THE HABITATION TAX1 BY JOHN BURTON PHILLIPS Additional sources of public income are essential to modern efficient government. This is due to the great demand for increased revenue, and the need of a substitute for the general tax on personal property. The growth of urban population has made necessary additional taxes. A city government is more costly than governments of purely rural communities with their freedom from sewer, water, lighting, and police expenses. The increase of taxation that has to be borne by the city. dwellers falls primarily on property within the corporate limits. In theory, all taxation in modern cities is levied on the real and personal property therein, but in reality, the tax is very largely contributed by the realty. It is well known that personal property everywhere does not contribute its share of taxation. Hence, in the selection of new sources of taxation, efforts should be made to relieve real estate as much as possible from the undue proportion of taxation which it now bears by securing from the owners of personalty the proportion of tax which they ought in equity to pay. The complications in the present method of assessing personal property render evasion easy and justice impossible. The new methods should conform as nearly as possible to the established principles of taxation. The more important of these principles are the following: I. A tax should be levied according to the ability of the taxpayers to contribute. This principle is so obvious that it needs no discussion. The other theories of taxation, such as benefit and sacrifice, seem to have been largely abandoned, and ability accepted as the fundamental principle. 2. Again, a tax should be certain both as to its amount and payment. The amount to be paid should be definitely known both to the taxpayer and to everyone else in the same community. Paper read at the National Conference on State and Local Taxation, Columbus, Ohio, November 12-15, 1907. 3. A tax should be so contrived that its assessment and collection may be made with a minimum of expense. Its levy should be simple, requiring no detailed inquisition into the affairs of the taxpayer, as this will tend to deprive it of public support by affording apparent justification for its resistance. These are the principal canons of taxation laid down by Adam Smith and if carefully followed undoubtedly furnish the basis of an ideal revenue system. As a substitute for the tax on personal property the tax on rentals, or "habitation tax" as it has been called, has been recommended as conforming in large measure to the above principles. This is a tax levied upon the occupiers of residences according to the rental value of the places they occupy. In order to attain substantial justice, the rentals of property below a certain amount are exempt from the tax. This exemption is felt to be necessary because the smaller properties are now bearing far more than their proportion of taxation, and again, a certain amount must be expended for subsistence before any considerable degree of tax-paying ability emerges. In the more recent proposals of this tax it applies only to the rentals of buildings occupied as dwellings. Business properties are exempt. It is felt that such buildings are effectively reached by other kinds of taxes. This tax is not proposed as a sufficient source of revenue. From a financial point of view it is defective in elasticity, as are all taxes levied at a flat rate upon property which does not vary greatly from year to year. It is therefore necessary to provide in some of the other taxes for the variations to be introduced as the fiscal needs change. This should not be omitted, as an inelastic system of taxation by bringing in a surplus of revenue in prosperous years may lead to extravagant undertakings and unwarranted expenditures on the part of the legislators, and it is wise to shield them from the temptations of an overflowing treasury. The habitation tax is brought forward as a supplemental tax to serve as a part of a general system. It is offered as a substitute for the tax on personalty and it is believed to contain features that will make it adaptable to modern conditions and various localities with a minimum of friction. Theoretically, the income tax is regarded as approaching most nearly to the principle of ability, and for a number of years this tax has been expected to furnish the means of escape from the inequalities in the taxation of general property. Increasing study of the abuses inherent in the practical operation of the income tax in those countries where it has become a settled part of the fiscal system has weakened the faith in the efficiency of this tax to reach considerable classes of personal property. When the income tax is applied on the principle of stoppage at sourcetaking the tax out of the dividends before they are paid to the stockholder -it has proven successful. Its greatest defect is in the fact that it must rely upon the declaration of the taxpayer as to the amount of his income derived from investments in notes, mortgages, bonds, and other securities to which the principle of stoppage at source cannot be applied. In the ascertainment of this part of the income, the tax has become subject to abuse. In so far as the income tax is successful, much the same result is now obtained in some of the American states by the use of corporation taxes. Thus, while the practical results of the income tax are secured in the taxation of corporate property, the tax on rentals has been proposed in the endeavor to reach that species of property not effectively reached either by taxes on income or corporations. The expenditure for house rent is generally some indication of the occupant's income. It is true it is not an absolute measure of income, but in a general way, differences in rent tend to approximate diffrences in tax-paying ability. Normal persons are fond of material comforts and luxuries, and an increase in income generally expresses itself at once in larger and more elaborate homes. It is also claimed that the habitation tax reaches funded income and taxes it at a higher rate than income from services, such as the income of lawyers and physicians. In all schemes of income taxation an effort is made to make this discrimination so as to avoid the hardship in taxing income derived from service at the same rate as income derived from government bonds or other permanent investments. The tax on rentals, it is said, reaches income from investments and taxes it at a higher rate than income from service because, in so far as the residence is the index of income, it is 'LEROY-BEAULIEU, Traité de la science des finances, Part I, Book II, chap. vii. |