothing at all could be added to the declaration: "how does it matter to them [the community] that he shall not add when he wishes to do so?" There was no choice, he held, but to say that principally it was intended that there should be no detraction, and that the words "he shall not add thereto," represented no more than a routine and customary form of expression (loc. cit., no. 408).
Tax Collection Procedure
securing and recovering a tax debt
It was laid down that a tax debt, "from the moment of its assessment by the trustees," must be regarded in the same way as a debt "by deed" and was to be recovered out of the debtor's "free" property (nekhasim benei ḥorin), and failing this from his "alienated and encumbered" property (nekhasim meshu'badim), that is from property which the debtor had transferred to a third party after becoming liable for the tax (see *Lien; Resp. Rashba, vol. 5, no. 136; vol. 4, nos. 64, 65). The free property included all the property, movable or immovable, in the debtor's possession, except that he had to be left with his basic needs for survival (Resp. Rashba, loc. cit.; see also *Execution (Civil)) and except as otherwise provided in any takkanah. An instance is recorded in which the community enacted that a debtor's seat in the synagogue could not be attached in payment of a debt, not even a tax debt; later a special takkanah was enacted in connection with an extraordinary tax imposed by the central authorities, to the effect that even a synagogue seat could be taken in satisfaction of such an unpaid tax debt (Resp. Rosh, 5:4; at that time a synagogue seat entailed a proprietary right: see *Ḥazakah).
For the purposes of recovering a tax debt, the concept of nekhasim meshu'badim had a wider scope than in the case of a regular debt. Thus it was held: "It has been the custom of all the communities… that when a person's money is subject to a debt owed to the community and this money is given to another, then the party becoming entitled to it takes the place of the first owner"; therefore the tax could be exacted from such money – even though this was not the law in case of any other debt – since "the tax obligation is imposed on the money, and all money which is so obligated and acquired by the second owner is still subject to the obligation of the first owner" (Resp. Ran, no. 10). It was also the practice to oblige the tax debtor to provide a surety or pledge for repayment of the debt (see, e.g., Resp. Rashba, vol. 3, no. 398; Resp. Rosh, 6:29; 7:11).
fine, ban, or imprisonment
The customary means of coercion in post-talmudic times, a fine or ban (niddui or ḥerem), were also adopted against errant taxpayers (see, e.g., Resp. Ramah, no. 250; Resp. Rosh, 6:29, 28:4). Another means of enforcing a tax debt was imprisonment. Originally, in Jewish law imprisonment was not employed as a means of enforcing repayment of a debt, no matter what kind, since this was looked upon as prejudicial to the debtor's personal freedom and inimical to the fundamental principles of Jewish law governing the creditor-debtor relationship. It was only from the 14th century onward – in consequence of changed socio-economic conditions and influenced by the surrounding legal systems – that the Jewish communities came to adopt imprisonment for debt, and then with material reservations designed to protect an impoverished debtor (see *Imprisonment for Debt). However, in the case of a tax debt, imprisonment as a means of coercion had come into practice at an earlier date, apparently as early as the 11th century (see Rashi to Pes. 91a and Elon, Ḥerut ha-Perat …, p. 113). At any rate, it is recorded that in the 13th century it was "the custom of the communities to imprison any person who failed to pay the king's tax because the law of the land is law" (Resp. Rosh, 68:10). Some scholars explained this law on the basis that since the tax in question went to the government and since the general law of the land required that the debtor be imprisoned until he paid the tax, it followed that the community had to do likewise as "the king's agents" (Resp. Ranaḥ, no. 58; cf. the same concept above). However, as regards a tax debt, imprisonment was customary, not only in respect of "the king's tax," but also in respect of a communal tax: "The custom is widespread, in all countries of the Diaspora, that a person who owes [and fails to pay] tax to the community is incarcerated in prison; he is not brought before the court, but the communal leaders adjudge him in accordance with their custom, and he is not set free until he pays or until he provides a surety or binds himself by deed… for such is the tax law" (Resp. Rosh, 7:11). This continued to be the practice in the following century (see, e.g., Zikhron Yehudah, no. 79; see also the charter of rights for Majorcan Jewry, of 1315, in Dinur, loc. cit., vol. 2, pt. 2, p. 354).
After imprisonment had become an accepted means of enforcement in the case of regular unpaid debts, that is from the 14th century, it continued to be used, sometimes with increased severity, in respect of tax debts. Joseph Colon, the 15th-century Italian halakhic scholar, stated that it was permissible to have a recalcitrant tax debtor imprisoned and compelled to pay his debt, even through intervention of the gentiles; this he explained on the basis that a Jew who refused to submit to the internal Jewish government was as one who refused to be adjudged before a Jewish court and whom it was permissible to sue in the civil courts, and under the general law of the land it was the practice for debtors to be imprisoned (Resp. Maharik, no. 17; here this rule was attributed to R. Gershom b. Judah; see also Rema, Ḥm 163:1). Even in such a case, however, it was forbidden for all of the debtor's property to be handed to the civil authorities in a manner that caused him loss far beyond the measure of his tax liability (Resp. Maharik, no. 127); furthermore, it was forbidden to coerce, through the general authorities, any individual who was not a resident of the community claiming the tax from him, since such an individual was not subject to the jurisdiction of that community: "shall robbery be permitted because it is committed by the public?" (Resp. Maharik, loc. cit.). From the end of the 16th century onward, there are instances of particular severity in the enforcement of tax collection methods. Tax evasion had become a severe hindrance to the effective organization of autonomous Jewish life and to the maintenance of proper relations with the central government. Thus, for example, the following procedure was adopted: if a tax debt remained unpaid for three days, the debtor was declared "obdurate" (sarvan); if he persisted in his refusal, a ban was imposed, with various degrees of severity (see *Ḥerem); if thereafter the debt remained unpaid for a specific period of time, the debtor was imprisoned until the debt and the expenses involved were paid. This procedure was justified thus: "therefore we have taken such a stringent approach as concerns the tax takkanah because we see that many stumble in this respect and permit themselves latitude in tax matters, without taking to heart that this amounts to robbery of the public; hence we very carefully warn the public about this matter" (see takkanot of the Cracow community and of Moravia in the 17th century in Elon, Ḥerut ha-Perat …, pp. 178–80, 195f.). In another takkanah provision was even made for various sanctions, including imprisonment, to be adopted against communal leaders in the event of their failure to transfer the tax monies ("Toleranzgelder") to the proper destination in time, so as to avoid "great wrath" on the part of the government (Elon, ibid., p. 221). A similar detailed description has come down of the onerous tax collection procedures which, in the middle of the 18th century, the leaders of the Prague community were compelled by the government to adopt in order to raise the amount the latter prescribed for financing a war (see Elon, ibid., pp. 221f.).
Ethics of Tax Payment
At all times the halakhic scholars sought to educate members of the public toward genuine payment of their taxes, and emphasized the basic premise that anyone who evaded payment of his share of the tax increased the burden of the remaining members of the community by obliging them to pay more than their due share, and that this was the case whether the tax went to the government or toward financing the various services provided by the community. Hence it was held that tax evasion entailed not only ordinary robbery, but also "robbery of the public" (gezel ha-rabbim), which had to be most severely punished (see bb 35b, 88b). This transgression is repeatedly warned against (see, e.g., Sefer Ḥasidim, nos. 671, 1386, 1451), and not only the offender was held to be subject to punishment but also the communal leaders (even when they had paid their own due share of the tax) who failed to enact suitable takkanot designed to discourage others from tax evasion (loc. cit., no. 671). Samuel di Medina concluded that tax evasion rendered a person "a robber and disqualified as a witness and profit gained in consequence is to be weighed against the loss of the world to come" (Resp. Maharashdam, Ḥm no. 442).
The multiple exhortations against tax evasion were aimed at counteracting a common human weakness to justify such conduct on a variety of grounds (see, e.g., Terumat ha-Deshen, Resp. no. 343). Hence in various takkanot a strict ban was imposed on all persons evading tax payment or aiding and abetting the evasion (see, e.g., takkanot of Valladolid of 1432, in Finkelstein, loc. cit., p. 371). Indeed, many were most careful to meet their tax liability in full, and often, after having submitted declarations of their taxable property, they returned to advise the trustees of any particulars they had forgotten to mention, in order to fulfill "the duty toward Heaven" and pay the true amount that was due (Resp. Rashba, vol. 3, no. 408). However, there were also instances where means of special severity had to be adopted to cope with tax evasion: "In these times fraud is prevalent and it is right to act with great severity so as not to encourage those who practice it" (Resp. Maharil, no. 121 and see above). A detailed and instructive illustration of the demand for integrity in tax payment is to be found in the "order of assessment" of the Mantua community of 1695. After it is stressed that the individual must faithfully render his tax "report" in all its details – lest he commit "robbery of the public" and his transgression be "beyond bearing" – it is stated: "for he shall not permit himself to do so and think that others too do not submit their report honestly and justly, and therefore he may act like them and withhold for himself… it is forbidden to do so for two reasons: firstly, this is simply a vain answer and an unfounded judgment, for how can he have clear information about the others… and secondly if it were true as he thinks, I would be surprised to know who permitted the robbery of those of good and upright heart because of someone who acts dishonestly, or who permitted a man to forfeit his right in the world to come because of that sinner or sinners?" (ch. 15; see further Massa Ḥayyim, Missim ve-Arnoniyyot, no. 16).
Halakhic Compilations of Tax Law
The special development that took place in the field of tax law also left its mark on the literary sources of Jewish law. The fact that this development took place mainly in the 12th and 13th centuries can be clearly deduced from a review of the classic halakhic compilations of Jewish law. Thus, for example, there is very little mention of tax law in Alfasi's Sefer ha-Halakhot or in Maimonides' Mishneh Torah (11th and 12th centuries respectively). The subject is discussed more widely in Jacob b. Asher's Turim (Ḥm 163) from the 14th century, and the scope of the discussion is progressively wider in Joseph Caro's Beit Yosef and Shulḥan Arukh, in Moses Isserles' Darkhei Moshe and glosses (Ḥm 163) from the 16th century in Ereẓ Israel and Poland respectively, and in Ḥayyim Benveniste's Keneset ha-Gedolah to the Tur and Beit Yosef in the 17th century in Turkey. In the responsa collections also, particularly those dating from the 13th century onward, whole sections are devoted to tax law, which provide a great deal of informative material on this field of Jewish law (see indexes to the responsa collections; for particulars of all the above-mentioned works, see *Codification of Law).
The emergence of compilations specially devoted to the subject of tax law is of interest. As early as the 11th century a small work of this kind was compiled by Joseph Tov Elem (quoted in Resp. Maharam of Rothenburg, ed. Prague, nos. 940, 941). In the 14th century some 50 tax halakhot, in summary form, were quoted in the Nimmukim of Menahem of Merseburg (printed as an addendum to Resp. Maharyw). The most comprehensive and interesting compilation of this nature is the Massa Melekh, written by the 16th-century scholar from Salonika, Joseph b. Isaac ibn Ezra. Divided into seven parts, the work is a comprehensive review of tax law, titled and subtitled according to subject matter. At the end of these seven parts the author added a concluding section, Ne'ilat She'arim, containing a detailed exposition of the laws of custom with the author's explanation that tax law was based, first and foremost, on the legal source of custom. An interesting literary feature is the author's condensation of his own detailed discussions within the body of his work, into brief summarized halakhot, each containing the conclusion drawn from the preceding discussion (see summaries of the seven parts, pp. 65, 1–70, 2 and of the Ne'ilat She'arim, pp. 70, 2–72, 4). This method corresponded to that adopted by Joseph Caro, whose Shulḥan Arukh contains the summarized conclusions of the discussions in his Beit Yosef. Another such compilation is the Avodat Massa, written by the 19th-century scholar from Izmir, Joshua Abraham Judah. His book is composed of 24 sections subdivided into paragraphs and contains collections of tax takkanot and customs from Joseph Escapa, a rabbi of Izmir in the 17th century, and subsequent scholars. Some time later a work called Massa Ḥayyim was compiled by Ḥayyim *Palache, also of Izmir. It is divided into three parts, the first containing a very large collection of diverse takkanot and customs, particularly in the tax law field, the second dealing with various laws concerning tax matters, and the last part with the law of custom in general; each part is arranged in alphabetical order. In addition, tax laws are dealt with in detail in the takkanot collections of the various communities (see bibl.).
In the State of Israel
For a discussion of the sources and details of the tax laws in the State of Israel see *Israel, State of: Taxation, as well as the work of Witkon and Ne'eman (bibl.). It may be noted that terms such as mas, mekhes, belo, and arnona are still current in the State in the context of tax matters, although they generally have a different meaning from that attributed to them in the course of this article (see Witkon-Ne'eman, pp. 4–8, et al.). In 1964 a tax museum was established in Jerusalem for the preservation of historical material relating to Jewish tax law and all matters touching on taxation in Ereẓ Israel in its earlier and later periods and in the State of Israel. In addition to various research projects, a periodical, Rivon le-Inyenei Missim, devoted to tax matters, is published regularly under the auspices of the museum.
Article 86 of the Income Tax Ordinance (New Version) stipulates that when a tax official concludes that a particular transaction which effectuates a reduction in the tax due is "artificial or invented," that transaction may be disregarded in fixing the amount of tax to be paid. In interpreting the term "artificial transaction," the Israel Supreme Court relied on Jewish Law (ca 265/67 Mapi Ltd. v. the Tax Assessor for Large Businesses, Tel Aviv, 21 (2) pd 593, per Justice Moshe Silberg).
Justice Silberg noted that Jewish Law holds a rather liberal attitude toward circumvention of the law through means of the law itself, in order to maintain the "flexibility and vitality of the ancient law, so as to enable it to incorporate changing patterns of life." Circumvention of the law by using the law is referred to in halakhah as ha'aramah, and there are various instances of its practice in Jewish law: for example, ha'aram ah to circumvent the prohibition against taking interest on a loan (see *Usury). In some instances, the halakhah upheld ha'aramah; in others, it was rejected.
In his opinion, Justice Silberg discusses two examples, one of which was halakhically accepted, the other rejected. The first example involves the second tithe (ma'aser sheni). The Torah provides that one-tenth of an individual's yearly produce is to be set aside and taken to Jerusalem to be consumed there (Lev. 27:30–31; Deut. 14:22). The Torah likewise provides that the tithe may be redeemed for an amount of money equal in value to the produce, which is then taken to Jerusalem where it is used to purchase food; however, in that case an additional sum of money equal to one-fifth of the value of the produce must be added. The Mishnah, however, considers various methods for avoiding payment of the extra fifth. One such method is to give a sum of money equal to the value of the produce as a gift to a friend, who then uses the money to redeem the produce, after which he returns the money to the owner, relying upon the rule that if the tithe is redeemed by someone other than the owner of the produce, the additional fifth need not be given. Thus, through this fictive gift, the owner of the produce circumvents his obligation to add a fifth to the redemption money. This result was planned in advance, as the purpose of the gift of the money was to evade the obligation to add the fifth. The Mishnah itself cites this method as achieving this result.
The second example discussed by Justice Silberg, one rejected by the halakhah, involves the first tithe (ma'aser rishon). This tithe, also a tenth of the produce, is set aside prior to the second tithe and given to the Levites. According to an interpretation of the biblical passage (Num. 18:21f.), the obligation to set aside the first tithe only applies to that produce that is brought into the house through its entrance. If it is brought in by a circuitous way, such as through the roof, the first tithe need not be given. However, this method of evading the obligation was rejected.
Justice Silberg analyzes the difference between the two cases: viz. the acceptance of the ha'aramah involving the second tithe, and the rejection of that involving the first tithe. He concludes that "with regard to the second tithe, although the purpose was to obviate the obligation to give the additional fifth, the mechanism used and its legal effects are much broader and deeper. The ownership of the object (i.e., the money used to redeem the produce) must actually be transferred to the recipient (i.e., the one who actually performs the redemption) and all the necessary requirements must be satisfied. If anything related to the substance or scope of the transfer is omitted… the ha'aramah does not achieve its purpose." On the other hand, bringing the produce through the roof involves nothing beyond the exemption from paying the tithe. This act has no other significance.
Using the same standard, Justice Silberg concluded that the term "artificial transaction" in the tax law should be interpreted as referring to a transaction that has no substance or purpose other than the desired reduction in the amount of the tax. (See also Cr. A. 1182/99 Hurvitz v. State of Israel 54 (4) pd 85–88, per Justice Yitzhak Englard).
interpretation of tax laws
An example of the rule that communal enactments (takkanot ha-kahal) in the area of tax law be interpreted according to their language and not according to their intention which did not receive expression in the takkanah, appears in a responsum of R. Solomon b. Abraham Aderet. The question submitted concerned a communal enactment whose purpose was to increase the amount of taxes collected by the community. However, application of the terms of the enactment had the unforeseen result that a particular taxpayer's obligation was reduced. Rashba ruled that the clear language of the enactment must be applied (Resp. Rashba vol. 5 no. 282). The Israeli Supreme Court relied on this ruling as to statutory interpretation in general, and to tax law in particular (hc 333/78 Trust Association of Bank Leumi of Israel v. Administrator of Estate Taxes, 32 (3) pd 202, Justice Menachem Elon; for extensive discussion, see *Interpretation).
