Principles of rational taxation

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SOCIAL SCIENCE ASSOCIATION.

THE

Principles of Rational Taxation,

at a Meeting of the ^Association,

Prof. SIMON N. PATTEN, Ph.D.

Published by the

PHILADELPHIA SOCIAL SCIENCE ASSOCIATION,
Locust Street, Philadelphia.

THE PRINCIPLES OF RATIONAL TAXATION.

One of the most pressing needs of the present day is an. in-
crease of revenue, by which our city and local governments can
make the improvements desired by all good citizens. The
condition of our great cities is a fair example of the
urgent need of more money for public uses. The streets are
dirty ; the water is bad ; a large part of the pavements need to
be replaced ; the sewerage is deficient ; and last but not least,
the public schools, though improving, are not adequate to the
needs of the city, nor have they that equipment necessary for
their best use. Doubtless there are many citizens who look
upon this lamentable state of affairs with indifference, and who
worry more about a high tax rate than they do about the
miseries which flow from the present deplorable condition of our
city. Yet I hope there are many who take a more rational
view of the situation and who are ready to listen to a plea for
more revenue, if some rational plan is advanced by which it can
be secured.

I use the word ' ' rational ' ' advisedly because the popular
mind has never laid aside those crude notions of taxation which
grew up among our ancestors at a time when taxation was a
form of oppression used by rulers for their personal advantage.
Past systems have been designed to hide the burden of taxation
by placing it where the least opposition would be aroused. At an
earlier period this method seemed a success, and it might still be
a success, if the demand for extensive public improvements had
not required more revenue than the old system of taxation could
furnish without violent opposition. Since we cannot increase
the present tax rate without encountering all the opposition
that new taxes would cause, it seems to me a favorable oppor-
tunity to take up the whole subject in a systematic way. If a
new point of view can be acquired through which a solution of

4 The Principles of Rational Taxation.

this great problem is gained, it will be worth our while to reach
it even if the journey to it leads along a way we dislike to
travel.

Every theory of taxation must be based upon some theory of
the distribution of wealth. Each writer upon taxation starts
with the assumption that the wealth to be distributed to the
factors in production follows some given law. Doubtless many
persons are not conscious of what they assume ; yet if we exam-
ine into their theories some law of distribution will be found,
from which their system of taxation can be developed. In
choosing between these different theories of distribution it is not
necessary to decide in an absolute way upon their truth or false-
ness. The different theories are not really exclusive since each
of them is true, or nearly so, in some stage of industrial progress.
It concerns us much more to ascertain which of them corres-
ponds most closely to the actual conditions by which we are
surrounded in the America of to-day.

To get the key to the distribution of American taxation we
must analyze our own industrial conditions and trace the distri-
bution of wealth into the hands of the various groups of persons
who make up our producing classes. Any solution of the prob-
lems of taxation demands a previous investigation of the lines
along which the results of improved production tend to diffuse
themselves. Where are the increased revenues absorbed ? Who
gets the benefits resulting from all the saving of labor which
has been introduced in the last fifty years ? Until these ques-
tions can be satisfactorily answered there is little hope of solving
the more complicated problems which arise in taxation. If all
this increase of wealth passes into the hands of the general
public without loss from waste or from absorbtion by favored
persons, the burden of taxation rests in a different place from
what it does if the greater portion of it is wasted in useless
competition or absorbed by successful combinations.

I use the term ' ' waste " in a broad way to indicate all those
causes which keep the price of goods higher than they might be
if the sellers made no effort to attract customers. In former
times the sellers of goods remained quiet in their places of busi-
ness and awaited the arrival of buyers. If one store sold cloth

The Principles of Rational Taxation. 5

at a lower price than its competitors, the buyers of themselves
sought out the place and made their purchases. But those
good old days are gone. A seller must now be ever on the
alert to attract trade or his rivals will soon displace him. His
store must be upon a good street. He must pay large sums for
advertising. Agents on large salaries must be sent out to
induce customers to buy his goods. These and many other
expenses must be met by any one who expects to be successful
in trade at the present time. But what is the result upon
prices ? Are not prices in our stores much higher than they
would be if the buyers sought the sellers instead of the sellers
the buyers? Would not sewing machines and organs be
cheaper if the persons who desired to purchase them should
look up the dealer instead of the latter searching carefully all
over the city for them ? The number of dealers in any article
is but a small fraction of the number of buyers, and they can
find the proper store much more easily than the dealers could
hunt up their customers.*