[Menachem Elon (2nd ed.)]
historical aspects: Baron, Community, index: 550–4; Baron, Social2, index; U. Heyd, Ottoman Documents on Palestine, 1552 – 1615 (1960), 117–27 and index (translated into Hebrew by A. Givati and published by Ha-Muze'on le-Missim, Jerusalem, Firmanim be-Inyenei Missim be-Ereẓ Yisrael me-ha-Shanim 1560 – 1585 (1965); B. Lewis, Notes and Documents from the Turkish Archives (1952); Israel, Misrad ha-Oẓar, Hitpatteḥut ha-Missim … (1954); Ha-Muze'on le-Missim, Jerusalem, Hitpatteḥut ha-Missim be-Ereẓ Yisrael, ed. by A. Mendel (1968); J.A. Judah, Sefer Avodat Massa (Salonika, 1846, Jerusalem, 19642); A. Suessmann, Judenschuldentilgungen unter Koenig Wenzel (1907); Kisch, Germany, index; Baer, Spain, index; Roth, England, index; H.G. Richardson, English Jewry under Angevin Kings (1960), index; B. and G. Lagumina, Codice Diplomatico dei giudei di Sicilia, 3 vols. (1884–1909); C. Roth, History of the Jews in Venice (1930), 124–7; idem, Gleanings (1967), 214–8; A. Milano, Il Ghetto di Roma (1964); S. Luce, in: rej, 2 (1881), 15–23; L. Lazard, ibid., 15 (1887), 233–61; ibid., index vol. 50 (1905), s.v.Taxes imposées aux Juifs; Dubnow, Hist Russ, 3 (1920), index s.v.Tax; I. Levitats, Jewish Community in Russia 1772 – 1844 (1943), index; L. Greenberg, Jews in Russia, 1 (1944), index; Rivon le-Inyenei Missim, 1 (1965–to date). legal aspects: Seder ha-Ha'arakhah li-Kehillat Mantovah (1695, reprint 1963); Finkelstein, Middle Ages, index s.v.Taxes; Pinkas ha-Medinah… Lita …, ed. by S. Dubnow (1925), s.v.Missim; Gulak, Oẓar, 337–44; idem, in: Sefer Magnes (1938), 97–104; idem, in: Tarbiz, 11 (1939/40), 119–22; J. Newman, Agricultural Life of The Jews in Babylonia (1932), s.v.Taxation; B.D. Weinryb, in: huca, 16 (1941), 187–214 (Germ.); Baron, Community, 2 (1942), 246–89, and index (in vol. 3) s.v.Taxes and Taxpayers; Neuman, Spain, 1 (1942), 60–111; 2 (1942), index s.v.Taxation; Takkanot Kandia ve-Zikhronoteha, ed. by E.S. Artom (= Hartom) and U.M.D. Cassuto, 1 (1943); Halpern, Pinkas, s.v.Missim; M. Benayahu, in: Kobez al Jad, 4 (14; 1946), 193–228; et, 2 (1949), 194–6; 5 (1953), 46–51; Takkanot Medinat Mehrin, ed. by J. Halpern (1951), index s.v.Missim; I.M. Horn, Meḥkarim (1951), 73–91; K.P. Tekhorsh, in: Ha-Torah ve-ha-Medinah, 5–6 (1952/54), 233–82; M. Beer, in: Tarbiz, 33 (1953/54), 247–58; S. Baron, Historyah Ḥevratit ve-Datit shel Am Yisrael, 1, pt. 3 (1957), 50f.; 2, pt. 4 (1965), 138–45; J. Katz, Masoret u-Mashber (1958), s.v.Missim; Alon, Toledot, indexes s.v.Missim in both vols.; B.Z. Benedikt, in: Ha-Torah ye-ha-Medinah, 11–13 (1959/62), 590–8; D.J. Kohen, in: Sefer Yovel le-Y. Baer (1960), 364–8; Baer, Spain, index in vol. 2 s.v.Taxation; S. Simonsohn, Toledot ha-Yehudim be-Dukkasut Mantovah, 2 vols. (1962–64), index s.v.Mas; M. Elon, Ḥerut ha-Perat be-Darkhei Geviyyat Ḥov… (1964), 15–17, 75, 81, 85, 113f., 127–31, 136, 152, 164, 178–80, 195f., 221f.; idem, in: Meḥkerei Mishpat le-Zekher Avraham Rosenthal (1964), 25, 28–31, 42–51; idem, Mafte'aḥ, 132–8, 649; J. Bazak, Hilkhot Missim ba-Mekorot ha-Ivriy yim (1964); em, 5 (1968), 13, 51–55; Toledot Am Yisrael, ed. by H.H. Ben-Sasson, 3 vols. (1969), index in vol. 3 s.v.Mas; A. Witkon and J. Ne'eman, Dinei Missim (19694). add. bibliography: M. Elon, Ha-Mishpat ha-Ivri (1988), 1:347ff., 372ff., 379ff., 566ff., 585ff., 602ff., 745ff., 617–629, 746ff., 2:1204ff., index; idem, Jewish Law (1994), 1:416ff., 450ff., 459ff.; 2:688ff., 720ff., 763–78, 920ff., 3:1444ff., index; M. Elon and B. Lifshitz, Mafte'aḥ ha-She'elot ve-ha-Teshuvot shel Ḥakhmei Sefarad u-Ẓefon Afrikah (legal digest) (1986), 234–44; B. Lifshitz and E. Shochetman, Mafte'aḥ ha-She'elot ve-ha-Teshuvot shel Ḥakhmei Ashkenaz, Ẓarefat ve-Italyah (legal digest) (1997), 170–77; Enẓyklopedia Talmudit, vol. 2, s.v. "arnona," 194–96; vol. 5, s.v. "gabai" 50–51; vol. 9 s.v. "ha'aramah," 697ff; Index.
Elderly persons are treated very well by the U.S. federal tax system and by the tax systems of many states and localities. They get an extra federal standard deduction, Social Security benefits are taxed lightly or not at all, pensions get special relief, and state and local property tax burdens are often offset by income tax relief. It is not, however, easy to provide a simple, widely accepted philosophical justification for taxing an elderly person at a lower rate than a younger person with the same income.
These tax concessions may simply reflect the political power of elderly voters. People sixty-five and over constituted 16.5 percent of the voting age population in the 1996 election, but provided over 20 percent of the votes. Their political importance will grow considerably when an increasing number of baby boomers reach age sixty-five in the years following 2010.
Despite the political power of older voters, it is hard to believe that significant tax breaks would be possible without the tacit support of the younger population. Older people are popular. Many are peoples’ grandparents, and young people certainly hope to survive to an age at which they too can enjoy the tax concessions granted older adults.
However, it must be noted that the benefits conveyed to older Americans have a considerable cost—a cost that will rise as the population ages. The related revenue loss must be added to the much larger benefits appearing on the spending side of the budget. Social Security is now the largest single federal program and Medicare spending will soon exceed defense spending. Those over sixty-five absorb about 50 percent of the civilian, noninterest expenditures of the federal government. Although the tax preferences given to older Americans are quite small relative to the benefits received on the spending side of the budget, they do add up. They also imply that younger workers are forced to pay higher taxes than they would otherwise. Given American hostility to higher taxes, it is probable that the benefits conveyed to older adults on both the spending and tax side of federal, state, and local budgets tend to crowd out other government activities in areas such as defense, child welfare, and highways.
Federal tax law
The most important federal tax break involves the taxation of Social Security. Benefits are completely excluded from taxable income for lower-income elderly taxpayers. Single taxpayers with $25,000 to $34,000 in income, and couples between $32,000 and $44,000, receive 50 percent or more of their benefits tax-free, while singles with incomes above $34,000 and couples above $44,000 must pay taxes on up to 85 percent of benefits. A complex formula is used to phase in the taxation of benefits, and it has the peculiar result that over certain ranges of income the marginal tax rate on an extra dollar of non-Social Security income is higher than on an extra dollar of benefits. During the phase-in ranges, Social Security recipients are also subjected to very high marginal tax rates on extra earnings or on extra income from investments, because every extra dollar of such income has a double impact on a person’s tax bill. It is subject to taxation itself, and it adds to the portion of Social Security benefits that will be taxed. This could create disincentives to work and to save. The exclusion of Social Security benefits from ordinary taxable income cost the federal government $17.1 billion in lost revenue in fiscal year 1999.
It has been proposed that it would be proper to include 85 percent of Social Security benefits in taxable income for everyone. The other 15 percent reflects the estimated return of principal invested out of after-tax dollars in a typical private pension plan that enjoys no tax advantages. However, the creation of IRAs, Keoghs, 401(k) plans, and the like has made tax law much more favorable to private retirement savings. Contributions to such plans are deducted from taxable income and withdrawals are fully taxed. Only contributions in excess of the limits imposed for such plans are deprived of tax advantages and contributions of this type are uncommon.
If Social Security is seen as a typical tax-advantaged retirement plan and treated like most other retirement saving plans, it would be appropriate to subject 50 percent of benefits to taxation while allowing 50 percent to be tax free. That is because the 50 percent of the payroll tax that is paid by employers is deducted from their taxable income, while the 50 percent that is paid by employees is financed out of after-tax income.
On the other hand, it might not be appropriate to regard Social Security as a typical retirement plan, because the level of benefits is only loosely related to the payment of payroll taxes. People with lower lifetime earnings receive a higher rate of return than those with higher earnings, dependent spouses receive an extra benefit equal to 50 percent of that of the principal earner, and the return on one’s payroll tax contribution can depend on when income was earned. Consequently, it may be more accurate to regard Social Security as a transfer program that distributes money from high to low earners rather than as a pension program. But there is no consistent rule governing the taxation of transfer payments. For example, unemployment insurance benefits are included in taxable income, while welfare payments are not.
The taxation of benefits obviously reduces their net value, particularly for those affluent taxpayers who are in the highest tax brackets. Thus, the taxation of benefits can be seen as an indirect approach to means-testing Social Security since the tax imposes the largest burden on the most affluent beneficiaries. Given the rapidly rising economic burden that will be imposed by Social Security once baby boomers start to retire, there may be a strong argument for subjecting 100 percent of benefits to taxation as a way of strengthening means-testing.
It should be noted that the taxation of Social Security benefits is a relatively recent phenomenon. Before 1983, benefits were not taxed at all. After that time, a maximum of 50 percent of the benefit was brought into taxable income. The proportion brought into taxable income was not raised to 85 percent for more affluent taxpayers until 1993.
A less important federal tax concession provides an extra standard deduction to each individual age sixty-five and older. In 1999, this equaled $1,000 for single taxpayers and $800 each for married taxpayers. The associated revenue loss was $1.8 billion in fiscal 1999. There is also a nonrefundable tax credit for low-income retirees whose retirement income is mostly taxable, but this credit is rarely used.
Because the use of the standard deduction declines as income rises, the extra standard deduction is most valuable, on average, to lower-income elderly taxpayers. Only about 10 percent of elderly couples with incomes between $20,000 and $30,000 itemize deductions while itemized deductions are used by a substantial majority of those with incomes above $80,000. However, only 15 percent of elderly couples had incomes that high in 1998.
The elderly receive Medicare and Medicaid benefits tax-free, as well as an untaxed subsidy for the purchase of insurance for physician services. Although it would be practically possible to tax such items, it would be extremely unpopular politically. It should be noted that employer-provided health insurance is also tax-free, as are Medicaid benefits.
As noted earlier, private saving for retirement is now highly favored by the federal tax system. Employers’ contributions to defined benefit plans are not, for the most part, considered to be taxable income to the employee. Employer and employee contributions to defined contribution plans are deductible up to specified limits that differ from plan to plan. The tax saving associated with the deduction for contributions into a retirement account is sufficient to pay the tax on future withdrawals if the tax saving is invested at the same rate of return as the rest of the account—and if withdrawals are taxed at the same tax rate as was applicable when the contribution was made. Put another way, it is equivalent, under these very special assumptions, to eliminating the entire tax on income saved for retirement. If the retiree is in a lower tax bracket when funds are withdrawn than when funds were contributed, he or she receives a tax subsidy for retirement saving. That is to say, the after-tax return on the retirement account becomes greater than the before-tax rate of return.
The law provides for a confusing array of defined benefit and defined contribution accounts that have different deduction limits and are subjected to different tax rules. The regulation of such accounts, especially defined benefit plans, is also extremely complicated. The system badly needs simplification.
Whether tax-favored, private retirement accounts improve the income of retirees depends on the extent to which the tax incentives actually increased the retirement savings of people while they were working. There is profound disagreement among economists on this point. Some believe that the tax concessions induce a sizeable increase in retirement saving. Others argue that the savings deducted from taxable income largely represents either transfers from other accounts or saving that would have occurred even in the absence of tax concessions. The naysayers believe that the increase in private saving is less than the associated revenue loss to the federal treasury.
State income taxation
Tax burdens on older adults vary greatly from state to state. Many replicate federal law in allowing an extra standard deduction, and some do not tax Social Security benefits at all. Many also exclude a large portion of other types of retirement income. This creates a severe inequity between people whose income flow is in the form of pensions and people who get exactly the same income from interest and dividends that are fully taxed. Table 1 describes selected tax provisions that especially affected elderly taxpayers in different states in 1998. It does not include provisions related to property taxes.
The combination of federal and state income tax burdens
The total income-tax relief given older adults can be very important. The precise amount of the relief, however, depends on how income is received. In Tax Benefits for the Elderly (2000) Rudolph Penner presents a number of examples, loosely based on data from the Statistics of Income (U.S. Treasury, Internal Revenue Service). One example involves a retired couple age sixty-five or older with $67,372 in income (in 1998) who get 24 percent of their income from Social Security, 40 percent from pensions and annuities, 30 percent from interest and dividends, and 5 percent from earnings. In Hawaii, such a couple would pay about $5,500 less in taxes than a younger couple receiving the same total income from wages. The tax liability of the older couple is thus reduced by 36 percent, or by 8.1 percent of income. In South Carolina, the elderly couple would receive a tax cut of about $4,000, or 6.0 percent of income. In Georgia, the benefit is about $2,100, or 3.2 percent of income. None of the above figures count property tax concessions. In all cases, the tax cut for older couples would be much lower if almost all income came from wages and interest and dividends.
For lower incomes, the percentage cut in the tax liability is usually higher, although the absolute value of the cut declines. Assuming $28,323 of income, with 37 percent derived from Social Security, 33 percent from pensions and annuities, 15 percent from interest and dividends, and 15 percent from earnings, the percentage tax cuts in Hawaii, Georgia, and South Carolina are 12.1 percent, 9.8 percent, and 9.2 percent, respectively. Because the percentage cut tends to grow at lower income levels, it can be said that the tax concessions given to elderly persons tend to be progressive. However, it must be reemphasized that they also tend to be erratic. A person who decides to work after the normal retirement age and who does not benefit from a tax-free pension will, in many states, receive much less of a tax break than a retired person with exactly the same income from Social Security and private pensions. Because people tend to retire earlier if they have a more generous pension, the tax concessions provided for retirement income undoubtedly encourage some to retire earlier than they would without the tax concession.
Property tax relief
Many states provide income tax relief related to property taxes paid at the state and local level. Often, the relief is restricted to elderly persons. In some states, such as Washington, people as young as sixty-one can qualify. The disabled often also qualify.
There are two types of relief. The first is often referred to as a circuit breaker and is confined to low-income taxpayers. For example, Connecticut, Nebraska, New Jersey, Ohio, and Washington all have special provisions of this type focused on the elderly, but in all cases, the relief phases out at relatively low income levels. The second type of relief provides a property tax exemption that does not depend on income. Alabama, Kentucky, Mississippi, South Carolina, and West Virginia have provisions of this type targeted at the elderly. For example, an exemption of assessed value up to $20,000 is provided in West Virginia. The average residential property-tax rate in the state is about 1.2 percent, so that the amount of relief for average property owners is $240. Generally, property-tax relief consists of relatively small concessions compared to the income-tax relief described earlier.
Estate and inheritance taxes are imposed at the time of death and are extremely important to affluent elderly persons. The federal estate tax exempts $675,000 of lifetime taxable transfers of wealth, and this amount is now scheduled to rise in steps described in a tax law passed in May of 2001. The first increase is to $1,000,000 in 2002 and 2003, and ultimately the exemption is increased to $3.5 million in 2009. With a modicum of estate planning, couples can double the basic exemption although the new law will impose limits on this privilege in future years. After the exemption is exhausted, a tax rate of 37 percent is currently applied—a rate that gradually rises to 55 percent on taxable estates greater than $3 million, but these rates are to be lowered in the future. The federal estate tax is supposed to disappear altogether in 2010 and then to be reimposed in 2011, but that, as well as scheduled exemptions and rate reductions, could be changed many times before then.
Because of the large exemption, only 2 percent of estates pay the federal estate tax, but that figure greatly understates its effects. Only one member of a couple actually pays the tax, but it is of concern to both. Moreover, many avoid paying only because of judicious planning. Perhaps more important politically, many aspire to be rich enough to be affected, although few will attain the requisite amount of wealth.
For whatever reason, the tax is extremely unpopular and many who have no hope of paying it still regard it as being extremely unfair. Many consider it to be a tax on those who are frugal, hard working, and altruistic toward their descendants. Although special provisions ease the burden of the tax on those wishing to convey farms and small businesses to family members, many do not think that the special provisions are lenient enough and complain that the need to pay the tax forces sales of property. However, such sales are actually extremely rare.
Proponents of the tax praise its progressivity and see it as a tool for extracting taxes from those who have been skilled at avoiding income taxes through their lifetime, either legally or illegally. It is also seen as a device for preventing great concentrations of wealth.
The federal estate tax law now allows a 100 percent credit up to a certain limit against the federal estate tax for estate taxes levied by states. The limit on the credit is related to the taxable value of the estate. Because a state estate tax levied up to the limit does not impose any extra cost on taxpayers, all states impose so-called pick-up taxes that exploit the entire federal limit. The new law gradually reduces these credits and repeals them entirely in 2005.
Thirteen states and Puerto Rico levy inheritance taxes in addition to pick-up taxes, while four states have additional estate taxes. An inheritance tax depends on the size of the bequest left to an individual heir, whereas an estate tax depends on the total value of the estate left by the decedent, regardless of how it is spread among heirs. Estate and inheritance tax rates and basic exemptions vary greatly from state to state and often depend on the relationship between the beneficiary and the decedent, with close relatives being favored.
A strong trend has developed at the state level toward reducing or eliminating estate and inheritance taxes because they are so unpopular politically. In 1989, eighteen states levied inheritance taxes and eight levied estate taxes in addition to pick-up taxes. In January 1999, only fourteen states had inheritance taxes and four still had estate taxes. New York has been reducing its very heavy estate tax by raising exemptions and cutting rates.
Effects of state and local tax policy on location decisions
States have an additional reason to lower their estate and inheritance taxes. They do not want to pressure affluent elderly taxpayers into moving to states that have only pick-up taxes or very-low estate and inheritance taxes.
More generally, states and localities tend to use tax policy to compete for older Americans. They are considered to be attractive residents, especially those who are more affluent, because they are law abiding, often attract other forms of economic activity, and do not impose costs on local school systems.
Duncombe, Robbins, and Wolf (2000) have investigated the effect of state and local fiscal policy on the migration of retirees. They have found that inheritance, income, and property tax policies have more effect on location decisions than expenditures on social services and law enforcement. However, it takes very large tax cuts to provoke even tiny amounts of in-migration. The authors conclude the revenue losses are likely to far outweigh any economic and fiscal benefits derived from attracting older adults. In a much older study, Voss, Gunderson, and Manchin (1988) also concluded that tax factors are significant, but not overwhelmingly important. Both studies suggest that amenities offered by a state, such as climate, are much more important in affecting the migration patterns of older adults. Both studies also do statistical analyses that result in the perverse conclusion that high estate taxes seem to attract certain types of older migrants. This obviously fallacious result would seem to provide a further indication that tax burdens are a relatively unimportant determinant of where older people choose to live.
Federal, state, and local tax systems tend to treat elderly taxpayers very generously. The costs of this generosity will rise rapidly after 2010 when the number of elderly persons will grow at an extremely rapid rate and the number of workers will stagnate because of the continuation of low birth rates that began in the 1960s.
The devices used to provide tax relief to older adults often have erratic and inequitable effects. People with the same income can face quite different tax bills depending on how the income is received. If it is deemed desirable to provide tax relief to older individuals, it would be more equitable to do it with an extra exemption, a tax credit, or lower tax rates for all those over a certain age, say sixty-five, rather than concentrating relief on specific types of income likely to be received by old people, such as Social Security or pensions. Whether one chooses a credit, an extra deduction, or a lower tax rate would depend on how one believes that the tax relief should be shared by different income groups. Superficially, it appears somewhat odd to provide any tax relief at all to very affluent older taxpayers. However, the current tax and transfer system, along with private policies such as means tests for college financial assistance, already contain numerous disincentives for accumulating wealth. It is necessary therefore, to be cautious as to how far we should go in continually making the system more progressive.
Rudolph G. Penner
See also Estate Planning; Pensions; Retirement Planning; Savings; Social Security.
Duncombe, W.; Robbins, M.; and Wolf, D. ‘‘Chasing the Elderly: Can State and Local Governments Attract Recent Retirees?’’ Aging Studies Program. Paper 22. Syracuse, N.Y.: Center for Policy Research, 2000.
Engen, E. M.; Gale, W. G.; and Scholz, J. K. ‘‘The Illusory Effects of Savings Incentives on Saving.’’ The Journal of Economic Perspectives 10, no. 4 (1996): 113–138.
Gale, W. G., and Slemrod, J. B. ‘‘Ancestor Worship.’’ The Milken Institute Review 2, no. 3 (2000): 36–49.
Hubbard, R. G., and Skinner, J. S. ‘‘Assessing the Effectiveness of Savings Incentives.’’ The Journal of Economic Perspectives 10, no. 4 (1996): 73–90.
Nalebuff, B., and Zeckhauser, R. J. ‘‘Pensions and the Retirement Decision.’’ In Pensions, Labor, and Individual Choice. Edited by David A. Wise. Chicago: University of Chicago Press, 1985. Pages 283–316.