Do not misunderstand me. I do not wish to find fault with
any one or any class of business men. They do what they must
do under the circumstances, and we have no right to find fault
with them as individuals. Still it is proper that we examine the
effect of this grand rush for trade upon the price of commodities
and upon the welfare of the city. If a given merchant does not
use all the familiar means to advance his interests some more
pushing rival \vill steal away his trade ; yet is the trade of the
city as a whole increased by all these efforts to displace rivals ?
Is any more soap, coal, or shoes sold in this city because they are
advertised in the street cars ? Do all the circulars our grocery
men leave at our doors, increase the quantity of coffee and sugar
consumed in the city ? Do the high rents paid for good localities
increase the whole local trade, or does the rent merely indicate
the advantage which one rival for the same trade has over
another ?

A little thought, I think, will show that a large part of these
expenses do not add to the general welfare of the city. If they

* See my "Stability of Prices," page 51 (Publications of the American
Economic Association.)

6 The Principles of Rational Taxation.

are incurred by one of a number of rivals he can gain trade at
the expense of the others. But if they are incurred by all of the
dealers alike no one gets more trade than he would have had
without them. The merchants must all charge a higher price
for their wares to make good this expense and the public have
a burden without a corresponding benefit.

Another form of waste arises from a great increase of retail
stores. Each new store has attractions by which it secures a
share of the trade. Take* the shoe stores of the city as a
sample. Think how thick they are, sometimes several in a
single block. As they" must duplicate the stock of goods,
employ many extra hands and pay rent on many unnecessary
buildings, is it any wonder that the price of shoes is so high.
Notice also the increase of milk and baker's wagons. The con-
tinuous rattle of their wheels on our streets every morning tells
only too well the miles of useless journeying they necessitate.
These causes are at work in nearly every line of retail trade. A.
recent investigation shows that the number of retail dealers in
this country has increased four times as fast as population.

Keeping these facts in mind it is easy to see where a large
part of the increase of productive power has gone. In propor-
tion to their product our factories employ fewer men, but these,
displaced men have been to a large extent absorbed by the
retail trade. The small factory has been closed by its larger
rival, but the owner, or at least some one of his class, has
opened a small store in its place.

The same tendencies show themselves in the wholesale trade.
Each manufacturer or dealer must resort to many costry means
of preserving his trade, which are of no advantage to the ulti-
mate consumer. Each one must do what his rivals do to keep
himself afloat, but the public must foot the bills. Do farmers
get any advantage from the intense rivalry of the firms who
resort to so many costly expedients to sell them their machinery ?
How much do the whole body of commercial travelers, who are
said to cost the wholesale trade $200,000,000 a year, increase
the quantity of goods which are annually sold to the American
people.

This enormous waste is a leading cause of the present ten-

The Principles of Rational Taxation. 7

dency to form trusts or similar combinations. As soon as a
trade becomes united in some organized way the whole body of
these useless expenses can be lopped off, and the resulting
economy is the main source of the increase of dividends. A
legitimate trust is an organization to save waste and it is not
likely to continue long in existence if it tries to raise prices
higher than they would have gone if a reckless competition
had continued. Of course the results of the saving pass largely
into the possession of the trust, yet saving is better than wasting
whoever may get the benefit.

There is, however, besides the waste of competition, another
absorbent of the results of improved production which demands
attention. I refer to the growth of rent both of city and of
country property. Land is a limited monopoly and we must all
compete for its use. The growth of population demanding more
food, raises the value of farming lands, and the aggregation of
thousands of people in our large cities has the same effect upon
the price of city lots. There seems no limit to the rise in the
value of land so long as an intense competition prevents the
capitalists and laborers in our industries from keeping their
share of the increase of productive power. As soon as an im-
proved process is in general use, a change in price or an increase
of waste follows through which the greater part of the benefit
of the improvement passes out of the hands of both employer
and laborer. What is not lost in waste is likely to fall into the
possession of land owners through the increased competition for
farms, houses and stores. The rapid rise of rents in cities and
the enormous increase of the capital invested in mortgages upon
farming lands, indicate to some extent how great has been the
absorption of the results of increased production by the owners
of land and of city lots.*

Having shown how the classes protected from competition

either acquire or waste the increase of our productive power, let

us see if they are as successful in avoiding taxes as they are in

'absorbing increased revenues. If the popular verdict is to be

taken their success is as great in the one direction as in the

* See chapter V of my Premises of Political Economy (Lippincott, Phil-
adelphia.)

8 The Principles of Rational Taxation.

other. This opinion, however, is based more upon a feeling of
opposition to monopolies than upon any careful examination of
the facts bearing upon the case. There are two limits of prices.
The one limit so low that sellers will refuse to part with their
goods if the price goes lower. The other is so high that buy-
ers will stop buying if the price goes above it. It might seem
that a monopoly could ask any price they desired, but this
assumption is not a fact. Where the production is upon a large
scale a large quantit}^ must be sold to make the business pay.
It is more profitable to use the full productive force at a lower
price than to ernplo}^ only a part of it at a higher price. A limit
is thus reached at which the maximum profit is realized and no
intelligent monopolist would desire to risk a higher price. Even
the sugar trust found there was a limit to the price which could
be obtained for sugar, and having asked too much they were
compelled, in their own interest, to reduce the price again. It
is doubtless true there would be a large sale of sugar even if the
price were raised to twelve cents a pound, yet at each succes-
sive rise of the price of sugar above its cost of production, the
quantity sold will be rapidly contracted by the use of other
kinds of food or by substituting other sweets. There is also
great risk that more capital will be attracted to the business
with an over-production and a fall of prices as a result.

In our railroad traffic we see clearly the two limits of price.
In summer when there is competition by water the rates are
forced as low as the cost of the traffic will permit. In winter,
however, when competition by water ceases, the rates quickly
pass to the upper limit. The problem now is to put rates as
high as possible and yet not discourage traffic.

The effect on prices of the modern system of competition
encouraging waste is the same as that of a monopoly or com-
bination. Prices are forced to the upper limit, above which
they could not go without discouraging trade. When the con-
ditions of a business are such that a large expenditure of money
in attracting customers, will give a merchant an advantage
unless his rivals follow his example, the general use of extensive
advertising, traveling salesmen, expensive stores in fashionable
localities raise prices far above the cost of production. The

The Principles of Rational Taxation. 9

•

small dealer who has not the capital to increase his trade by
such expensive means moves his store nearer to the homes of
the consumers, so that the advantage of locality may in a
measure counteract advantages possessed by richer rivals. A
multitude of small stores spring up to profit by the advantage
of locality, and prices are separated still farther from the cost of
production to allow the dealer to pay his rent and secure his
living from the small stock of goods demanded by the locality.

When all these causes get in full operation, and each rival
resorts to new expedients to draw the trade of others to himself,
there is no limit to the rise of prices except at the point beyond
which the people wTill cease to purchase in large quantities. So
we have practically the same limit to the rise of prices for a sys-
tem of wasteful competition as for monoplies. If the}- follow
their own interest monoplies cannot force prices higher than a
system of wraste can. To the public as buyers, the effect on
retail prices is the same under both systems. All is gotten from
the buyer it is possible to do without preventing a sale.

In the leading professions the same influences are at work by
which the price of services are forced to the upper limit. The
tendency of lawyer's fees are not towards the real cost to the
lawyer in time and energy, but towards the point beyond which
people would cease to employ them. And with the doctors the
same tendencies are even more easily seen. A }^oung doctor
could not rely upon cheapness to attract business. He must in
some way get into the good graces of a part of the public, take
an active part in some church, or society, and in other wa}rs get
himself into notice. But all these means of securing trade cost
money, and he must make his bills large enough to get it all
back and leave enough for a good living.

The old formula about competition reducing prices has yet so
strong a hold on the public that the}' do not appreciate the
changes in the business methods which now are in common use.
They think that a multitude of competitors in any trade is a
safeguard to low prices. Yet these rivals find that passive
cheapness brings little trade. Costly aggressiveness brings ten
customers where cheap passivity secures one. Doubtless the
public desire cheapness, but they are willing to pay dearly to

io The Principles of Rational Taxation.

those who aid them in the search. When dealers recognize these
facts and organize their business on an aggressive basis, real
cheapness becomes a thing of the past, and prices, in such a
business, approximate what they would if it were controlled by
a trust or an intelligent monopoly.