National Conference of State Legislatures. Fiscal Affairs: State Death Taxes. Available on the World Wide Web at www.ncsl.org
Penner, R. ‘‘Tax Benefits for the Elderly.’’ The Retirement Project Occasional Paper No. 5. Washington, D.C.: The Urban Institute, 2000.
Poterba, J. M.; Venti, S. F.; and Wise, D. A. ‘‘How Retirement Savings Programs Increase Saving.’’ The Journal of Economic Perspectives 10, no. 4 (1996): 91–112.
U.S. Office of Management and Budget. ‘‘Tax Expenditures.’’ Analytic Perspectives: The Budget of the United States Government, Fiscal Year 2001. Washington, D.C.: U.S. Government Printing Office, 2000.
U.S. Treasury, Internal Revenue Service. Individual Income Tax Returns 1998. Washington, D.C.: IRS, 2001.
Voss, P.; Gunderson, R.; and Manchin, R. ‘‘Death Taxes and Elderly Interstate Migration.’’ Research on Aging 10 (1988): 420–450.
TAXATION. Early modern Europe was home to a bewildering array of taxes. The church collected tithes, lords exacted feudal dues, towns imposed customs duties, and rulers levied state taxes. Although there were multiple channels by which fiscal resources were extracted and redistributed throughout society, this essay will focus on state taxation, which expanded most dramatically in this period. To meet growing costs of war and debt, rulers across Europe raised taxation to unprecedented levels, forming what historians call "tax states." The tax state was not wholly powered by a modern centralized bureaucracy, but it had a profound effect on early modern politics and society. On the one hand, it reinforced social inequality, as rulers created fiscal alliances with elites and levied taxes on the common people. On the other hand, the tax state shaped early modern politics, as revenue-hungry sovereigns clashed with representative institutions and provoked popular tax rebellions. Even as popular tax revolts subsided in the eighteenth century, ideas linking taxation, citizenship, and political representation fueled revolution in the British colonies and in France.
THE RISE OF THE TAX STATE
Taxation was essential to the development of the modern state. In the Middle Ages, kings mainly "lived of their own," that is, supported themselves with revenues from the royal domain, which included income from crown lands and various feudal and regalian dues. Over the early modern period, however, European monarchies expanded beyond the medieval domain to levy taxes. Tax revenues mounted steadily across Europe in the sixteenth century, even taking high population growth and inflation into account, and soared to new heights in the seventeenth and eighteenth centuries. Not all European countries followed this trend; Brandenburg-Prussia relied heavily on domain revenue as late as the eighteenth century. But the overall pattern is clear: the early modern tax state eclipsed the medieval domain state and considerably expanded the financial resources of rulers.
The tax state was a child of war. In this period of "military revolution," as armies grew spectacularly in size and required increasingly intensive training and elaborate supply networks, the costs of war skyrocketed. French military expenses increased five to eight times during the seventeenth century; Spanish war expenditure peaked in the 1650s; the English budget increased, in real terms, at least sixteen-fold between the late sixteenth and early eighteenth centuries; expenditure in Denmark and the United Provinces also accelerated dramatically. Consequently, rulers across Europe scrambled to find revenue by increasing "ordinary" taxes and creating new "extraordinary" ones that, with time, would be deemed ordinary as well. Monarchs became keenly aware of the fact that projecting power abroad depended on financial strength at home.
For ambitious sovereigns, however, there seemed never to be enough tax revenue available to finance military campaigns. Thus, in the city-states of Italy and the Netherlands, and then in unified monarchies, rulers began to borrow and accumulate debt. This recourse to credit, in turn, contributed to the growth of taxation, because short-term war debt was often consolidated into long-term debt serviced with tax revenue. If, in the sixteenth century, taxes were used principally to pay for burgeoning state administrations as well as war, in the seventeenth and eighteenth centuries, the vast majority of tax revenue was spent on military campaigns and the increasingly large debts they generated. As a result, belligerent states in the seventeenth and eighteenth centuries confronted a spiral of war, debt, and taxation that, as we shall see, profoundly shaped the political life of the age.
Although the fiscal weight of the state grew rapidly in the early modern period, it should not be inferred that states developed modern centralized bureaucracies of the kind associated with "absolutism." Today, historians stress the limits of the absolute state and emphasize how powerful monarchs like Louis XIV (ruled 1643–1715) had to negotiate with elites and regional and local institutions.
In practice, even "absolute" sovereigns could not tax at will. Although there was little theoretical recognition of the citizen's right to consent to taxation before the eighteenth century, rulers regularly sought the consent and cooperation of corporate institutions to reduce resistance to the tax levy. In addition to dealing with law courts, church organizations, and municipal governments, monarchs consulted with a host of representative bodies that flourished in the early modern period. The Spanish monarchy negotiated with the Castilian Cortes; the Holy Roman emperor dealt with the Imperial Diet (just as territorial princes in the German lands worked with provincial diets); French kings summoned the Estates-General and provincial Estates; and the English crown consulted Parliament. Representative bodies haggled over the weight and form of taxes but usually found it in their interest to compromise with monarchs, who rewarded their acquiescence with fiscal and administrative privileges. Representative institutions were also willing to compromise at times, because the elite social groups they represented (clergy, nobility, urban notables) were heavily invested in state debt and did not want to interfere with taxes that funded their interest payments. In this respect, there was an inherent tension between the financial interests of ordinary taxpayers, who wished to minimize the tax burden, and those of wealthier state creditors, who feared that poor tax yields might jeopardize returns on their investments.
Negotiations between rulers and corporate bodies did not, however, always run smoothly. In seventeenth-century England, fiscal strife combined with religious conflict to produce a constitutional crisis and civil war. When the early Stuart kings sought to levy new subsidies, forced loans, and ship money, Parliament reacted by asserting its right to consent to taxation. In 1640, after Charles I refused to work with Parliament, the crisis turned into a bloody civil war in which the king was executed. Ironically, the English Civil War and the Glorious Revolution of 1688, both of which secured for Parliament a central role in the English constitution, ultimately made it easier for the English state to raise taxes. Eighteenth-century England and the Netherlands experienced the highest rates of taxation in Europe, owing in large part to the sense of legitimacy that representative institutions in both countries bestowed on tax levies.
Elsewhere in Europe, the relationship between monarchs and corporate bodies evolved differently. In the Fronde of 1648, the Parlement of Paris challenged the fiscal policies of the crown, but it was not nearly as successful as the English Parliament. The French monarchy not only quelled the Fronde, but stopped calling the Estates-General after 1614–1615 and replaced many provincial Estates with more easily controlled royal officers. But even in "absolutist" France the monarchy did not completely prevail, for the surviving provincial Estates (in Languedoc and Brittany, for instance) continued to drive hard bargains with kings and to administer taxes in their regions down to 1789. Yet another scenario unfolded in Castile, the heart of the Spanish empire, where the once instrumental Cortes faded from power in the seventeenth century as the Spanish monarchy grew weaker.
Just as we should be careful not to infer that the rise of the European tax state automatically reflected the development of absolutist institutions, we should not assume that rising tax levels were the result of increasingly efficient and centralized administrations. On the contrary, early modern tax systems were extremely fragmented. Many rulers relied on tax farming, a practice whereby taxes were franchised to semiprivate financiers who paid fixed sums of money in return for the right to collect taxes. These tax farmers were allowed to pocket the difference between the amounts of revenue they collected and the lump sums they had advanced. Not all taxes were farmed. Rulers also entrusted the task of levying certain taxes to official state administrators, but even in this case administrators could not collect taxes without the active participation of villages and local heads of household. Consider the example of the taille, the main direct tax in France from the fifteenth century to the French Revolution. Every year, the global sum of the taille was divided among the kingdom's parishes. Each parish was assigned a lump sum of money and was held responsible for collecting and forwarding that sum to tax receivers. Royal financial officials supervised the levy, pressuring recalcitrant villages and adjudicating disputes, but the crucial tasks of drawing up tax rolls and collecting revenue were left to parish assessors and collectors appointed by local village assemblies. Without the participation of thousands of village assemblies across France, even the mighty French crown would not have been able to levy the taille.
FORMS AND SOCIAL INCIDENCE OF TAXATION
The burden of the tax state was not shouldered equally by all social groups. Although it is difficult to determine with precision who paid taxes in early modern Europe, it is safe to say that the two main types of taxes, direct and indirect, were generally regressive. In both cases, common people—the peasants and artisans who made up the majority of the population—paid higher proportions of their income than did wealthy elites.
Indirect taxes, which many monarchs and town magistrates preferred because they were less intrusive than direct taxes, predominated in urban and commercial areas of Europe such as England, Italy, and the Netherlands. Taking the form of tolls, excise taxes on consumer goods, and taxes on salt, tobacco, and other goods sold by state monopolies, indirect taxes fell on consumers in a highly regressive fashion. Levied on such staples as grain, meat, beer, wine, and salt, indirect taxes imposed a proportionally heavy burden on urban workers who had to purchase basic commodities with relatively little disposable income. In the towns of Castile, where excise taxes on wine and oil could double the price of such goods, wage earners suffered a reduction of purchasing power on the order of 30–50 percent. In Paris, whose residents enjoyed privileges with respect to direct taxes, indirect taxation was rather heavy. It has been calculated that in 1789, the average Parisian head of household needed fifty-six days to work off his taxes. During periods of economic growth, indirect taxes were easier to bear, but in bad times, when wages stagnated or unemployment rose, they could become quite oppressive.
Levied on landed income and property, we might expect direct taxes to have been less regressive. But this was not usually the case, because the wealthy and powerful often held the privilege of exemption. Consider once again the example of the principal direct tax in France, the taille. The most remarkable feature of the taille was the number of people who did not have to pay it. In much of France, clergymen, nobles, bourgeois, venal officeholders, royal administrators, and residents of certain provinces and towns enjoyed at least partial exemption from the taille. This meant that the weight of the tax fell overwhelmingly on the peasantry. It has been estimated that in the late seventeenth century the taille and other direct taxes absorbed on average one-fifth of the peasantry's gross production. Wealthier peasants appear to have carried most of this burden, but the poorest peasants had a difficult time scraping together enough cash to pay even the tiniest assessments. In a hierarchical society riddled with privilege, the taille was so closely associated with low status that Cardinal Richelieu (1585–1642) believed it unwise to relieve the common people of this burden because "they would lose the mark of their subjection and consequently the awareness of their station." Similar sentiment existed in Sweden, the German lands, and Castile, where the payment of direct taxes was also a sign of common birth.
If regressive taxation reflected the steep social hierarchy of the early modern period, so too did the ways in which the state spent the tax revenue it collected. As historians have recently emphasized, monarchs not only drew the lion's share of tax revenue from peasants and artisans but, with state spending, redistributed that revenue up the social hierarchy to nobles, officeholders, and other elites. In seventeenth-century Languedoc, as much as a third of the province's tax revenue passed directly to regional notables in the form of pensions, salaries, and interest payments. Extracting and redistributing tax revenue on a massive scale, early modern states doubly reinforced the social inequalities of the age.
POPULAR TAX REVOLTS
Given the weight and incidence of taxation, it may come as no surprise that levies encountered a good deal of popular resistance in the early modern period. The medieval notion that a king was supposed "to live of his own" did not quickly fade, leading many to believe as late as the seventeenth century that regular taxation was a dangerous innovation. In such a climate, any attempt to create a new tax or increase an old one, even when the justification of military defense was invoked, could be met with great skepticism. Ever dubious and resourceful, taxpayers found ways to evade or at least minimize their fiscal obligations. Heads of households escaped full liability for direct taxes by hiding or falsely reporting their wealth or, in the case of powerful individuals, by exerting influence over local tax assessors. As for indirect taxes, smugglers formed vast underground networks that circumvented customs and excise taxes to supply consumers with untaxed commodities at lower prices.
Resistance could also take the more direct form of open revolt. In addition to, and sometimes linked to, the challenges to taxation mounted by representative institutions, popular tax revolts broke out sporadically across Europe throughout the early modern era. From the late sixteenth to the mid-seventeenth century, when intense warfare was coupled with economic and demographic crisis, a particularly destabilizing series of tax rebellions erupted in the German lands, Spain, Portugal, Naples, England, and France. It is important to note that these revolts were not irrational explosions of violence carried out by the hopelessly poor. Rather, as recent research emphasizes, revolts were deliberate political acts in which a variety of social groups participated.
The revolts that shook France in the first half of the seventeenth century are particularly well studied, and they suggest how and why uprisings occurred. It should be stated at the outset that rebellions in this period were not aimed solely at taxes; crowds also gathered to protest military conscription, the billeting of troops, high food prices, seigneurial dues, and religious heresy. But from 1630 to 1660 tax revolts were by far the most prominent form of protest in France. In this period of economic, military, and fiscal turmoil, taxpayers assembled on numerous occasions to submit petitions for tax relief to authorities. When such acts of protest proved unsuccessful, crowds gathered to keep tax officials at bay—by force if necessary. Moved by a sense of communal justice, taxpayers enacted mock trials and burned tax officials in effigy, broke into or burned down tax collectors' houses, and verbally or physically harassed collectors to run them out of town. Although the most violent incidents of collective action involved beating or stoning officials, such activity was not revolutionary in the modern sense of the term. Appealing to God, king, and custom rather than revolutionary principle, crowds believed that their attempts to block new taxes (or sudden tax increases) were part of a larger plan to restore the traditional order. "Long live the king without the salt tax," French protesters cried, looking backward to a time when the crown supposedly did not impose harmful fiscal innovations. Just because revolts were backward-looking, however, does not mean that they failed to achieve practical results. Revolts did achieve temporary successes, when tax collectors were chased out of town or when controversial tax initiatives were withdrawn. But revolts were just as likely to provoke brutal repression by the royal army.
One of the most extraordinary features of tax revolts was the participation of different social groups. It is not surprising that destitute peasants, artisans, and day laborers joined the fray, since taxation threatened to take what little cash they possessed. But in seventeenth-century France, wealthier peasants and artisans, local elites, and even nobles were similarly moved to participate in revolts or at least abet them from behind the scenes. Wealthier peasants paid the bulk of direct taxes and so had a strong interest in stopping tax increases. Noble landlords saw rebellion as a means to retain regional liberties and expand their power, but they, too, had a financial interest in tax revolts, for they competed with the crown for the economic surplus produced by the peasantry. Although nobles paid comparatively little in taxes, they understood that higher taxes on the peasantry would lead to lower rents and feudal dues. Thus, when Louis XIII (ruled 1610–1633) dramatically increased taxes in the 1620s and 1630s, many nobles supported popular sedition. Not all joined in, for some elites feared that revolt would cut off royal revenue and endanger the financial perquisites they received from the crown, but for many the prospect of losing revenue from their land outweighed other considerations.
REFORM AND REVOLUTION IN THE EIGHTEENTH CENTURY
Although traditional tax revolts died down in the eighteenth century, taxation became a key issue in the American and French Revolutions. In both cases, revolution stemmed from the tremendous fiscal burden that weighed on Britain and France as the two countries engaged one another in a series of protracted, global, and costly wars that have been likened to a second Hundred Years' War. For both countries, the financial response to the burden of war would have far-reaching political consequences.
From the Glorious Revolution of 1688 to the defeat of revolutionary France in 1815, Britain ascended to great power status on the wings of a "financial revolution" in which Parliament guaranteed the security of a permanent and rapidly expanding national debt. Although historians once believed that the spectacular growth of English public credit compensated for the country's supposedly weak tax system, today they attribute much of the success of English credit to the efficiency and reliability of taxes. At bottom, England's tax system was effective because elites consented to taxation through their representatives in Parliament. In the 1690s, for example, Parliament agreed to the levy of a land tax on the propertied classes that would spare no landowner, be he gentleman or cleric. The land tax was significant not only because it touched elites and provided an important source of revenue, especially to 1714, but also because it secured the political power of Parliament—and the landed gentry that the institution represented—in a new constitutional order. The English monarchy learned that it had much to gain financially by consulting Parliament; Parliament learned to tolerate the fiscal and administrative expansion of the English state in return for the right to scrutinize public finances. At the end of the eighteenth century, Parliament replaced the land tax with a modern income tax, a remarkable innovation that required all heads of household with annual incomes above fifty pounds to declare their wealth for assessment.
We should be careful, however, not to exaggerate the fiscal generosity of English elites. The land tax, which Parliament never allowed to be administered by a royal bureaucracy, was applied unevenly and fell dramatically over the century in proportion to total tax revenue. Likewise, the income tax was quickly repealed once France was defeated. The two taxes demonstrate that while English elites were willing to contribute direct taxes to a state in which they enjoyed representation, they did not intend to pay too much for this political privilege. Indeed, despite notable innovations in direct taxation, crown and Parliament ensured that indirect taxation, in particular the regressive excise tax, would become the true backbone of the eighteenth-century English fiscal system. Climbing to dizzying heights over the century, the excise tax raised the vast majority of the revenue that funded the loans of the Seven Years' War (1756–1763) and the American War of Independence (1775–1783). Backed by parliamentary statute and staffed by an astonishingly modern bureaucracy, the excise administration made English consumers pay for the nation's international power.
If Britain excelled in the fiscal rivalry that characterized eighteenth-century international relations, it did so despite the rebellion of its North American colonies. In light of the critical role Parliament played in lending legitimacy to English taxes, it is not all that surprising that North American colonials balked when the crown attempted to impose new taxes in the wake of the costly Seven Years' War. In the absence of colonial representation in Parliament, and with the elimination of the French threat in North America, colonials perceived the new taxes and duties of the late 1760s and early 1770s as the work of a despotic government. "No taxation without representation," they exclaimed, insisting that all British taxpayers had a right to national political representation. With the spread of such constitutional ideas, what began as a tax revolt quickly turned into republican revolution.
Taxation was also an important cause of the French Revolution. Because French kings periodically repudiated debts (and were therefore known as risky borrowers), the French royal debt was more expensive to service than English national debt, putting additional stress on the French tax system. As in England, France increasingly relied on indirect taxes over the eighteenth century, but French indirect taxes never reached the proportions of total tax revenue that English indirect taxes did. Direct taxes remained essential in France, and it was here that the French crown initiated its most ambitious reforms. The crown not only conducted land surveys in certain provinces to improve the repartition of the taille; it also created new universal taxes (the capitation, dixième, and vingtième ) aimed at individuals, including nobles, who had formerly enjoyed the privilege of tax exemption. (The creation of universal taxes in France was part of a general trend among eighteenth-century European governments to end noble tax privileges; similar reforms were instituted in Artois, Flanders, Luxembourg, Savoy, Holland, and Prussia). Although French universal taxes bolstered direct tax revenues, they were woefully inadequate to the task of funding military expenditure and debt. Even when combined with rising indirect tax revenue, they did not substantially raise the incidence of real, per capita taxation.
Looked at another way, however, the new universal taxes proved all too successful. Because they did indeed strike nobles and other privileged groups, they alienated elites who, unlike their counterparts across the channel but much like Britons in North America, did not enjoy representation in a national legislature. As a result, French courts of law became increasingly sensitive to the issue of taxation and publicized the need for an institutional bulwark against the monarchy. Seeking to fend off increases in universal taxes from the Seven Years' War on, courts disseminated subversive concepts of national sovereignty, political representation, and the rights of citizenship. In 1789, revolutionaries drew on this and other fiscal-political rhetoric to launch both a constitutional revolution, in which a National Assembly would seize the power to tax from the monarchy, and a social revolution, in which the Third Estate would claim political rights based on its tax contributions to the state. Once in power, revolutionaries abolished indirect taxes, expunged vestiges of privilege from direct taxation, and formally linked taxation and citizenship by extending political rights to taxpayers. By the late eighteenth century, taxation had become invested with revolutionary significance.