There are, then, goocl reasons why we should think of the
tendencies of wasteful competition towards higher prices as
having the same results upon prices, and following the same
laws that monoplies do. When we wish to ascertain the effects
of present economic conditions we will arrive much more nearly
the truth if we think of a multitude of our industries and trades
as monoplies than if we adhere to the old hypothesis that an
intense competition in them brings cheapness. The law of
monopoly governs the price of drugs just as much as it does of
sugar. The retail price has no more tendency to conform to the
lowest cost of their production than the price of sugar does,
under the present trust. The difference is merely that in the
latter case the increased price passes into the hands of the
refiners, while in the former it is wasted by the large number
of persons who get a living by handling and distributing them.

The public think that aggressive competition brings them
cheap goods, because they assume that the reduction of price is
a necessary result of the action of self interest in the sellers.
But the action of self interest may lead a dealer to attract trade
by expensive means as well as by mere cheapness. In which
way his self interest will prompt him to act is determined not
by himself but by the social condition of the people with which
he deals. If the people are easily misled and their standard of
living does not require all their productive power, aggressive
action on the part of the dealer counts for more than mere
cheapness. The real limit of the upward movement of prices is
fixed by the action of buyers and not of sellers. Prices cease to
rise at that point above which the demand of the public would
rapidly fall off. For this reason the upper limit of prices is the
same for aggressive competition as for intelligent monopoly.
The increased net revenue is the controlling motive of both
competing sellers and monopolies. The price is fixed by that
buyer who, if he ceased to buy, would reduce the net revenue
of the seller.

The Principles of Rational Taxation. n

It should also be noticed that this point of view coincides
with the newer doctrines of value which are now receiving so
much attention. The old view that value depends upon cost of
production supposes that the seller and not the buyer fixes the
price. When, however, later writers say that value depends
upon the final degree of utility the cause of the price of com-
modities is sought in the mental state of the buyers and not of
the sellers. Carry the reasoning of the newer doctrine a little
farther than has thus far been done, and the law of prices for
competition becomes a species of the same general law that
operates in the case of monopolies. By accepting the doctrine
that prices are fixed by the buyers, the logic of the situation
requires an economist to put prices fixed by aggressive compe-
tition as governed by the law of intelligent monopoly. Both
the wasteful competition of sellers and the interest of a monopoly
tend to raise prices to as high a point as possible. The action
of the buyers sets a limit to the rise of price and becomes the
controlling element in its determination.

The popular notion that a great fall in prices has followed
improved production is based upon wholesale prices and not as
a sound opinion should be upon retail prices. In many cases
a fall in wholesale prices has been accompanied by a rise in
retail prices. The recent investigation of the Labor Bureau of
Connecticut (1888) is of especial importance upon this topic.
It shows that the retail prices of the leading articles of the food
supply — forming at least a half of the expenses of the average
family — have since 1860 greatly increased. It would seem that
rapid transit would reduce the price of butter, j^et, in fact, its
price has risen fort}7 per cent. Even flour has increased in price
twenty per cent, in spite of the great reduction in the cost of
transportation. With such tendencies at work ought we still
call competition a success and rely upon it to distribute the
benefits of the increase of productive power among those engaged
in production ?

Nor do the actual prices of articles fixed by competition show
any less difference between cost of production and retail price
than do those controlled by trusts or combinations. The public
have a very mistaken notion of the power of monopolies to raise

12 The Principles of Rational Taxation.

prices, and at the same time do not realize the distance by
which the cost to the public is separated from the cost of pro-
duction of those articles whose prices are fixed by competition.
The most successful monopolies like the Standard Oil Company
and the Whiskey Trust have not been able to raise prices at all.
They get their large profits through the saving of waste which
competition caused. Kven the sugar trust has not been able to
keep the retail price more than forty per cent, above the cost of
production, and it is not likely that this price can be long
maintained. Yet there is a multitude of articles whose prices
are controlled by competition with a far greater difference
between the cost to the public and to producers. Coal in
this city has the two costs as far apart. Milk costing the
farmer three cents a quart, sells at our doors for seven. The
cheese for which we pay fifteen cents a pound does not
bring the maker more than six. Tea and coffee where competi-
tion seems especially fierce, get as much added to their first cost
as to sugar. Our farmers would be very thankful if their
machinery could be obtained by as little addition to first cost as
to sugar, and yet there is no end of rival firms advertising
largely, and sending out agents to help them find the cheapest.
Our gardeners would also be pleased with a like result when
buy ing -their seeds, and still a throng of traveling agents scour
the land competing for their trade. A multitude of such cases
arouses but little interest, yet the public" is shocked at the first
appearance of a trust through which they lose a much smaller
sum.

That competition can result in dearness rather than in cheap-
ness is the outcome of our present economic conditions. The
necessary elements in the cost of production are wages and
interest. Prices cannot, for any length of time, fall so low that
wages will be below the standard of life of the workmen, or
interest below the customary rate. If the productive power of
the nation was just equal to the sum needed for the payment
of the necessary wages and interest there would be no surplus
revenue for any monopoly to absorb. The upper and lower
limit of prices would coincide and no fluctuation in prices would
be possible. This state of affairs prevailed in earlier times

The Principles of Rational Taxation. 13

before the division of labor and improved machinery came into
general use, During the present age, however, the standard of
life of the general public has not risen as rapidly as the great
improvements in production would allow. Interest and wages
no longer equal the whole productive power of the community.
After these shares are deducted from the whole produce, there
remains a large surplus revenue which passes into other hands.
It is the presence of this surplus revenue that allows the rise in
prices above the necessary cost of production. The possibility
of higher prices encourages waste and make trusts and combina-
tions a possibility, and the united result of the struggles of the
different producers and dealers is to force prices up to that upper
limit beyond which the public would reduce the quantity pur-
chased. When we know the relation of the standard of life of
the public to its productive power, the whole amount of the sur-
plus revenue, which waste and combinations can absorb, becomes
fixed, though its distribution among the various claimants may
not be known. When this party or that increases its advan-
tage, it secures a greater share, yet as the \vhole surplus rev-
enue is a limited sum the greater success of one party is at the
expense of its rivals rather than of the general public whose
revenue is fixed by their standard of living.*

It has been necessary to discuss as fully as I have done the
whole subject of monopolies and the limits to their power of
influencing the distribution of wealth, so that the direction
along which the benefits of improved production are diffused
may be clearly seen. The key to solving the problems of taxa-
tion lies in tracing the results of improved production into the
hands of those who consume them. The burden of taxation
falls upon those who profit by the increase of productive power.
In other words, the line along which the benefits of improve-
ments flow is the line of least resistence in taxation. This
statement doubtless seems odd yet I hope to make its truth
manifest.

It has been shown that monopolies, or of a system of waste,
affect prices by raising the price of commodities to the upper limit

* See " Stability of Prices," page 44.

14 The Principles of Rational Taxation.

above which the public will cease to purchase, or at least
reduce its purchases to such an extent that the net revenue of
the monopoly will be reduced. If such a monopoly is taxed
how can it shift the burden on the public? It cannot raise
prices to a higher level without reducing its net revenue. As
the price of its goods cannot be raised, the burden of taxation
will fall upon it and cannot be shifted to other parties. The
sugar trust for example, now asks for sugar all the public will
pay. A greater price would not add to their profits. In what
way then could they avoid the burden of a tax if it were
demanded of them by the government ? Nor would an indus-
try where prices were raised by a system of waste be in any
better position. The results of costly aggressiveness in the
search for customers have already pushed prices to their upper
limit. If the public were willing to pay more for goods a
greater aggressiveness among dealers would have already forced
prices higher than they are. The rivals in such an industry
have no power to shift their taxes upon the public because the
limit above which prices cannot go, has already been reached.
To pay the increased taxation they must cut off some of the
waste resulting from their own action and the public get the
benefit of the increased taxation without any cost to themselves.
And the possessors of rent are equally powerless to avoid tax-
ation. From the time of Ricardo most, if not all, economists
have assented to his doctrine that a tax on rent cannot be trans-
ferred to the consumers of agricultural produce. The differ-
ences of situation and fertility upon which rents depend, deter-
mine the rent of each tract of land, and its rent cannot be
increased unless poorer land is brought into cultivation. The
value of city and town lots is determined b}^ their situation and
until the growth of population demands the use of less advan-
tageous situations the rent of such lots cannot be raised. Taxes
on rent therefore form no exception to the general rule applying
to other monopolies. The owners of land share in the increase
of return due to improvements and from this growing return
they must pay the taxes which society places upon them.