See also Absolutism ; Military ; Popular Protest and Rebellions ; Representative Institutions ; Revolutions, Age of ; State and Bureaucracy .
Beik, William. Absolutism and Society in Seventeenth-Century France: State Power and Provincial Aristocracy in Languedoc. Cambridge, U.K., and New York, 1985.
Bercé, Yves Marie. History of Peasant Revolts: The Social Origins of Rebellion in Early Modern France. Translated by Amanda Whitmore. Cambridge, U.K., 1990.
Bonney, Richard, ed. Economic Systems and State Finance. Oxford and New York, 1995.
——. The Rise of the Fiscal State in Europe, c. 1200–1815. New York, 1999. A useful collection of essays on early modern public finance in several European countries.
Bossenga, Gail. "Taxes." In A Critical Dictionary of the French Revolution. Edited by François Furet and Mona Ozouf. Translated by Arthur Goldhammer. Cambridge, U.K., 1989.
Brewer, John. The Sinews of Power: War, Money and the English State, 1688–1783. London and Boston, 1990. A compelling study of the fiscal changes behind England's rise to power in the eighteenth century.
Collins, James B. Fiscal Limits of Absolutism: Direct Taxation in Early Seventeenth-Century France. Berkeley, 1988.
Herlihy, David, and Christiane Klapisch-Zuber. Tuscans and Their Families: A Study of the Florentine Catasto of 1427. New Haven, 1985.
Hoffman, Philip T., and Kathryn Norberg. Fiscal Crises, Liberty, and Representative Government, 1450–1789. Stanford, 1994. Analyzes the relationship between fiscal and political development in England, the Netherlands, Spain, and France.
Kwass, Michael. Privilege and the Politics of Taxation in Eighteenth-Century France: Liberté, Égalité, Fiscalité. Cambridge, U.K., and New York, 2000.
Mathias, Peter, and Patrick O'Brien. "Taxation in Britain and France, 1715–1810." Journal of European Economic History 5 (1976): 601–650.
Tilly, Charles. The Contentious French. Cambridge, Mass., 1986. Contains descriptions and analysis of French tax revolts in the sixteenth and seventeenth centuries.
Tracy, James D. "Taxation and State Debt." In Handbook of European History, 1400–1600: Late Middle Ages, Renaissance, and Reformation. 2 vols. Edited by Thomas A. Brady Jr., Heiko A. Oberman, and James D. Tracy. Leiden and New York, 1994.
TAXATION is the imposition by a government of a compulsory contribution on its citizens for meeting all or part of its expenditures. But taxation can be more than a revenue raiser. Taxes can redistribute income, favor one group of taxpayers at the expense of others, punish or reward, and shape the behavior of taxpayers through incentives and disincentives. The architects of American tax policy have always used taxes for a variety of social purposes: upholding social order, advancing social justice, promoting economic growth, and seeking their own political gain. The need for new revenues has always set the stage for pursuing social goals through taxation, and the need for new revenues has been most intense during America's five great national crises: the political and economic crisis of the 1780s, the Civil War, World War I, the Great Depression, and World War II. In the process of managing each of these crises, the federal government led the way in creating a distinctive tax regime—a tax system with its own characteristic tax base, rate structure, administrative apparatus, and social intention.
In the United States, progressive taxation—taxation that bears proportionately more heavily on individuals, families, and firms with higher incomes—has always enjoyed great popularity. Progressive taxation has offered a way of reconciling the republican or democratic ideals with the high concentrations of wealth characteristic of capitalist economic systems. During national crises, political leaders have been especially intent on rallying popular support. Consequently, the powerful tax regimes associated with great national crises have each had a significant progressive dimension.
The Colonial Era and the American Revolution, 1607–1783
Before the American Revolution, taxation was relatively light in the British colonies that would form the United States. Public services, such as education and roads, were limited in scale, and the British government heavily funded military operations. In 1763, after the expensive Seven Years' War, the British government initiated a program to increase taxes levied on Americans, especially through "internal" taxes such as the Stamp Act (1765) and the Townshend Acts (1767). But colonial resistance forced the British to repeal these taxes quickly, and the overall rate of taxation in America remained low until the outset of the Revolution, at least by contemporary British standards.
Tax rates and types of taxation varied substantially from colony to colony, and even from community to community within particular colonies, depending on modes of political organization and the distribution of economic power. British taxing traditions were diverse, and the various colonies and local communities had a rich array of institutions from which to choose: taxes on imports and exports; property taxes (taxes on the value of real and personal assets); poll taxes (taxes levied on citizens without any regard for their property, income, or any economic characteristic); excise (sales) taxes; and faculty taxes, which were taxes on the implicit incomes of people in trades or businesses. The mix varied, but each colony made use of virtually all of these different modes of taxation.
Fighting the Revolution forced a greater degree of fiscal effort on Americans. At the same time, the democratic forces that the American Revolution unleashed energized reformers throughout America to restructure state taxation. Reformers focused on abandoning deeply unpopular poll taxes and shifting taxes to wealth as measured by the value of property holdings. The reformers embraced "ability to pay"—the notion that the rich ought to contribute disproportionately to government—as a criterion to determine the distribution of taxes. The reformers were aware that the rich of their day spent more of their income on housing than did the poor and that a flat, ad valorem property levy was therefore progressive. Some conservative leaders also supported the reforms as necessary both to raise revenue and to quell social discord. The accomplishments of the reform movements varied widely across the new states; the greatest successes were in New England and the Middle Atlantic states.
During the Revolution, while state government increased taxes and relied more heavily on property taxes, the nascent federal government failed to develop effective taxing authority. The Continental Congress depended on funds requisitioned from the states, which usually ignored calls for funds or responded very slowly. There was little improvement under the Articles of Confederation. States resisted requisitions and vetoed efforts to establish national tariffs.
The Early Republic, 1783–1861
The modern structure of the American tax system emerged from the social crisis that extended from 1783 to the ratification in 1788 of the U.S. Constitution. At the same time that the architects of the federal government forged their constitutional ideas, they struggled with an array of severe fiscal problems. The most pressing were how to finance the revolutionary war debts and how to establish the credit of the nation in a way that won respect in international financial markets. To solve these problems, the Constitution gave the new government the general power, in the words of Article 1, section 8, "To lay and collect Taxes, Duties, Imposts, and Excises."
The Constitution, however, also imposed some restrictions on the taxing power. First, Article 1, section 8, required that "all Duties, Imposts and Excises shall be uniform throughout the United States." This clause prevented Congress from singling out a particular state or group of states for higher rates of taxation on trade, and reflected the hope of the framers that the new Constitution would foster the development of a national market. Second, Article 1, section 9, limited federal taxation of property by specifying that "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census." The framers of the Constitution never clearly defined "direct" taxation, but they regarded property taxes and "capitation" or poll taxes as direct taxes. The framers' goals were to protect the dominance of state and local governments in property taxation, and to shield special categories of property, such as slaves, against discriminatory federal taxation.
As the framers of the Constitution intended, property taxation flourished at the state and local levels during the early years of the Republic. Most of the nation's fiscal effort was at these levels of government, rather than at the federal level, and the property tax provided most of the funding muscle.
Differences persisted among states regarding the extent and form of property taxation. Southern states remained leery of property taxation as a threat to the land and slaves owned by powerful planters. These states also had the most modest governments because of limited programs of education and internal improvements. One southern state, Georgia, abandoned taxation altogether and financed its state programs through land sales.
Northern states, in contrast, generally expanded their revenue systems, both at the state and local levels, and developed ambitious new property taxes. The reformers who created these new property taxes sought to tax not just real estate but all forms of wealth. They described the taxes that would do this as general property taxes. These were comprehensive taxes on wealth that would reach not only tangible property such as real estate, tools, equipment, and furnishings but also intangible personal property such as cash, credits, notes, stocks, bonds, and mortgages. Between the 1820s and the Civil War, as industrialization picked up steam and created new concentrations of wealth, tax reformers tried to compel the new wealth to contribute its fair share to promoting communal welfare. By the 1860s, the general property tax had, in fact, significantly increased the contributions of the wealthiest Americans to government.
At the federal level, a new tax regime developed under the financial leadership of the first secretary of the Treasury, Alexander Hamilton. His regime featured tariffs—customs duties on goods imported into the United States—as its flagship. Tariffs remained the dominant source of the government's revenue until the Civil War.
To establish precedents for future fiscal crises, Hamilton wanted to exercise all the taxing powers provided by Congress, including the power to levy "internal" taxes. So, from 1791 to 1802, Congress experimented with excise taxes on all distilled spirits (1791); on carriages, snuff manufacturing, and sugar refining (1794); and with stamp duties on legal transactions, including a duty on probates for wills (1797)—a first step in the development of the federal estate tax. In addition, in 1798 Congress imposed a temporary property tax, apportioned according to the Constitution, on all dwelling houses, lands, and large slave holdings.
Excise taxes proved especially unpopular, and the tax on spirits touched off the Whiskey Rebellion of 1794. President George Washington had to raise 15,000 troops to discourage the Pennsylvania farmers who had protested, waving banners denouncing tyranny and proclaiming "Liberty, Equality, and Fraternity."
In 1802, the administration of President Thomas Jefferson abolished the Federalist system of internal taxation, but during the War of 1812, Congress restored such taxation on an emergency basis. In 1813, 1815, and 1816, Congress enacted direct taxes on houses, lands, and slaves, and apportioned them to the states on the basis of the 1810 census. Congress also enacted duties on liquor licenses, carriages, refined sugar, and even distilled spirits. At the very end of the war, President James Madison's secretary of the Treasury, Alexander J. Dallas, proposed adopting an inheritance tax and a tax on incomes. But the war ended before Congress acted.
The Era of Civil War and Modern Industrialization, 1861–1913
The dependence of the federal government on tariff revenue might have lasted for at least another generation. But a great national emergency intervened. The Civil War created such enormous requirements for capital that the Union government had to return to the precedents set during the administrations of Washington and Madison and enact a program of emergency taxation. The program was unprecedented in scale, scope, and complexity.
During the Civil War, the Union government placed excise taxes on virtually all consumer goods, license taxes on a wide variety of activities (including every profession except the ministry), special taxes on corporations, stamp taxes on legal documents, and taxes on inheritances. Each wartime Congress also raised the tariffs on foreign goods, doubling the average tariff rate by the end of the war. And, for the first time, the government levied an income tax.
Republicans came to the income tax as they searched for a way to hold popular confidence in their party in the face of the adoption of the new regressive levies—taxes that taxed lower income people at higher rates than the wealthy. Republicans looked for a tax that bore a closer relationship to "ability to pay" than did the tariffs and excises. They considered a federal property tax but rejected it because the allocation formula that the Constitution imposed meant taxing property in wealthy, more urban states at lower rates than in poorer, more rural states. The Republican leadership then took note of how the British Liberals had used income taxation in financing the Crimean War as a substitute for heavier taxation of property. They settled on this approach, and the result was not only an income tax but a graduated, progressive tax—one that reached a maximum rate of 10 percent. This was the first time that the federal government discriminated among taxpayers by virtue of their income. The rates imposed significantly higher taxes on the wealthy—perhaps twice as much as the wealthy were used to paying under the general property tax. By the end of the war, more than 15 percent of all Union households in the northeastern states paid an income tax.
After the Civil War, Republican Congresses responded to the complaints of the affluent citizens who had accepted the tax only as an emergency measure. In 1872, Congress allowed the income tax to expire. And, during the late 1860s and early 1870s, Republican Congresses phased out the excise taxes, except for the taxes on alcohol and tobacco.
Republicans, however, kept the high tariffs, and these constituted a new federal tax regime. Until the Under-wood-Simmons Tariff Act of 1913 significantly reduced the Civil War rates, the ratio between duties and the value of dutiable goods rarely dropped below 40 percent and was frequently close to 50 percent. On many manufactured items the rate of taxation reached 100 percent. The system of high tariffs came to symbolize the commitment of the federal government to creating a powerful national market and to protecting capitalists and workers within that market. The nationalistic symbolism of the tariff in turn reinforced the political strength of the Republican Party.
After the Civil War, continuing industrialization and the associated rise of both modern corporations and financial capitalism increased Democratic pressure to reform the tariff. Many Americans, especially in the South and West, came to regard the tariff as a tax that was not only regressive but also protective of corporate monopolies. One result was the enactment, in 1894, of a progressive income tax. But in 1895 the Supreme Court, in Pollock v. Farmers' Loan and Trust Company, claimed, with little historical justification, that the architects of the Constitution regarded an income tax as a direct tax. Since Congress had not allocated the 1894 tax to the states on the basis of population, the tax was, in the Court's view, unconstitutional. Another result of reform pressure was the adoption in 1898, during the Spanish-American War, of the first federal taxation of estates. This tax was graduated according to both the size of the estate and the degree of relationship to the deceased. The Supreme Court upheld the tax in Knowlton v. Moore (1900), but in 1902 a Republican Congress repealed it.
State and local tax policy also began to change under the pressure of industrialization. The demand of urban governments for the funds required for new parks, schools, hospitals, transit systems, waterworks, and sewers crushed the general property tax. In particular, traditional self-assessment of property values proved inadequate to expose and determine the value of intangible property such as corporate stocks and bonds. Rather than adopt rigorous and intrusive new administrative systems to assess the value of such, most local governments focused property taxation on real estate, which they believed they could assess accurately at relatively low cost. Some states considered following the advice of the reformer Henry George and replacing the property tax with a "single tax" on the monopoly profits embedded in the price of land. Farm lobbies, however, invariably blocked such initiatives. Instead, after 1900, state governments began replacing property taxation with special taxes, such as income taxes, inheritance taxes, and special corporate taxes. Beginning in the 1920s, state governments would continue this trend by adding vehicle registration fees, gasoline taxes, and general sales taxes.
The Establishment of Progressive Income Taxation, 1913–1929
Popular support for progressive income taxation continued to grow, and in 1909 reform leaders in Congress from both parties finally united to send the Sixteenth Amendment, legalizing a federal income tax, to the states for ratification. It prevailed in 1913 and in that same year Congress passed a modest income tax. That tax, however, might well have remained a largely symbolic element in the federal tax system had World War I not intervened.
World War I accelerated the pace of reform. The revenue demands of the war effort were enormous, and the leadership of the Democratic Party, which had taken power in 1912, was more strongly committed to progressive income taxes and more opposed to general sales taxes than was the Republican Party. In order to persuade Americans to make the financial and human sacrifices for World War I, President Woodrow Wilson and the Democratic leadership of Congress introduced progressive income taxation on a grand scale.
The World War I income tax, which the Revenue Act of 1916 established as a preparedness measure, was an explicit "soak-the-rich" instrument. It imposed the first significant taxation of corporate profits and personal incomes and rejected moving toward a "mass-based" income tax—one falling most heavily on wages and salaries. The act also reintroduced the progressive taxation of estates. Further, it adopted the concept of taxing corporate excess profits. Among the World War I belligerents, only the United States and Canada placed excess-profits taxation—a graduated tax on all business profits above a "normal" rate of return—at the center of wartime finance. Excess-profits taxation turned out to generate most of the tax revenues raised by the federal government during the war. Thus, wartime public finance depended heavily on the taxation of income that leading Democrats, including President Wilson, regarded as monopoly profits and therefore ill-gotten and socially hurtful.
During the 1920s, three Republican administrations, under the financial leadership of Secretary of the Treasury Andrew Mellon, modified the wartime tax system. In 1921 they abolished the excess-profits tax, dashing Democratic hopes that the tax would become permanent. In addition, they made the rate structure of the income tax less progressive so that it would be less burdensome on the wealthy. Also in 1921, they began to install a wide range of special tax exemptions and deductions, which the highly progressive rates of the income tax had made extremely valuable to wealthy taxpayers and to their surrogates in Congress. The Revenue Acts during the 1920s introduced the preferential taxation of capital gains and a variety of deductions that favored particular industries, deductions such as oil- and gas-depletion allowances.
The tax system nonetheless retained its "soak-the-rich" character. Secretary Mellon led a struggle within the Republican Party to protect income and estate taxes from those who wanted to replace them with a national sales tax. Mellon helped persuade corporations and the wealthiest individuals to accept some progressive income taxation and the principle of "ability to pay." This approach would, Mellon told them, demonstrate their civic responsibility and help block radical attacks on capital.
The Great Depression and New Deal, 1929–1941
The Great Depression—the nation's worst economic collapse—produced a new tax regime. Until 1935, however, depression-driven changes in tax policy were ad hoc measures to promote economic recovery and budget balancing rather than efforts to seek comprehensive tax reform. In 1932, to reduce the federal deficit and reduce upward pressure on interest rates, the Republican administration of President Herbert Hoover engineered across-the-board increases in both income and estate taxes. These were the largest peacetime tax increases in the nation's history. They were so large that President Franklin D. Roosevelt did not have to recommend any significant tax hikes until 1935.
Beginning in 1935, however, Roosevelt led in the creation of major new taxes. In that year, Congress adopted taxes on wages and the payrolls of employers to fund the new social security system. The rates of these taxes were flat, and the tax on wages provided an exemption of wages over $3,000. Thus, social security taxation was regressive, taxing lower incomes more heavily than higher incomes. Partly to offset this regressive effect on federal taxation, Congress subsequently enacted an undistributed profits tax. This was a progressive tax on retained earnings—the profits that corporations did not distribute to their stockholders.
This measure, more than any other enactment of the New Deal, aroused fear and hostility on the part of large corporations. Quite correctly, they viewed Roosevelt's tax program as a threat to their control over capital and their latitude for financial planning. In 1938, a coalition of Republicans and conservative Democrats took advantage of the Roosevelt administration's embarrassment over the recession of 1937–1938 to gut and then repeal the tax on undistributed profits.
World War II, 1941–1945: From "Class" to "Mass" Taxation
President Roosevelt's most dramatic reform of taxation came during World War II. During the early phases of mobilization, he hoped to be able to follow the example of Wilson by financing the war with taxes that bore heavily on corporations and upper-income groups. "In time of this grave national danger, when all excess income should go to win the war," Roosevelt told a joint session of Congress in 1942, "no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000." But doubts about radical war-tax proposals grew in the face of the revenue requirements of full mobilization. Roosevelt's military and economic planners, and Roosevelt himself, came to recognize the need to mobilize greater resources than during World War I. This need required a general sales tax or a mass-based income tax.
In October of 1942, Roosevelt and Congress agreed on a plan: dropping the general sales tax, as Roosevelt wished, and adopting a mass-based income tax that was highly progressive, although less progressive than Roosevelt desired. The act made major reductions in personal exemptions, thereby establishing the means for the federal government to acquire huge revenues from the taxation of middle-class wages and salaries. Just as important, the rates on individuals' incomes—rates that included a surtax graduated from 13 percent on the first $2,000 to 82 percent on taxable income over $200,000—made the personal income tax more progressive than at any other time in its history.
Under the new tax system, the number of individual taxpayers grew from 3.9 million in 1939 to 42.6 million in 1945, and federal income tax collections leaped from $2.2 billion to $35.1 billion. By the end of the war, nearly 90 percent of the members of the labor force submitted income tax returns, and about 60 percent of the labor force paid income taxes, usually in the form of withheld wages and salaries.
In making the new individual income tax work, the Roosevelt administration and Congress relied heavily on payroll withholding, the information collection procedures provided by the social security system, deductions that sweetened the new tax system for the middle class, the progressive rate structure, and the popularity of the war effort. Americans concluded that their nation's security was at stake and that victory required both personal sacrifice through taxation and indulgence of the corporate profits that helped fuel the war machine. The Roosevelt administration reinforced this spirit of patriotism and sacrifice by invoking the extensive propaganda machinery at their command. The Treasury, its Bureau of Internal Revenue, and the Office of War Information made elaborate calls for civic responsibility and patriotic sacrifice.
Cumulatively, the two world wars revolutionized public finance at the federal level. Policy architects had seized the opportunity to modernize the tax system, in the sense of adapting it to new economic and organizational conditions and thereby making it a more efficient producer of revenue. The income tax enabled the federal government to capitalize on the financial apparatus associated with the rise of the modern corporation to monitor income flows and collect taxes on those flows. In the process, progressive income taxation gathered greater popular support as an equitable means for financing government. Taxation, Americans increasingly believed, ought to redistribute income according to ideals of social justice and thus express the democratic ideals of the nation.
The Era of Easy Finance, 1945 to the Present
The tax regime established during World War II proved to have extraordinary vitality. Its elasticity—its ability to produce new revenues during periods of economic growth or inflation—enabled the federal government to enact new programs while only rarely enacting politically damaging tax increases. Consequently, the World War II tax regime was still in place at the beginning of the twenty-first century. During the 1970s and the early 1980s, however, the regime weakened. Stagnant economic productivity slowed the growth of tax revenues, and the administration of President Ronald Reagan sponsored the Emergency Tax Relief Act of 1981, which slashed income tax rates and indexed the new rates for inflation. But the World War II regime regained strength after the Tax Reform Act of 1986, which broadened the base of income taxation; the tax increases led by Presidents George H. W. Bush and William J. Clinton in 1991 and 1993; the prolonged economic expansion of the 1990s; and the increasing concentration of incomes received by the nation's wealthiest citizens during the buoyant stock market of 1995–2000. Renewed revenue growth first produced significant budgetary surpluses and then, in 2001, it enabled the administration of president George W. Bush to cut taxes dramatically. Meanwhile, talk of adopting a new tax regime, in the form of a "flat tax" or a national sales tax, nearly vanished. At the beginning of the twenty-first century, the overall rate of taxation, by all levels of government, was about the same in the United States as in the world's other modern economies. But the United States relied less heavily on consumption taxes, especially value-added taxes and gasoline taxes, and more heavily on social security payroll taxes and the progressive income tax.
Becker, Robert A. Revolution, Reform, and the Politics of American Taxation, 1763–1783. Baton Rouge: Louisiana State University Press, 1980. Sees conflict within the colonies and states as an important part of the American Revolution.
Beito, David T. Taxpayers in Revolt: Tax Resistance during the Great Depression. Chapel Hill: University of North Carolina Press, 1989. A neoconservative approach to the history of taxation during the New Deal era.
Brownlee, W. Elliot. Federal Taxation in America: A Short History. Washington, D.C., and Cambridge, U.K.: Wilson Center Press and Cambridge University Press, 1996. Includes a historiographical essay.
Brownlee, W. Elliot, ed. Funding the Modern American State, 1941–1995:The Rise and Fall of the Era of Easy Finance. Washington, D.C., and Cambridge, U.K.: Cambridge University Press, 1996.
Fischer, Glenn W. The Worst Tax? A History of the Property Tax in America. Lawrence: University Press of Kansas, 1996. The best single volume on the history of property taxation.
Jones, Carolyn. "Class Tax to Mass Tax: The Role of Propaganda in the Expansion of the Income Tax during World War II." Buffalo Law Review 37 (1989): 685–737.
King, Ronald Frederick. Money, Time, and Politics: Investment Tax Subsidies in American Democracy. New Haven, Conn.: Yale University Press, 1993. Stresses a post–World War II victory for a "hegemonic tax logic" based on the needs of American capitalism.
Leff, Mark. The Limits of Symbolic Reform: The New Deal and Taxation, 1933–1939. Cambridge, U.K.: Cambridge University Press, 1984. Interprets President Franklin Roosevelt's interest in progressive taxation as symbolic rather than substantive.
Ratner, Sidney. Taxation and Democracy in America. New York: Wiley, 1967. The classic interpretation of the expansion of income taxation as a great victory for American democracy.
Stanley, Robert. Dimensions of Law in the Service of Order: Origins of the Federal Income Tax, 1861–1913. New York: Oxford University Press, 1993. Regards the income tax as an effort to preserve the capitalist status quo.
Stein, Herbert. The Fiscal Revolution in America. Rev. ed. Washington, D.C.: AEI Press, 1990. Explores the influence of "domesticated Keynesianism" on fiscal policy, including the Kennedy-Johnson tax cut of 1964.
Steinmo, Sven. Taxation and Democracy: Swedish, British, and American Approaches to Financing the Modern State. New Haven, Conn.: Yale University Press, 1993. A model study in comparative political economy applied to international tax policy.
Steuerle, C. Eugene. The Tax Decade: How Taxes Came to Dominate the Public Agenda. Washington: Urban Institute, 1992. The best history of the "Reagan Revolution" in tax policy.
Wallenstein, Peter. From Slave South to New South: Public Policy in Nineteenth-Century Georgia. Chapel Hill: University of North Carolina Press, 1987. The best fiscal history of a single state.
Witte, John F. The Politics and Development of the Federal Income Tax. Madison: University of Wisconsin Press, 1985. The leading history of the income tax from a pluralist point of view.
Zelizer, Julian E. Taxing America: Wilbur D. Mills, Congress, and the State, 1945–1975. Cambridge, U.K.: Cambridge University Press, 1998. Interprets the powerful chair of the House Ways and Means Committee as a reformer.
See alsoBudget, Federal ; Capitation Taxes ; Debts, Revolutionary War ; Excess Profits Tax ; Hamilton's Economic Policies ; Inheritance Tax Laws ; Negative Income Tax ; Poll Tax ; Pollock v. Farmers' Loan and Trust Company ; Revenue, Public ; Revolution, American: Financial Aspects ; Sales Taxes ; Social Security ; Stamp Act ; Tariff .
TAXATION.GROWTH AND STRUCTURE OF TAXATION IN THE TWENTIETH CENTURY
THEORIES OF FISCAL GROWTH
TAXATION AND THE RISE OF THE REGULATORY STATE
EUROPEAN INTEGRATION, GLOBALIZATION, AND INTERNATIONAL TAX COMPETITION
Taxes are a fundamental element of all modern societies. They are levied in almost every country of the world to raise revenue for government expenditure and to provide the financial basis for public services. Taxes are compulsory levies. They are unreciprocated, which means that they are not paid in exchange for specific benefits conferred on the payer.
However, in all political systems, governments have to justify why they raise taxes. Conflicts over taxation have thus been a common phenomenon throughout modern history. Taxes play a central role in defining the complex and contentious relationship between state and civil society, and they are intertwined with economic and social development in general. The institutional practices of taxation have been a matter of continuous renegotiations in relation to the changing forms and functions of the society that they help to constitute. Already in 1918 the Austrian economist Joseph Schumpeter (1883–1950), one of the founding fathers of fiscal sociology, underlined the significance of taxation for the analysis of social change:
The public finances are one of the best starting points for an investigation of society, especially, though not exclusively of its political life. The full fruitfulness of this approach is seen particularly at those turning points, or better epochs, during which existing forms begin to die off and to change into something new, and which always involve a crisis of the old fiscal methods. (Schumpeter, p. 7)
According to Schumpeter, World War I represented one of the key turning points in modern fiscal history. Just as the "domain state" of feudalism was succeeded by the tax state of the Industrial Revolution, the deep changes of World War I paved the way for the modern fiscal state that became one of the most powerful institutions of the twentieth century.
Several features characterize the development of the modern fiscal state. First, tax revenues grew at a greater rate relative to the general development of the economy. Taxation was gradually extended to all economic activities, including personal and corporate income, property, sales, and consumption. Second, beyond their purely fiscal goals, taxes became a powerful instrument of economic and social policy in general. In modern societies, taxes are used to redistribute wealth and income and to compensate for negative external effects such as the free use of natural resources. Fiscal interventions aim to stabilize economic fluctuations and stimulate economic growth. The proactive form of government, with its stress on social intervention and public service, is unthinkable without an elaborate tax system.
However, rising public debts, globalization, and the process of European integration are imposing a new set of constraints on tax policy makers. There has been a general trend toward containing taxation and to reducing the scale of government and public services. Even though there are still marked differences between national tax systems in Europe, a general process of convergence has taken place during the past decades.
GROWTH AND STRUCTURE OF TAXATION IN THE TWENTIETH CENTURY
Until World War I, a considerable share of state revenues came from public domains and import duties. In Prussia, for example, domains accounted for 60 percent of state revenues in 1914. Half a century later, more than 90 percent of public revenue in Europe was provided by taxes. Whereas during the nineteenth century taxes had been levied mainly on property, higher income, and specific consumption goods, taxation was now extended to all spheres of economic activity. This extension was based on three principles that gained influence on tax legislation in most European states since World War I: first, the benefit principle, that is, the idea that there should be some equivalence between what the individual pays and the benefits obtained from governmental activities; second, the principle of horizontal equity requires that persons in the same or similar positions are subject to the same tax liability; and third, the principle of vertical equity, which means that the total tax burden should be shared in accordance with taxpayers' respective ability to pay.
All three principles implied a broadening as well as a differentiation of taxation. Although it is difficult to generalize, certain patterns can be detected in the changes of tax structures over the twentieth century: while customs duties and excises lost importance or were completely abolished, most countries increasingly relied on sales taxes and other general consumption taxes. Almost everywhere, turnover taxes were replaced with value-added taxes, especially after the European Community decided to reform indirect taxes in 1967. Taxes on the privilege of doing business and on real estate have lost ground and are significant in the early twenty-first century mainly as revenue sources for local governments. The absolute and relative weight of direct personal taxation has been rising in most countries, and greater attention has been given to payroll and value-added taxes. In general, there has been a shift from indirect to direct taxes. In most countries
direct taxes (including social security taxes) account for more than 60 percent of the overall revenue, while before World War I, indirect taxes were the most important source of state income. Taking the euro area as a whole, taxes on incomes and profits contributed 33.2 percent of all revenues in 2003, while social security and payroll taxes were 29.8 percent, taxes on property 5.2 percent, and taxes on services 30.4 percent.
As is shown in tables 1 and 2, tax revenues grew both in absolute and in relative terms. While tax ratios were significantly below 10 percent before World War I, they ranged between 15 and 20 percent in the years of the economic depression. World War II and the prosperous postwar era saw a massive increase of tax ratios all over Europe. In 2000 taxation as a percentage of gross domestic product (GDP) was 37.4 percent in the United Kingdom, 37.9 percent in Germany, 45.3 percent in France, 54.2 percent in Sweden, and 41.6 percent in the euro area (calculated on an unweighted average). As taxes have become the main revenue of state budgets, this growth is closely related to the overproportional rise of government expenditure.
THEORIES OF FISCAL GROWTH
In the 1880s, the German economist Adolph Wagner (1835–1917) predicted that in modern societies, government expenditure would increase at a faster rate than economic output. According to Wagner, this was due to three forms of state activity that characterize all industrial societies: the upholding of external and internal order; the emergence of public enterprise; and the provision of public goods such as education, infrastructures, and social security. Wagner's "law of expanding state activity" was empirically confirmed by a number of investigations, observing the statistical significance of the income elasticity of public expenditures. However, the reasons for the overproportional increase of public expenditure are controversial. The British economists Alan Peacock and Jack Wiseman (1961) argue that external factors significantly impact the growth of government expenditure. While in calm times the government fiscal budget grows steadily, in times of crisis, for example, war, famine, or economic recession, government expenditure will expand rapidly, creating a "step" in the otherwise smooth growth process. Peacock and Wiseman name this the "displacement effect." The basic idea is that governments are forced to react to the challenges posed by such shocks, that is, the commitments related to public debts, war pensions, and social programs. When this period of "sudden change" is over, expenditure will fall to some extent but will not return to previous levels. Moreover, the experience of war often implies a higher public tolerance for taxation.
The twentieth century provides evidence of such sudden changes: World Wars I and II induced massive ruptures both in the structure and the level of taxes. Many taxes, in particular the income tax and the turnover or purchase tax (Germany, 1918; Great Britain, 1940) were introduced as "temporary" war measures. Likewise, the withholding method of income tax collection began as a wartime innovation in France, the United States, and Britain. World War II transformed the income taxes of many nations from upper-class taxes to mass taxes.
Yet wars and other crises do not account for all increases of taxes during the twentieth century. For example, they cannot explain the massive expansion of tax ratios that occurred in almost all European countries during the "Golden Age" of economic growth, that is, in the decades between postwar reconstruction and the oil crisis of 1973–1974. Mancur Olson (1965) attributes government (and tax) growth to interest-group behavior and private rent-seeking that occurs in many democratic systems. By contrast, William J. Baumol argues that the overproportional growth of public expenditure relates to the fact that the productivity growth is substantially higher in the private than in the public sector. As relative prices change, costs of public services rise faster and induce an increase of public expenditure. Other authors such as Carolyn Webber and Aaron Wildavsky hold that rising taxes are a consequence of the growing commitment of governments to equality. They argue that governments spend more on social programs when they have surpluses but rarely cut expenditure in periods of slow economic growth and falling tax revenues.
TAXATION AND THE RISE OF THE REGULATORY STATE
While until the nineteenth century taxes had mainly served to secure state revenues, the modern fiscal state has a much broader scope: governments use taxation for other than merely fiscal purposes. World War I led to massive expansion of the public sector and to rising state interventions in the economy. The idea that taxes should be used to redistribute income and wealth rapidly gained ground and set the political agenda for the postwar era. However, a progressive income tax was not realized immediately in all European countries. While Germany adopted a fairly progressive income tax with the Federal Tax Reform of 1919–1920, Great Britain, Sweden, and France abstained from a progressive tariff.
The Great Depression of 1929 gave birth to new concepts of fiscal policies. John Maynard Keynes (1883–1946) and other economists started to think about the instruments of public revenue and expenditure to control macroeconomic development. Keynesian economists advocated the use of countercyclical tax policy as a way of promoting overall economic stability. As this clashed with the still-prevailing balanced-budget concept, most European governments were reluctant to adopt a forceful policy of deficit spending during the slump. However, the economic crisis marked a watershed between traditional politics of laissez-faire and more systematic state interventions in the economy. This was particularly the case in Germany, where after the rise of National Socialism, the government stimulated the economy with massive expenditure for rearmament, infrastructure, and industrial investments. Even though these programs were mainly financed by public debts, they also led to a rise of tax rates. Moreover, the Third Reich used taxes systematically to discriminate against Jews and other religious or ethnic minorities. For example, Jews were excluded from all forms of tax deduction and tax exemption, and they had to pay a high tax when they left Germany (Reichsfluchtsteuer).
After World War II, tax policy was integrated into a broader concept of proactive macroeconomic management. The postwar period was the heyday of Keynesian theories, which shaped economic sciences and policies alike. Still, as growth rates remained high and unemployment fell during the postwar decades, countercyclical demand policies were not adopted in the same way by all European governments. While fiscal demand management became a powerful instrument of economic policy especially in Great Britain, France, and the Scandinavian countries, West Germany pursued a more supply-oriented direction in economic policy that was not compatible with Keynesian prescriptions. However, the German government also relied heavily on tax policy to realize overall economic goals, in particular to create incentives for higher savings and investments in order to stimulate economic growth. Income redistribution and social equality became a central feature of all tax systems in Europe during the postwar era. It was mainly achieved through property taxes as well as highly progressive income tariffs. Finally, taxes were increasingly used to compensate for market failures. Since the early 1970s, there was a growing awareness that natural resources were scarce and therefore should be consumed at lower levels. By internalizing environmental costs into prices, taxes were used to signal the structural economic changes needed to move to a more sustainable economy.
The expansion of the fiscal state in Europe after 1945 has been highly disputed. Tax evasion and avoidance has emerged as a major problem of fiscal administration in all European countries. In 1953 the French right-wing politician Pierre Poujade founded an antitax movement that mobilized small shopkeepers, artisans, and peasants against the government. Since the middle of the 1970s, antifiscalism and protest against taxation has gained momentum in most industrialized countries. The rise of Thatcherism in Great Britain was largely due to the fact that many people considered the level of taxation unsustainable. Moreover, tax systems were criticized as incoherent, highly bureaucratic, and unfair, as they left many possibilities of legal evasion.
Since the late 1970s, most tax reforms aim to reduce the overall tax burden and to make tax systems more transparent and simple. This change in the tax policy agendas also reflects a general shift from demand to supply-side policies. According to this view, low tax rates should generate incentives for higher investments and, in the long run, help to create higher economic growth. At the same time, the spread of monetarism as the leading economic doctrine questioned the capacity of fiscal fine-tuning of economic parameters. Finally, international developments had a growing impact on national tax policies.
EUROPEAN INTEGRATION, GLOBALIZATION, AND INTERNATIONAL TAX COMPETITION
The process of European integration has had substantial effects on national tax systems. As one of the main goals of the Treaty of Rome (1957) was the creation of a single European market, all taxes that distorted free trade of goods and services had to be abolished. An important step toward tax harmonization was the introduction of a Value Added Tax (VAT) in the European Community in 1967. Within two decades, the VAT has become the general consumption tax in almost all European countries. Major efforts have been made to harmonize the rates of VAT as well as tax rates on specific goods such as alcohol, tobacco, and more recently, the taxation of energy products and vehicles. Even though direct taxation is left entirely to the discretion of the member states, there are enduring efforts to harmonize personal and income tax rates as well as the corporate tax base. These efforts reflect the rising concerns of European governments that international integration of capital and labor markets increases tax competition between nation-states and erode the basis of tax revenue.
Indeed, globalization has posed major threats to national fiscal sovereignty. The liberalization of capital, labor, and commodity markets and the emergence of multinational corporations have seriously challenged national tax policies. In particular, the taxation of highly mobile factors such as capital, technology, and a trained workforce is becoming more and more difficult. Taxpayers can often avoid high domestic taxes by shifting their tax base to another country with lower burdens. There are indications that competition for mobile tax bases will inevitably lead to a fiscally ruinous race to the bottom, with serious implications for welfare policy and income distribution. Even though tax revenues have developed fairly steadily in the European Union until the late 1990s, there is evidence that globalization undermines the ability of countries to collect taxes. Between 2000 and 2003, the average tax ratio has declined from 41.7 to 40.5 percent in the euro area, which means that there was an inversion of a secular trend of increasing tax ratios. Moreover, structure of direct tax revenue changes according to the mobility of factors: while taxation of labor has been increasing, the taxation of other production factors has shown an overall decrease. Finally, the enlargement of the EU is likely to intensify tax competition in Europe, as most of the new member states have fiscal systems with relatively low direct tax rates.
By 2006 international cooperation to coordinate tax systems had proved ineffective for the most part. The plan for an excise tax on cross-border currency transactions (Tobin Tax) had not found consent among the industrialized nations. More serious efforts to contain harmful tax competition have been made by the EU but with only limited results. The future will show whether the fiscal state of the twentieth century is obsolete and will be replaced by a new system of public finance.
See alsoEuropean Free Trade Association; European Union; Keynes, J. M.
Ambrosius, Gerold, and William H. Hubbard. A Social and Economic History of Twentieth-Century Europe. Translated by Keith Tribe and William H. Hubbard. Cambridge, Mass., 1989.
Baumol, William J. "The Macroeconomics of Unbalanced Growth: The Anatomy of the Urban Crisis." American Economic Review 57 (June 1967): 415–426.
Bernardi, Luigi, and Paola Profeta, eds. Tax Systems and Tax Reforms in Europe. New York, 2004.
Daunton, Martin . Just Taxes: The Politics of Taxation in Britain, 1914–1979. Cambridge, U.K., 2003.
Easson, Alex J. Tax Law and Policy in the EEC. London, 1980.
Hansen, Bent. Fiscal Policies in Seven Countries. Paris, 1969.
Karras, Georgios. "Taxes and Growth in Europe, 1885–1987." Journal of European Economic History 28, no. 2 (1999): 365–379.
Messere, Ken, ed. The Tax System in Industrialized Countries. Oxford, U.K., 1998.
Olson, Mancur. The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge, Mass., 1965.
Organisation for Economic Co-operation and Development (OECD). Revenue Statistics: 1965–2001. Paris, 2002.
Peacock, Alan T., and Jack Wiseman, assisted by Jindrich Veverka. The Growth of Public Expenditures in the United Kingdom. Princeton, N.J., 1961.
Schremmer, Eckart. "Taxation and Public Finance: Britain, France, and Germany." In The Cambridge Economic History of Europe from the Decline of the Roman Empire, edited by J. H. Clapham and Eileen Power, vol. 8: The Industrial Economies: The Development of Economic and Social Policies, edited by Peter Mathias and Sidney Pollard, 315–494. Cambridge, U.K., 1989.
Schumpeter, Joseph. "The Crisis of the Tax State." Reprinted in International Economic Papers, vol. 4, edited by Alan T. Peacock, Ralph Turvey, Wolfgang F. Stolper, and Elizabeth Hendersons, 5–38. London, 1954.
Steinmo, Sven. Taxation and Democracy: Swedish, British, and American Approaches to Financing the Modern State. New Haven, Conn., 1993.
Webber, Carolyn, and Aaron Wildavsky. A History of Taxation and Expenditure in the Western World. New York, 1986.
Witt, Peter-Christian, ed. Wealth and Taxation in Central Europe: The History and Sociology of Public Finance. Leamington Spa, U.K., 1987.
The process whereby charges are imposed on individuals or property by the legislative branch of the federal government and by many state governments to raise funds for public purposes.
EC Term of Years Trust v. United States
The U.S. Supreme Court on April 30, 2007 ruled that a statute of limitations contained in the Internal Revenue Code was the exclusive remedy for a trust that wanted to recover funds that had been seized from its account by the Internal Revenue Service. The taxpayers who brought the suit had argued that another limitations period should apply and allow the case to proceed. A unanimous Supreme Court disagreed, holding that the case was barred.
Under the Internal Revenue Code, where a person is liable to pay a tax neglects or refuses to do so, a lien may attach to all real and personal property that belongs to the taxpayer. This lien is not self-executing, meaning that the IRS must take affirmative steps in order to enforce the collection of unpaid taxes. One of the means by which the IRS can collect the tax is through a levy, which allows the government to seize and sell a taxpayer's property in order to satisfy the tax liability.
In 1966, Congress enacted the Federal Tax Lien Act, which provides that "[i]f a levy has been made on property … any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in … such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court." However, the same provision establishes that this type of action must be brought before the expiration of nine months after the date in which the IRS makes the levy against a taxpayer's property. I.R.C. §7426(a)(1). Congress intended for this period of time to be quite short. During the hearings that were held in 1966 when Congress considered the proposed law, an assistant secretary to the Treasury Department said that because an IRS district director is likely to suspend collection efforts after seizing property, "it is essential that he be advised promptly if he has seized property which does not belong to the taxpayer."
Under another federal statute, a taxpayer may bring a tax refund action when the government has assessed a tax erroneously or illegally. 28 U.S.C. §1346(a)(1). In order to bring this type of action, the taxpayer must bring an administrative claim with the Service. The taxpayer must file the refund claim with the service within two years of the date that the tax was paid or within three years that the tax return was filed, whichever is later. If the IRS denies the taxpayer's refund claim, then the taxpayer has two years to bring a judicial action.
Elmer W. and Dorothy Culler allegedly took unwarranted income tax deductions during the 1980s. Before the IRS attempted to collect these taxes, the couple in 1991 established a the EC Term of Years Trust. The IRS assumed that the couple had transferred funds to the trust so that they could evade taxes. In August 1999, the IRS filed a tax lien against the trust. Although the trust denied liability, it deposited funds into a bank account. The government in October 1999 levied on the account.
Nearly a year after the government seized its funds, the trust brought an action under §7426(a)(1) in the U.S. District Court for the Western District of Texas, claiming that the government's had wrongfully levied on the account. The trust brought the suit after the expiration of the nine-month period that followed the action. The district court held that the claim was barred because the nine-month period had expired. Moreover, the court held that the provisions of 28 U.S.C. §1346(a)(1) did not apply to the trust because §7426(a)(1) "affords the exclusive remedy for an innocent third party whose property is confiscated by the IRS to satisfy another person's tax liability." BSC Term of Years Trust v. United States, 2000 WL 33155870 (W.D. Tex. 2000).
The trust later filed a second action, seeking a refund under §1346. The district court again held that §7426 of the Internal Revenue Code was the exclusive remedy for a wrongful levy claim. EC Term of Years Trust v. United States, No. EP03-CA-363KC, 2004 WL 5264837 (W.D. Tex. 2004). The trust appealed the decision to the Fifth Circuit Court of Appeals, which affirmed the district court's decision. EC Term of Years Trust v. United States, 434 F.3d 807 (5th Cir. 2006).
The application of these federal statutes has caused a conflict among the federal courts. The Ninth Circuit Court of Appeals has held that §7426(a)(1) is not the exclusive remedy for a wrongful levy claim, meaning that a taxpayer under that circuit's prior rulings could seek a refund under §1346(a)(1). WWSM Investors v. United States, 64 F.3d 456 (9th Cir. 1995). Because of this conflict, the Supreme Court in 2006 granted certiorari to consider the case.
A unanimous Supreme Court affirmed the decisions of the lower courts. In an opinion by Justice David Souter, the Court said that Congress had "specifically tailored" §7426(a)(1) to third-party wrongful levy claims, and if a party had the option of filing a general tax refund claim, the party could easily avoid the nine-month limitations period in §7426. The Court also said that the trust tried to read its prior cases too broadly, noting that previous Supreme Court cases have considered the application of §1346 in the context of a lien but not in the context of a levy.
Hinck v. United States
In 2007, the U.S. Supreme Court reviewed a case that involved the application of a Tax Code provision that applies to the abatement of interest collected by the federal government on unpaid taxes. The section in question was enacted as part of the Taxpayers Bill of Rights in 1996. Under this section, Congress gave the U.S. Tax Court authority to review cases involving decisions about whether such interest should be abated. A unanimous Supreme Court determined that the Tax Court had exclusive jurisdiction to review these claims.
When a taxpayer fails to pay taxes when they become due, interest accrues on the amount of the unpaid taxes. The Internal Revenue Service may take a significant period of time to decide whether the taxpayer indeed owed the tax, and during the period of time, interest may continue to accrue. Under §6404 of the Internal Revenue Code, the Secretary of the Treasury may decide to abate, or forgive, any tax or related liability. In 1986, Congress enacted §6404(e)(1), which provides that "[i]n the case of any assessment of interest on … any deficiency attributable in whole or in part to any error or delay by an officer or employee of the Internal Revenue Service (acting in his official capacity) in performing a ministerial act … the Secretary may abate the assessment of all or any part of such interest for any period."
Following the passage of this section, several parties attempted to challenge decisions by the Secretary not to abate interest on taxes that were owed. The federal courts that considered these claims uniformly held that these decisions were not subject to judicial review. According to these courts, this decision was within the discretion of the Secretary alone, and so the decision was insulated from judicial review.
As part of the Taxpayer Bill of Rights approved in 1996, Congress allowed taxpayers to review cases in which the Secretary refused to abate interest. Under §6404(h), Congress gave the U.S. Tax Court jurisdiction over any action brought by a taxpayer who bring suit to "determine whether the Secretary's failure to abate interest … was an abuse of discretion …." Moreover, the section allows the Tax Court to order an abatement, so long as the suit is brought within 180 days of the date in which the Secretary mails the final determination not to abate the interest.
John Hinck was a limited partner in a company called Agri-Cal Venture Associates (ACVA). In 1986, he and his wife filed a joint tax return, reporting losses that resulted from the partnership. The IRS reviewed Hinck's return and decided that deductions for several years needed to be adjusted, and in 1990, notified the partnership that the Service would disallow tens of millions of dollars in deductions. Hinks and his wife paid $93,890 to the IRS in 1996 to cover any personal deficiencies that would result from the adjustment of the deductions. After the IRS settled with ACVA in 1999 with respect to adjustments that would affect Hinck's return, the Service imposed additional liability against Hinck in both tax and interest.
The Hincks requested that the IRS abate the interest due to errors and delays that allegedly occurred between 1989 and 1993. After the IRS denied this request, the Hincks brought suit in the U.S. Court of Federal Claims, asking the court to review the denial of the abatement request. Judge Francis Allegra granted the government's motion to dismiss, holding that §6404(e)(1) did not provide a basis to allow the court to exercise jurisdiction over the claim. Hinck v. United States 64 Fed. Cl. 71 (Fed. Cl. 2005). The Hincks then appealed the decision to the Federal Circuit Court of Appeals, which affirmed the lower court's decision. Hinck v. United States, 446 F.3d 1307 (Fed. Cir. 2006).
In 2003, the Fifth Circuit Court of Appeals determined that §6404(e)(1) granted concurrent jurisdiction to the Tax Court as well as federal district courts and the U.S. Court of Federal Claims. Beall v. United States, 336 F.3d 419 (5th Cir. 2003). Federal district courts also reached different results on the issue. To resolve the split among the lower courts, the Supreme Court granted certiorari to review the case.
A unanimous Court affirmed the lower court's decision. Hinck v. United States, No. 06-376, 2007 WL 1641153 (May 21, 2007). In an opinion by Chief Justice John Roberts, the Court emphasized that "a precisely drawn, detailed statute pre-empts more general remedies." The Court also noted the principle that "when Congress enacts a specific remedy when no remedy was previously recognized, or when previous remedies were 'problematic,' the remedy provided is generally regarded as exclusive."
According to Roberts' opinion, both of these principles apply to §6404(h). Even though Congress did not expressly state that the Tax Court's jurisdiction under this section, Congress addressed a specific need by enacting the statute; that is, Congress allowed a taxpayer to challenge an abatement decision made by the Secretary by giving jurisdiction to the Tax Court. The Hincks argued that Congress had removed impediments to review by district courts, and so Congress had only given concurrent jurisdiction to the various federal courts. The Court rejected this and other arguments, noting that Congress "set out a carefully circumscribed, time-limited, plaintiff-specific provision, which also precisely defined the appropriate forum."
Limtiaco v. Camacho
Being a U.S. territory, the island of Guam has appellate rights through the United States' judicial system. Originally, appeals were channeled through the U.S. Circuit Court of Appeals for the Ninth Circuit. However, in 2004, Congress amended 48 USC §1424-2 to now provide that the U.S. Supreme Court, and not the Ninth Circuit, has certiorari (review) jurisdiction over decisions of the Guam Supreme Court.
The long-running dispute which became the subject matter of Limtiaco, Attorney General of Guam v. Camacho, Governor of Guam, No. 06-116, 549 U.S. ____(2007) (originally captioned as Moylan v. Camacho, referring to the prior attorney general), began in 2003, when Guam had insufficient revenues to pay its obligations. To remedy the situation, the legislature of Guam authorized Guam's Governor Camacho to issue bonds worth approximately $400 million. The governor signed the law and prepared to issue the bonds.
Under Guam's law, the attorney general must review and approve all government contracts prior to their execution. Section 11 of the Organic Act of Guam provided in relevant part that the government of Guam could issue "bonds and other obligations" as needed "to anticipate taxes and revenues." However, within the same Section 11 (48 USC §1423a), Congress limited Guam's debt to "… 10 per centum of the aggregate tax valuation of the property in Guam." The attorney general concluded that issuing bonds in the requested amount ($400 million) would raise Guam's debt above the permitted level, and he refused to approve the bond contracts.
The governor then sought a declaration from the Guam Supreme Court that issuance of the bonds would not raise Guam's debt above the limitation. In order to make that determination, the court needed to ascertain the meaning of the term "aggregate tax valuation" as used in Section 11 of the Organic Act. The attorney general interpreted this to mean 10 percent of the assessed valuation, while the governor argued that it meant 10 percent of the appraised valuation. The Guam Supreme Court agreed with the governor and concluded that 48 USC §1423a prohibited debt greater than 10 percent of the appraised valuation of property in Guam.
The attorney general sought review in the Ninth Circuit. While the appeal was pending, Congress amended §1424-2, removing language that vested appellate jurisdiction for Guam controversies in the Ninth Circuit. The Ninth Circuit, citing one of its earlier cases addressing the effect of the amendment on its jurisdiction, dismissed the attorney general's appeal on March 6, 2006. The attorney general then filed a petition for certiorari to the U.S. Supreme Court.
As the case came to it, the Supreme Court now had two issues before it: the substantive issue relating to the definition of "aggregate tax valuation" and a new issue of whether the time for filing petition for certiorari had expired, rendering the substantive arguments moot.
Justice Thomas delivered the opinion of the Court. The jurisdictional issue needed to be addressed first. Under 21 USC §2101(c), petitions for certiorari must be filed within 90 days after the entry of a lower court's "genuinely final judgment." There are some circumstances that serve to "suspend" the finality of judgments by "rais[ing] the question whether the court will modify the judgment and alter the parties' rights." (Hibbs v. Winn, 542 U.S. 88).) The Supreme Court held that the Ninth Circuit, by granting the petition for certiorari, raised the possibility that "the court will modify the judgment and alter the parties' rights." Therefore, until it issued its order dismissing the case for lack of jurisdiction, the appeal remained "pending," and the "finality" of the judgment remained suspended. Limiting its holding to the unique procedural circumstances presented in this case only, the Court found the petition timely filed and moved on to the merits.
The Court resolved the meaning of "aggregate tax valuation" by noting that it most naturally and meaningfully correlated with the value to which the tax rate is applied. Tax rates are generally applied to properties according to their assessed values, not their appraised values (which simply reflect market value ). Further, the Guam Supreme Court had reasoned that, because the debt-limitation provision contained in the Virgin Islands' law explicitly referred to "assessed value," Congress must have intended, by absence of similar language, to base Guam's limitation on some other value. The Court rejected this reasoning. By not including the word "assessed," Congress also chose not to insert the words "actual" or "appraised," so one meaning cannot be imputed more than another. But, said the Court, interpreting it to mean "assessed value" comported with most states' practice of holding debt limitations of municipalities to assessed valuation. The U.S. Supreme Court accordingly reversed the decision of the Guam Supreme Court and remanded the case.
The Court's plurality opinion included Chief Justice Roberts, as well as Justices Scalia, Kennedy, and Breyer. Justice Souter concurred in part and dissented in part, in which Justices Stevens, Ginsburg, and Alito joined. The dissent agreed with the Court's finding of timeliness of the petition for writ of certiorari. However, the dissent disagreed that the phrase "tax valuation" in the Organic Act of Guam referred unambiguously to assessed value. Since statutory text and sources gave no dispositive finality to the meaning, the dissent opined that congressional purpose may have indicated that appraised, rather than assessed value was the intended meaning of the term.
Permanent Mission of India v. City of New York
The Permanent Mission of India to the United Nations (the Mission) is the diplomatic delegation of India to the United Nations. It owned real property (a 26-floor building) in New York City, which housed not only its diplomatic offices but also residential units (filling about 20 floors) for its lower-level employees and their families. Similarly, the Ministry for Foreign Affairs of the People's Republic of Mongolia was housed in a six-story building in New York City owned by the Mongolian government. Like the Mission, the Ministry Building also used much of its floor space to house lower-level employees and their families.
Under New York law, real property owned by foreign governments is exempt from taxation when used exclusively for diplomatic offices or residential quarters for ambassadors or ministers to the United Nations.
For years, New York City levied property taxes on the Mission and the Ministry for that portion of their real property that was used to house lower levels of employees and their families. The Mission and the Ministry refused to pay. By operation of law, the unpaid taxes converted to tax liens against the property. By 2003, the taxes in arrears reached over $16 million for the Mission and $2 million for the Ministry.
In April 2003, the City of New York filed complaints in state court to establish the validity of the tax liens. The Mission and Ministry, defendants, removed the cases to federal court, then petitioned for dismissal based on sover-eign immunity. In Permanent Mission of India to the United Nations v. City of New York, No. 06-134, 551 U.S. ――― (2007), the U.S. Supreme Court was ultimately asked to determine whether the Foreign Sovereign Immunities Act of 1976 (FSIA), 28 USC §1602 et seq., provided immunity from a lawsuit to declare the validity of tax liens on property held by the sovereigns to house their employees. The Court concluded that the FSIA did not provide immunity from such a suit.
At the district court level, the court denied dismissal based on immunity, citing an exception contained within the FSIA expressly providing that a foreign state shall not be immune from jurisdiction in any case in which "rights in immovable property situated in the United States are in issue" (§1605(a)(4)). The Second Circuit Court of Appeals affirmed, holding that the above exception did apply to the present case.
The Supreme Court affirmed the decision and agreed that the FSIA's exception applied to the Mission and the Ministry, and that they were not immune from a suit of this nature. Starting with the text of the FSIA, the Court determined the scope of the "immovable property" exception. The defendants had argued that the exception only applied to cases in which the specific right at issue involved title, ownership, or possession. The Court rejected this narrow application, finding that the plain language refers generally to "rights in" immovable property, and did not enumerate any specific rights. Next, looking to liens, the Court noted that liens are interests in property that run with the land. Therefore, a suit to establish validity of a tax lien necessarily implicates "rights in immovable property."
Moreover, looking to the stated purposes of the FSIA, the Court noted that Congress intended the FSIA to adopt a restrictive theory of sovereign immunity as one that recognized immunity "with regard to sovereign or public acts … of a state, but not … private acts" Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682). Property ownership is not an inherently sovereign function, said the Court. There is no foreign sovereign immunity to attach, it concluded. The Second Circuit's decision was affirmed and the case remanded.
Justice Breyer joined Justice Stevens in dissent. They felt that tax actions fell outside the purview of the FSIA. They also expressed concern for the possibility of increased incidence of pierced immunity, since New York City also applies liens to compel landowners to pay for pest control, emergency repairs, and sidewalk upkeep.
As a footnote, New York City had conceded that even if a court of competent jurisdiction found the tax liens valid, the Mission and the Ministry would be immune (as sovereigns) from foreclosure proceedings. However, valid tax liens often cause foreign sovereigns to concede and pay. If they still refuse to pay in the face of a valid court judgment, the sovereign's foreign aid may be reduced by the United States by as much as 110 percent of the outstanding debt. Third, the liens would "run with the land" and be enforceable as against subsequent purchasers.
Taxation is the principal means by which governments get the resources to pay for activities such as armed forces, a court system, a health care program, and programs aimed at transferring resources to the destitute or the elderly. Taxation is not, however, the only means by which a government gains control of resources; for example, many countries draft people into the military. Among developed countries, taxation accounts for between 25 and 50 percent of national income. Taxation in developing countries generally raises substantially less than this, primarily due to the difficulty the tax authorities encounter in collecting taxes. Although tax receipts in many countries fall well short of covering current expenditures, the resulting deficits do not imply that the expenditures are costless; payment is simply delayed, and future generations bear the costs of the expenditure.
Taxation is as old as government itself. Indeed, the first known written records, made by the Sumerians about 5,000 years ago, are apparently tax records. Before money was widely used, taxes were paid in kind with grain, cattle, labor, and other valuable objects. Compulsory labor is the earliest form of taxation for which records exist; indeed, in the ancient Egyptian language the word labor was a synonym for taxes.
In Europe before the seventeenth century, most taxes were levied directly on people, depending on their status in society or on the land they owned. About that time, new taxes arose that were associated with the rising tax bases related to commerce, transactions, and urban markets. Some advocated such taxes as a way of introducing equality in taxation, because the privileged classes had managed to obtain virtual immunity from the existing status-based tax system.
Beginning in the nineteenth century, the growing scale and cost of war greatly expanded the revenue needs of many Western countries, and the tax systems expanded to keep up with these needs. The modern income tax began in Great Britain around 1800 to help pay for wars with France. Financing wars was then the major expense of government—from the twelfth to the nineteenth century, between 75 and 90 percent of the English government’s expenditure went to financing wars. The income tax was also a response to a concern that a tax system that relied on land as a tax base was failing to reach the growing commercial wealth and income that arose during the Industrial Revolution.
Resistance to taxes was a theme of the American Revolutionary War (1775–1783). In keeping with that spirit, taxes in the United States were relatively low until the twentieth century and are still among the lowest of all developed countries. In 1900 U.S. federal taxes amounted to just 3.1 percent of gross domestic product (GDP), while state and local taxes comprised another 4 to 5 percent. The U.S. income tax was introduced in 1913, after the passage of the Sixteenth Amendment to the Constitution, which set aside the constitutional provision that all direct taxes must be levied across states in proportion to their population.
The role of the U.S. federal government expanded greatly during the first half of the twentieth century, and by 1943 federal taxes increased to 19.7 percent of GDP. World War II (1939–1945) was clearly the critical juncture, although the New Deal years of the 1930s were also important. Many programs, particularly Social Security, were introduced during the 1930s and would require much higher taxes in later years. By 2003 federal tax receipts (including social insurance payroll taxes) amounted to 17 percent of GDP, with state and local taxes adding another 8.8 percent. The total share had been roughly constant since the 1970s, but since 2001 federal taxes as a share of GDP have fallen notably due to a series of tax cuts enacted during the George W. Bush administration.
In modern tax systems, a wide range of activities and circumstances can trigger tax liability—the purchase of a good from a retailer triggers a sales tax, the payment of wages for a business to a worker triggers an income tax, or the passing of wealth from one generation to the next triggers estate and inheritance taxes. Although there are a large variety of taxes, certain kinds predominate. Among developed countries, which raise on average about 37 percent of GDP in taxes, slightly more than one-third of tax revenue comes from income taxes; slightly less than one-third comes from various taxes on consumption, including value-added taxes remitted by all businesses; and about one quarter comes from social insurance taxes. The United States stands out among developed nations for its relatively low taxes and for making much less use of consumption taxes. The United States is also the only member country of the Organisation for Economic Cooperation and Development, a group of thirty developed countries, without a value-added tax.
On average, poorer developing countries collect taxes that amount to a substantially lower percentage of their national income. Of the tax revenue they do collect, a smaller share comes from income taxes and a larger share from both consumption taxes and, especially, taxes on international trade. The reliance of developing countries on trade taxes reflects the relative ease with which goods can be observed and valued as they cross international borders, which is important in countries where administrative resources are scarce. It also reflects the use of import taxes as a deliberate economic strategy to promote domestic industrial development, as well as the prevalence of easily taxed exports of primary products such as oil, food, and industrial crops. This lower reliance on income taxes is largely due to the difficulty of collecting income taxes in countries with large informal sectors; unlike developed countries, only a small proportion of the workforce is employed by well-established, financially sophisticated companies whose existence facilitates collection of taxes on the income of both businesses and employees.
There are two key aspects to all taxes: Who bears the burden, and what is the effect on the economy? Ascertaining who bears the tax burden is not simply a matter of keeping track of who writes the checks to the government. For example, in the United States most of the income tax liability of employees is remitted by employers in the form of withholding, although it is widely believed that it is the employee, not the employer, who bears the burden through lower take-home pay. The filing of an employee’s tax return reconciles his or her actual tax liability to what has already been remitted, on the worker’s behalf, by the employer.
Taxes can also impose burdens by changing the prices of what people buy, as occurs with cigarette taxes. Taxes can even have an impact on individuals buying untaxed goods. For example, a tax on butter may cause some consumers to switch to margarine, driving up the price of margarine and shifting some of the tax to people who prefer margarine for health reasons.
Some types of taxes, such as the corporation income tax, are legally owed by a business entity, but the tax burden will be shared among the company’s shareholders, workers, and customers to the extent that the company is able to “pass on” the tax burden by, for example, paying lower or charging higher prices for their products. Assessing the burden of the corporation income tax is one of the most controversial questions in the study of taxation, made more difficult by the advent of multinational corporations that have operations, customers, and shareholders in many countries.
The question of who should bear the burden of taxes is separate from who does bear the burden. It is a perennially contentious issue for which there is no right or wrong answer. One aspect is how the burden should be shared across income classes, an issue often referred to as tax pro-gressivity. Intuitively appealing but vague principles—for example, taxes should match the benefits one receives from government activities, or taxes should equalize sacrifice—do not offer much practical guidance, and modern economics has for the most part given up on refining such principles to instead focus on the consequences of different levels of progressivity. Moreover, it is not clear why, in assessing the distributional consequences of government, it makes sense to focus on tax progressivity rather than the progressivity of what the government provides its citizens and how it assesses taxes to pay for those programs.
Aside from progressivity, tax systems should avoid arbitrary distinctions in tax burden based on people’s tastes or characteristics, whether intended or capricious. In the past, such arbitrary taxes have been imposed on minorities; examples include the poll tax collected from Jewish communities in the Holy Roman Empire and the poll tax levied on non-Muslims in the eighth-century Abbasid caliphate of Persia. Modern tax systems often make tax-burden distinctions among families of the same income level, based, for example, on such factors as family size, charitable inclinations, or tastes for cigarettes.
The second question to ask about any tax system is what costs it imposes. The first and most obvious cost is that every dollar of taxes remitted to the government leaves one less dollar for taxpayers to spend on goods and services. For this reason, a responsible government will only raise taxes to provide programs whose value exceeds the private consumption that is given up.
But there are costs over and above the money taxed away. For one thing, collecting taxes requires a substantial bureaucracy. The Internal Revenue Service (IRS) budget is over $10 billion per year, although that amounts to only about 0.5 percent of the revenue it collects. Dwarfing that are the costs borne directly by the taxpayers—called compliance costs —which include the value of their time spent on tax matters and money spent on tax software and professional tax preparers and planners. This cost has been estimated to exceed $100 billion a year for the U.S. income tax system, ten times the administrative cost for all taxes combined and about 10 percent of revenues collected.
Administration of a legitimate, nonarbitrary tax system is facilitated when there are observable, measurable things that can serve as tax bases. For example, it is notoriously difficult to enforce taxes on food products grown and consumed by farmers and on the income of self-employed individuals. Most modern tax systems rely on businesses that withhold taxes on employees’ earnings and provide information reports to the tax authority that can be matched with employees’ tax returns. Withholding and information reports are supplemented by random audits, with penalties for noncompliance. In many countries, the employee-withholding system is exact and final so that no tax return need be filed by most employees; the British pay-as-you-earn system is an example.
In spite of these measures, substantial tax evasion occurs. According to the IRS, about 16 percent of the federal taxes that should be paid are not. The noncompliance rate varies widely by the type of income; it is less than 2 percent for wages and salaries and as much as 50 percent for self-employment income, the stark difference reflecting the availability of withholding and information reports for the former but not the latter type of income.
Taxes impose another kind of cost on an economy because they alter the costs and rewards of various behaviors. For example, both income and consumption taxes reduce the incentive to work by reducing the consumption reward per hour of labor supplied to the market. Income taxes, but not consumption taxes, also reduce the reward and therefore the incentive of individuals to save and businesses to invest. These behavioral responses represent costs because they channel resources in socially unproductive directions. For example, from society’s point of view it is costly if income taxes dissuade someone from joining the labor force. Much economic analysis has tried to quantify these behavioral responses; the consensus view is that the overall labor supply response is not large and the saving response is not well understood, but certain other behaviors, such as the timing of capital assets sales to anticipated tax changes, are highly responsive to the tax system. The bigger the behavioral response, the higher the economic cost per dollar raised. Some have estimated that, all in all, the behavioral responses to the U.S. income tax system generate an extra forty cents of social cost for every additional tax dollar raised.
Tax policy is controversial because the objectives often conflict. Although the economic costs could arguably be reduced by making the tax burden less progressive (i.e., reducing how much the tax burden rises with income), many would find such a system to be an unfair shifting of the burden toward low-income people. Simplifying the tax system could save substantial administrative and compliance costs, but a simplified system might render the tax burden less finely tuned to individual circumstances. Many of the debates about tax policy involve such choices. For example, would lowering taxes on entrepreneurial income stimulate enough economic activity to offset the fact that (successful) entrepreneurs are often among society’s wealthiest citizens?
The twentieth-century expansion of the role of government, and the associated need for more tax revenues, seems to have peaked in the 1980s, and on average the worldwide ratio of tax collections to GDP has not changed much since that time. Looking ahead, as national economies become more interconnected, it may become more difficult to collect taxes without substantial crosscountry cooperation. Furthermore, governments may compete to attract businesses by offering lower taxes. Some view this development as a dangerous “race to the bottom” that will undermine the ability of governments to provide public goods and social insurance, while others applaud it as a way to discipline otherwise profligate governments in the same way that competition among companies promotes cost-minimizing business operations.
Especially in the last two decades, the U.S. income tax system has become much more than a way to raise revenue; it also delivers a wide range of social programs. Thus, it is misleading to associate government expenditure programs with what the government does and the tax system with how it pays for what it does because much of what government does is achieved via the tax system. For example, the U.S. income tax subsidizes charitable giving by making it deductible from taxable income. It also promotes homeownership through its favorable tax treatment, and it delivers the country’s biggest antipoverty program via the earned income tax credit. These programs add to the complexity of the tax system, and thus to its administrative and compliance costs, and the constituencies that benefit often oppose efforts to simplify the tax system that would eliminate these programs.
SEE ALSO Earned Income Tax Credit; Inheritance Tax; Negative Income Tax; Tax Credits; Tax Evasion and Tax Avoidance; Tax Relief; Taxes, Progressive; Taxes, Regressive; Transaction Taxes
Auerbach, Alan J., and Kevin A. Hassett, eds. 2005. Toward Fundamental Tax Reform. Washington, DC: American Enterprise Institute Press.
Brownlee, W. Elliot. 2004. Federal Taxation in America: A Short History. 2nd ed. Washington, DC: Woodrow Wilson Center; Cambridge, U.K., and New York: Cambridge University Press.
Messere, Ken, Flip de Kam, and Christopher Heady. 2003. Tax Policy: Theory and Practice in OECD Countries. New York: Oxford University Press.
President’s Advisory Panel on Federal Tax Reform. 2005. Final Report. Simple, Fair, and Pro-growth: Proposals to Fix America’s Tax System. http://www.taxreformpanel.gov/final-report/.
Rosen, Harvey. 2004. Public Finance. 7th ed. New York: McGraw-Hill.
Slemrod, Joel, and Jon Bakija. 2004. Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes. 3rd ed. Cambridge, MA: MIT Press.
Webber, Carolyn, and Aaron B. Wildavsky. 1986. History of Taxation and Expenditure in the Western World. New York: Simon & Schuster.
The process whereby charges are imposed on individuals or property by the legislative branch of the federal government and by many state governments to raise funds for public purposes.
Boulware v. United States
Federal tax law makes it a felony to willfully attempt “in any manner to evade or defeat any tax” imposed by the Internal Revenue Code. A key element of tax evasion is the “existence of a tax deficiency,” which the government must prove beyond a reasonable doubt . A question arose, however, as to whether a person charged with tax evasion who claimed he did not have a deficiency needed to prove that the funds he received from a corporation were nontaxable at the time the distribution occurred. The Supreme Court resolved this issue in Boulware v. United States,—U.S.—,—S.Ct.—,—L.Ed.2d—2008 WL 552880 (2008), ruling that the defendant did not have to make such a showing. It was permissible for the defendant to introduce evidence that the income was nontaxable.
Michael Boulware was charged with tax evasion and filing a false income return, based on his diversion of funds from Hawaiian Isles Enterprises (HIE), a closely held corporation that he controlled as president, founder, and primary, but not sole, shareholder. The government claimed that Boulware had received taxable income by systematically diverting funds from HIE. At his trial the government showed that Boulware had given millions of dollars to his wife and to his girlfriend without reporting any of this money on his personal income tax returns. He diverted corporate funds by writing checks to employees and friends, who then returned the cash to him, by diverting payments by HIE customers, by submitting fraudulent invoices to HIE, and by laundering money through companies in Hong Kong and the Kingdom of Tonga.
Boulware fought these charges by seeking to introduce evidence that HIE had no retained or current earnings and profits in the taxable years in question. He contended that he had in effect received distributions of property that must have been returns of capital, up to his basis in his stock. In other words, he got back what he had put into the corporation, with no income derived from that original investment. The Internal Revenue Service Code states that the portion of any corporate distribution to a shareholder that is not earnings and profits is nontaxable. Boulware argued that because the return of capital was nontaxable, the government could not establish the tax deficiency required to convict him of tax evasion.
The government convinced the federal district court not to allow Boulware to introduce this line of argument, pointing to a 1976 Ninth Circuit Court of Appeals decision that held in a criminal tax evasion case, a diversion of funds may be considered a return of capital only after “some demonstration on the part of the taxpayer and/or the corporation that such [a distribution was] intended to be such a return.” Boulware had not offered to make such a demonstration. A jury convicted Boulware on four counts of tax evasion and five counts of filing a false return. The Ninth Circuit upheld the verdict and its 1976 precedent that imposed an intent requirement on Boulware. One judge concurred in the decision only because the court was required to follow precedent. He thought it illogical that a defendant “may be criminally sanctioned for tax evasion without owing a penny in taxes to the government.” The precedent also contradicted the tax evasion statute , which requires a tax deficiency.
The Supreme Court, in a unanimous decision, vacated the criminal verdict and reversed the Ninth Circuit. Justice David Souter, writing for the Court, found no merit in the 1976 Ninth Circuit case. There was no support for the view that a defendant had to show “contemporaneous intent” that the distribution was a return of capital. The tax consequences on such a distribution depend not on intent but on whether “the corporation had earnings and profits, and the amount of the taxpayer's basis for his stock.” Agreeing with the concurring Ninth Circuit judge, Souter stated that there is “no criminal tax evasion without a tax deficiency, and there is no deficiency owing to a distribution” if the corporation “has no earnings or profits and the value distributed does not exceed the taxpayer-shareholder's basis for his stock.” The Ninth Circuit precedent also failed to note that the contemporaneous intent requirement would be difficult to meet, as the corporation will not know until the end of its fiscal year whether there were earnings or profits. Therefore, Boulware had a right to make his defense based on the lack of a deficiency.
United States v. Clintwood Elkhorn Mining Company
On April 15, 2008, the U.S. Supreme Court issued a ruling where the Court held that coal exporters and producers were barred from recovering for past taxes beyond the period of time covered by the statute of limitations in the Internal Revenue Code (I.R.C.). The case of United States v. Clintwood Elkhorn Mining Co.,—U.S.—, 128 S. Ct. 1511,—L. Ed. 2d—(2008) resolved a potential conflict between the I.R.C. and the Tucker Act, which allows a private party to sue the government under some circumstances.
Congress first imposed the Coal Excise Tax in 1978 in order to finance the Black Lung Disability Trust Fund. The tax was rather unique in that it applied to all sales of coal, irrespective of whether the coal was sold domestically or was exported. Coal exporters brought suit against the United States, arguing that the tax violated the Constitution. More specifically, the companies pointed to the Export Clause of Article 1, Section 9 of the Constitution, which states that “[n]o Tax or Duty shall be laid on Articles exported from any State.” The U.S. District Court for the Eastern District of Virginia ruled that the Coal Excise Tax indeed violated the Export Clause, noting that the Supreme Court in the past had “broadly proscribed excise taxes levied on a variety of goods.” Ranger Fuel Corp. v. United States, 33 F. Supp. 2d 466 (E.D. Va. 1998). Two years later, the Internal Revenue Service (IRS) acquiesced in the decision in Ranger Fuel. IRS Notice 2000-28, 2000-1 Cumm. Bull. 1116.
Under the I.R.C., a taxpayer who seeks a refund of a tax that was erroneously or unlawfully assessed may file an action against the United States in either a U.S. district court or the U.S. Court of Federal Claims. Before filing such a suit, however, the taxpayer must comply with the I.R.C.'s tax refund scheme. I.R.C. 7422. The claim must also be brought in a timely manner. Under I.R.C. 6511, a taxpayer who seeks a “refund of an overpayment of any tax imposed by [the tax code] in respect of which tax the taxpayer is required to file a return” must file the return no later than three years from the time the return was filed, or two years from the time that the tax was paid (whichever is later). The section also states that “[n]o credit or refund shall be allowed or made” of the claim is not filed within the appropriate time limits.
Several coal producers and exporters, including Clintwood Elkhorn Mining Company, had paid excise taxes on their coal until the I.R.S. had acquiesced to the Ranger Fuel decision. In response to that decision, Clintwood Elkhorn and other companies in 2000 filed administrative claims with the I.R.S., requesting refunds for excise taxes. These claims could only cover the three-year period prior to this filing, due to the requirements of § 6511. The I.R.S. complied, refunding taxes for the years of 1997, 1998, and 1999.
In addition to the administrative claim filed with the I.R.S., the companies filed suit in the Court of Federal Claims, where they sought to recover a total of $1,065,936 for taxes paid in 1994, 1995, and 1996. The companies based their claim on the Tucker Act, which allows private citizens to sue the United States government. Under 28 U.S.C. § 1491, claims under the Tucker Act may be brought within six years of the time that the claim was filed.
The Court of Federal Claims relied on the Federal Circuit's decision in Cyprus Amax Coal Co. v. United States, 205 F.3d 1369 (Fed. Cir. 2000). In that case, the Federal Circuit held that the Excise Clause gave a party an independent cause of action under the Tucker Act, meaning that the party did not have to first file an administrative claim. The Court of Federal Claims allowed the companies to recover based on the Tucker Act, although the court would not allow recovery of interest. Andalex Resources, Inc. v. United States, 54 Fed. Cl. 563 (2002). On appeal, the Federal Circuit refused to revisit the holding of Cyprus Amax and held that the companies could bring their claims under the Tucker Act. Moreover, the appellate court reversed the Court of Federal Claims and held that the companies could recover interest. Clintwood Elkhorn Mining Co. v. United States, 473 F.3d 1373 (Fed. Cir. 2007).
The government sought an appeal from the Supreme Court, and the Court granted a writ of certiorari , and the Court agreed to hear the case. In a unanimous decision, the Court sided with the government, holding that the companies were barred from bringing suit for the taxes covering the period of 1994 to 1996. Writing for the Court, Chief Justice John Roberts focused primarily on the statutory language of I.R.C. 7422, which states that “[n]o suit … shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund … has been duly filed with” the IRS. Commented Roberts, “Five ‘any's’ in one sentence and it begins to seem that Congress meant the statute to have expansive reach.”
The companies tried to argue that the language regarding the I.R.C.'s requirements is ambiguous. The Court, however, flatly rejected this premise. “The companies argue that these statutory provisions are ambiguous …, but we cannot imagine what language could more clearly state that taxpayers seeking refunds of unlawfully assessed taxes much comply with the Code's refund scheme before bringing suit, including the requirement to file a timely administrative claim.”
The companies focused much of their attention on their argument that the Tucker Act establishes an independent cause of action against the government. The Court refused to decide whether this was true, because the Court determined that it did not matter to the outcome of the case. The Court likewise rejected the companies' arguments that claims for refunds of taxes paid in violation of the Export Clause should be treated any differently than other types of refund cases. Accordingly, the Court reversed the Federal Circuit's opinion.
Knight v. Commissioner of Internal Revenue
The intricacies and ambiguities of the Internal Revenue Code keep legions of accountants and financial planners well-employed. The U.S. Supreme Court infrequently wades into tax law to settle disputes within the circuit courts of appeals on how to interpret a particular code provision. Such was the case in Knight v. Commissioner of Internal Revenue,—U.S.—, 128 S.Ct.782,—L.Ed.2d—(2008), where the legal debate was focused on the deductibility of certain trust expenses. The Internal Revenue Service (IRS) ruled that the trust expenses were limited to an amount that exceeds 2 percent of gross adjusted income. The trust administrator argued that the trust was entitled to deduct the entire amount of the expense. The Court, in a case of statutory construction, ruled that the law clearly meant to limit the deductible amount.
Michael Knight was the trustee of the William Rudkin trust, which was established in Connecticut in 1967. In 2000, Knight hired a financial advising firm to provide its expertise on management of the trust. The trust paid the firm over $22,000 that year and its fiduciary income tax return for 2000 reported total income of $624,000. It deducted the entire $22,000 on the return but a later IRS audit found that these fees were miscellaneous itemized deductions subject to the 2 percent floor. The IRS allowed the trust to deduct the investment advising fees only to the extent that they exceeded 2 percent of adjusted gross income . This resulted in a tax deficiency of $4,448. Knight filed a petition in the U.S. Tax Court seeking review of this decision. He contended that under Connecticut state law he was required to obtain investment advisory services and therefore had to pay the associated fees. These fees, he argued, were unique to trusts and therefore were fully deductible under 26 U.S.C. 67(e)(1). The Tax Court disagreed, ruling that this statute only applied to expenses that are not commonly incurred outside the trust setting. Investment advice is purchased by many individuals, so the trust expenses were subject to the 2 percent floor. The Circuit Court for the Second Circuit upheld the Tax Court decision.
The Supreme Court, in a unanimous decision, agreed that the fees were not fully deductible. Chief Justice John Robert, writing for the Court, noted that before 1986 itemized deductions were deductible in full. However, this system was complex and could be used, requiring extensive taxpayer record-keeping for small expenditures. Enforcing this part of the tax code was also taking a toll on IRS resources. The Tax Reform Actof 1986, 100 Stat. 2085, changed this policy, placing the 2 percent floor on miscellaneous itemized deductions for any taxable year to the extent that aggregate of these deductions exceeds 2 percent of adjusted gross income . Investment advisory fees are deductible as miscellaneous itemized deductions, as the Code does note this as of one the categories that is fully deductible. Under § 67(e), trust expenses can be fully deductible if they “would not have been incurred if the property were not held in such trust or estate.”
Knight had argued that this exception established a “straightforward causation test.” The proper inquiry was whether a trust expense “was caused by the fact that the property was held in trust or estate.” In this case the investment fees met the test because the costs were caused by the trustee's obligation to obtain financial advice in compliance with the trustee's fiduciary duties. Chief Justice Roberts was not persuaded. He pointed out that all or nearly all of a trust's expenses were incurred because the trustee has a duty to incur them: “otherwise, there would be no reason for the trust to incur the expense in the first place.” The argument offered by Knight was circular: “Trust investment advice fees are caused by the fact the property is held in trust.” If Knight's position was correct there would have been no need for Congress to insert the exception clause.
The Court ruled that the test adopted by Fourth and Federal Circuit Courts of Appeals was correct. Under this test costs incurred by trusts that escape the 2 percent floor are those that would not “commonly” or “customarily” be incurred by individuals. In this case Chief Justice Roberts noted that it was “not uncommon or unusual for individuals to hire an investment adviser.” Therefore, the trust's financial advisory expenses were not fully tax-deductible.
MeadWestvaco v. Illinois Department of Revenue
The question before the U.S. Supreme Court in MeadWestvaco Corp. v. Illinois Department of Revenue No. 06-1413, 553 U.S.—(2008), was whether and under what circumstances a parent company may use a division as a non-taxable “investment” and thus avoid state tax consequences when the division is sold. An unanimous Supreme Court remanded the case to the Illinois Appellate Court for renewed analysis and determination under U.S. Supreme Court precedent.
MeadWestvaco, the petitioner, was the successor in interest to its wholly owned subsidiary known as the Mead Corporation (Mead), an Ohio company. In 1968, Mead bought Data Corporation. At that time, Mead dealt mainly in paper products and school supplies, and made the purchase because Data Corporation owned ink-jet printing technology that Mead was interested in acquiring. Data Corporation's business at that time also included an information technology component that ultimately developed into Lexis/Nexis, a leader in the field of electronic legal, business, and news research software tools.
In 1994, Mead sold Lexis/Nexis for approximately $1.5 billion and realized just over $1 billion in gain. However, it did not report any of this gain as business income on its Illinois tax return for 1994. Instead, it took the position that the gain qualified as non-business income that should be allocated to Mead's domiciliary state of Ohio, under Illinois's Income Tax Act (ITA)[Ill. Comp. Stat. Ch. 35, § 5/303(a)]. But according to the State of Illinois, after auditing Mead's return, the ITA required Mead to treat the capital gain from the sale as taxable business income. Mead paid the tax, then filed suit in state court.
The relevant provision in the ITA allows the state to tax a non-domiciliary corporation that conducts business in Illinois on business income that is derived from, or “apportioned to,” its business in Illinois. Under the ITA, taxable business income includes income from intangible property, such as a corporation's subsidiaries. However, the “apportionment” referenced in the ITA is subject to constitutional limits of the Due Process and Commerce clauses. Accordingly, income from intangible property is only apportionable if the business and the intangible property are so closely related that they can be considered a singular entity (a “unitary business”). In the alternative, the intangible property must be necessary to the operation of the business (an “operational function”).
The state trial court rejected Illinois' argument that Mead and Lexis/Nexis were a unitary business, but it found that, in the alternative, the gain was apportionable business income, because Lexis/Nexis served an operational function. Mead appealed to the Appellate Court of Illinois. That court upheld the apportionment tax and affirmed the judgment in the state's favor.
But the U.S. Supreme Court concluded that the state courts had “misapprehended the principles that we have developed for determining whether a multistate business is unitary …” The high court vacated the decision of the Appellate Court of Illinois and remanded for further proceedings consistent with prior Supreme Court precedent.
To wit, the Supreme Court had previously held that the Due Process and Commerce Clauses prohibited states to tax “extraterritorial values.” Container Corp. Of America v. Franchise Tax Bd., 463 U.S. 159 (1983). The “unitary business” language came from Hunt-Wesson, Inc. v. Franchise Tax Bd. Of Cal., 528 U.S. 458 (2000), in which the Court held that a state may tax an apportioned share of the value generated by intrastate and extrastate activities of a multistate enterprise, if those activities form part of a unitary business.
Justice Alito delivered the opinion for an unanimous Supreme Court. Because in this case, Mead did business in Illinois, the inquiry shifted from whether Illinois may tax Mead, to what it may tax, wrote Alito. Under the unitary business principle, a state need not “isolate the intrastate income-producing activities from the rest of the business.” Instead, it may “tax an apportioned sum of the corporation's multistate business if the business is unitary.” (quoting from Allied-Signal, Inc. v. Director, Div. Of Taxation, 504 U.S. 768.
Justice Alito concluded that the Appellate Court of Illinois was misguided in applying an “operational function” test. Instead, said Alito, because in this case the “asset” was another business, the state appellate court should have looked for the existence of “functional integration, centralized management, and economies of scale.” Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U.S. 425. This would be the proper examination to determine whether or not the two were a unitary business for tax purposes. Because the appellate court had relied on its operational function test instead, on remand, it should re-examine under the unitary business question, the Court concluded.
Justice Thomas wrote a separate opinion in which he concurred in the results but opined that the Court should refrain from jurisdiction over state tax cases.
Governments need money so they can provide important services to their citizens. Such services can include national defense from foreign threats, police and fire departments, public schools and libraries, health and sanitation systems, roads, and many others. Governments at all levels, including city, state, and federal, charge citizens and businesses for these services through taxes. The raising of funds through taxes is called taxation. Taxes have been raised as long as governments have existed.
In primitive societies, community members supported common services largely through voluntary labor, to build roads and other facilities. In early European history, payment of tribute (forced payments) to leaders, such as feudal lords, for protection was common. With increasing private ownership of property and businesses, taxation was introduced. Taxes assessed by early European monarchies were often harshly, and unequally, imposed. Taxation was a key point of dispute between the United States and Great Britain leading to the American Revolutionary War (1776–1783). Colonists claimed they were being taxed without having any say regarding the taxes forced on them by the mother country. "Taxation Without Representation" began a popular slogan at the time.
Following independence from Great Britain, the nation's Founding Fathers addressed taxation in Article 1 of the U.S. Constitution. Adopted in 1786, the Constitution included the Tax and Spending Clause giving Congress power to "lay and collect Taxes, Duties, Imposts [duties on imported foreign goods], and Excises [taxes on domestic goods], to pay the Debts and provide for the common Defence and general Welfare of the United States." The rise of democratic societies, such as in the United States, required that taxation be more fairly applied in order for taxpayers to cooperate. The growth of trade and commerce led to a more complex taxation system. The change of the U.S. economy in the nineteenth century from agrarian (based on agriculture and farms) to industrial (factories) brought yet new kinds of taxes, and even more complexity including greater difficulty in record keeping and tax collection. Recognizing the importance of taxation to the well-being of the nation, the Court has traditionally interpreted Congress' taxing powers very broadly. Not only does the Tax and Spending Clause give Congress taxation powers, but other parts of the Constitution does also including the Commerce Clause as recognized in the Head Money Cases (1884) ruling. The Commerce Clause gives Congress power to regulate trade between states and with foreign nations and Indian tribes.
Taxation can take many forms. The federal government relies on import (tariffs), excise taxes, personal income and corporate (business) taxes, and Social Security taxes in addition to other revenues. State governments rely primarily on personal and corporate income taxes, sales taxes, and certain fees, such as hunting and fishing licenses. The property tax is primarily used by local governments. Other taxes include estate, inheritance, and gift taxes.
Federal Government Tariffs
Prior to the American Civil War (1861–1865) funding support for the U.S. government came primarily from tariffs. Tariffs are taxes placed on goods that one nation imports from another. Tariffs date back at least to the 1200s when the European Christian Crusades brought increased trade between Europe and the Middle East. Early tariff agreements were struck between Italian merchants and commercial partners in Asia and Africa. With the discovery in 1492 of New World populations and resources by European powers, foreign trade greatly increased. High tariffs were put in place by European countries.
High tariffs charged by Great Britain on goods exported from the colonies was a major factor leading American colonists to rebel against British domination. Shortly after gaining independence in the American Revolutionary War (1776–1783), Congress passed the Tariff Act of 1783. Tariffs were established to protect the newly emerging American industries and to raise revenue for the government, impoverished from the war effort.
The industrialization period of the nineteenth century led to increased production of goods, particularly in the North. The nation became split over tariff policies. Northern states wanted to raise prices of foreign goods through higher tariff rates to promote sales of their own goods. Southern states sought low tariffs since they still imported much of their goods from Britain. The tariff dispute was one factor besides slavery that led to the American Civil War (1861–1865).
Besides raising revenue for the federal government, tariffs also serve to protect U.S. industries from foreign competition. The tariff taxes increases the price of foreign goods, making U.S. made goods more attractive to buyers. By selling more goods, the tariffs encourage increased production by U.S. firms. The U.S. Constitution prohibits tariffs on exports from the United States to other nations.
Tariffs also can serve political purposes, such as protesting the policies of another nation by increasing the prices of their goods into the country. For example, in the 1990s the United States placed high tariffs on Japanese produced goods because of Japan placing strict limits on the amount of U.S. goods going into their country.
International agreements are often signed between nations setting low tariffs, or maybe even no tariffs at all, on each others goods. The United States maintains special tariff agreements with countries it extends most-favored-nation (MFN) status to. Low, preferential, tariffs may also be applied to underdeveloped nations to assist in their economic development.
In addition to tariffs charged on foreign goods sold in the United States, U.S. citizens also may have to pay duties to the U.S. Customs Service for certain goods purchased.
Whereas tariffs deal with foreign made goods, taxes placed on the purchase of domestic goods, goods made within the United States, are called excise taxes. Such taxed items include alcohol, firearms, tobacco, gasoline, and diesel fuel. In 2000, the federal tax on gasoline was 18.4 cents per gallon, on truck diesel fuel 24 cents a gallon. States also add taxes that vary from state to state. Revenues from taxes on gasoline and diesel fuel sales are specially directed to road construction projects. For a long time the United States also had a luxury tax applied to such items such as automobiles. However, the tax has been steadily phased out and will end altogether in 2002.
The most commonly known form of tax in modern America is the tax on incomes, both on individuals and corporations. Taxable income can include wages and salaries, rent, interest earned, and corporate earnings.
The personal income tax was first used in the United States during the American Civil War to pay for war expenses. Passed by Congress in 1862, the tax was repealed (canceled) a few years later. In 1894 Congress brought back the income tax on individuals and companies, assessing 2 percent of income. However, the following year the U.S. Supreme Court declared the tax unconstitutional. The Court ruled in Pollock v. Farmer's Loan and Trust Company (1895) that such a tax would be violating Article I since the revenue gained was not be distributed to services in the states in direct proportion to each state's population as directed by the Article.
Consequently, no national income tax existed until adoption of the Sixteenth Amendment in 1913. The amendment gave Congress authority to levy (collect) taxes on any form of income without the requirement of distributing the funds among the states in proportion to their populations. With its new power, Congress passed the Tariff Act of 1913 creating a tax system for individual and corporate incomes.
Individual, or personal, income taxes are a form of "progressive taxes." The higher a person's income, the higher the percentage of his income is collected for taxes. Therefore, people with higher incomes and a greater ability to pay provide most of the income tax revenue. By the late twentieth century, those with lower incomes paid 15 percent of their income in taxes, the highest incomes paid 40 percent. Corporate income taxes were based on profits and not as progressive as the personal income tax structure.
Social Security and Medicare
In 1935 Congress passed the landmark Social Security Act. The act provides old-age benefits and health insurance, known as Medicare, for people over sixty-five years of age. To fund these government programs, a payroll tax was created. Employers are responsible for paying these taxes instead of the workers. Money is deducted (withheld, subtracted) from an employee's wages before she receives her paycheck. The employers then must equally match that amount of funding from their own funds. The employers pay these taxes directly to the U.S. Treasury. People self-employed (working for themselves) have to pay income, Social Security, and Medicare taxes from their earnings. The tax and spending powers of Congress to withhold money from people's paychecks for retirement benefits was immediately challenged in 1937 after the Social Security Act was passed. The powers were affirmed by the U.S. Supreme Court in Helving v. Davis (1937).
State and Local Taxes
State and local governments are given authority through the Tenth Amendment to raise revenue in a variety of ways. Under the Tenth Amendment, states can claim powers not specifically reserved for the federal government nor denied to the states. Like the federal government, most states also have income taxes. These taxes are charged at a lower rate than the federal government.
Many state and local governments largely rely on sales taxes. Most goods and services purchased are assessed a certain tax level. Because of the sales tax effect on the poorer citizens, some goods considered essentials, such as food, clothing, and medicine, are exempt from the sales tax or are taxed at a lower rate. Property taxes are also a key means of raising revenue. Land and buildings, such as homes, are taxed a certain percentage based on their assessed (estimated) value. Many local governments rely heavily on property taxes to fund public schools.
Corporations and manufacturers are also assessed business taxes by states and local governments. In addition, various stages of production and distribution of goods can be taxed. These taxes add to the value of the final product and increases the costs paid by the purchasers. Also, companies can be assessed franchise taxes, the cost on the privilege of doing business in the state. Companies must also pay taxes to operate state unemployment compensation programs, government insurance established by the Social Security Act of 1935 for those who lose their jobs through no fault of their own. The unemployed receive a certain amount of money weekly for a limited period of time.
State and local governments will also charge set fees to professionals for obtaining a license to practice their profession.
Estate, Inheritance, and Gift Taxes
The federal and state governments also assess different kinds of taxes on money and property passing from deceased persons to their heirs. An estate tax is charged for the privilege of transferring property from people who have died to their heirs. It is assessed on the entire estate before it is distributed. The inheritance tax is paid by each heir for the privilege of receiving property from a deceased. A person pays a gift tax if they decide to give a valuable gift to another person.
The Internal Revenue Codes include federal laws directing how the various types of taxes are paid, whether income, business, or estate. The Internal Revenue Service (IRS), first created in 1862, is part of the U.S. Department of Treasury and responsible for collecting federal taxes. It is called Internal Revenue because it collects tax money from sources within the United States. Perceived abuses of the IRS in collecting taxes led to passage of the Taxpayer Bill of Rights in 1988 which was expanded in 1996. Many states passed similar state laws regarding collection of state taxes. The Taxpayer Bill of Rights gives taxpayers greater ability to question IRS findings and to be represented by lawyers or accountants.
Considerable debate surrounds the tax systems found in the United States. Fundamental concerns about taxation focus on equality and fairness. The burden of taxation must be imposed as equally as possible on all classes of people. This requirement led to progressive rate income tax systems. Higher rates are charged to people with higher incomes. However, the idea of equality of taxation does not mean that all the people must equally to enjoy the benefits of governments services. For example, couples who do not have schoolchildren still must pay taxes to support local schools.
The U.S. federal tax laws had become incredibly complex by the late twentieth century. The amount of time spent by individuals and corporations to compute and pay taxes was estimated to cost billions of dollars each year. Those supporting tax reform charge that the complexity leads to higher rates of tax avoidance with wealthy individuals and companies taking advantage of numerous legal opportunities to lessen their taxes paid. This is considered unfair to those in the middle and lower income levels with less opportunity to decrease their tax burden. Some want to shift a greater tax burden onto corporations, but others argue that these taxes would generally be passed on to individuals through higher prices for goods and services.
Also, many argue that the income tax which includes a tax on interest gained from savings accounts substantially discourages saving. The United States has the lowest saving rate among the western industrial countries. This situation forces corporations to seek loans outside the country. Many also claim that property taxes discourages home ownership. Reliance on property taxes also means wealthier communities have better schools and better government services.
A major push for tax reform forced consideration of alternative means of taxing. One alternative was the flat-rate tax system which would greatly simply the process. All citizens would pay taxes at a set rate and corporations would pay at a lower rate. However, opponents to the flat-tax claimed this alternative would potentially shift a larger tax burden onto the lower income population. Another alternative would be replacing the federal income tax with a national sales tax. This system could encourage saving but again place a greater burden on lower income citizens.
Tax Court System
Article I of the Constitution also gave Congress authority to establish a tax court system. The U.S. Tax Court was originally established by the Revenue Act of 1924. State and federal tax courts deal solely with tax disputes. Such disputes typically involve arguments over the assessment of property values or tax status of certain organizations. Decisions of the tax courts may be appealed to the U.S. courts of appeals and the U.S. Supreme Court.
Tax evasion is a criminal offense under federal and state laws. Prison sentences and fines may be imposed on those convicted. In order to gain criminal conviction, a deliberate attempt to illegally avoid paying taxes must be proven as ruled by the Supreme Court in Spies v. United States (1943). The decision in Sansone v. United States (1969) set further standards for proving criminal conduct.
Suggestions for further reading
Brown, Roger H. Redeeming the Republic: Federalists, Taxation, and the Origins of the Constitution. Baltimore: The Johns Hopkins University Press, 1993.
Brownlee, W. Elliott. Federal Taxation in America: A Short History. New York: Cambridge University Press, 1996.
Internal Revenue Service. [Online] http://www.irs.ustreas.gov (Accessed July 31, 2000).
Webber, Carolyn, and Aaron Wildavsky. A History of Taxation and Expenditure in the Western World. New York: Simon & Schuster, 1986.