All natural monopolies arise from some advantage one class
of producers has over others in the same occupation, or from the

The Principles of Rational Taxation. 15

advantage one mode of conducting business has over all other
modes. The advantage of good land is measured by comparing
it with poor land ; the advantage of a store on a fashionable
street by the disinclination of the people to go out of their way
into back streets to make their purchases ; the advantage of
advertising by the reduced effort the public makes in finding
what they want, by the strength of their curiosity and by their
love for the new, while the advantage of the neighboring store
equals the effort needed to reach some larger center of trade.
In short if we could find a store whose owner neither advertised
or sought for trade in any other way, but who sold his goods at a
slight advance on what he paid for them, we should have a
measure to fix the advantage of all other dealers who resort to
the present expensive means of attracting trade. If more than
the value of these advantages were asked for them by dealers,
the people would resort to more primitive methods of com-
merce. On the other hand the interests of the dealers coupled
with waste of their rivalry cause the public to pay the full
value of these advantages.

These conditions make it necessary for the purposes of tax-
ation to divide the different portions of the whole community
into two classes — those protected from competition by some nat-
ural advantage and those who compete on equal footing with
every one who has the same productive capacity. All who
must compete in the open market are one class in regard to the
return for labor of those who make the same effort. Their
shares in the final distribution tend towards a minimum equal
to their standard of life. This tendency towards a minimum is
the result of the conditions of their environment which make
their numbers so numerous or their industrial qualities of such
a nature that the present industrial world will not give them a
higher return for their productive efforts. The crushing ten-
dencies of competition have their source in conditions so funda-
mental that organized society cannot counteract, or to any
extent modify them. Human nature itself must be developed
and its leading characteristics brought into a greater harmony
before competition will cease to be accompanied by its present
evils. So long as the desire for the economic welfare of society

1 6 The Principles of Rational Taxation.

cannot hold in check the feelings and passions inherited from
earlier times, competition will take from the competing man all
that it can, instead of giving him all that it could. So long as
the opportunities for labor are mainly due to natural conditions
or to the individual efforts of a few persons of superior ability,
the competition of the public for these places will reduce the
return for their efforts to as low a point as the general social con-
dition of the nation will allow. Men in whom the qualities,
needed for industrial success, are not developed cannot create
enough new opportunities for labor where the return is high to
employ the whole population ; and where a part of the. workers
must resort to opportunities for labor when the return is low,
competition takes from those who utilize the better opportunities
for labor all the advantage they possess above the return of
those utilizing the poorest opportunities for labor. Compe-
tition is always crushing so long as a part of the workers can-
not find employment under advantageous circumstances.

If then it be asked why a competing man does not get a
greater reward for his labor, the reply must be that the whole
population cannot find employment in opportunities for labor
with a higher return than he gets. On the other hand, if it be
asked why his reward is as high as it is, the reply must be that
under the present social conditions the population would not
increase if the return were reduced ; and without the necessity
of resorting to poorer opportunities for labor through an increase
of population the return for labor cannot be reduced. In this
way the whole economic environment is the source of the pre-
vailing reward secured through competition and it cannot be
altered without some fundamental change in society.

With this conception of the causes fixing the reward of the
competing man as a basis, let us examine into the burden of
taxation by which so man}7 economists think he is oppressed. If
we could suppose that the only pressure upon the income of
such a man came from taxation, we might suppose that this
burden would have some effect upon his condition. But this
supposition does not conform to the facts. Some pressure from
competition is always present so long as there are differences in
the opportunities for labor which society utilizes, and it would

The Principles of Rational Taxation. 17

have been greater without any taxation if the present pressure
did not prevent a more rapid increase of population than of
opportunities for labor. New taxes cannot permanently add
any thing to the pressure of competition, because population and
opportunities for labor are already so adjusted that a greater
pressure would make the rate of increase of population slower
than that of opportunities for labor ; and as a result of its reduced
rate of increase the return for labor would rise, not fall.

Notice that in my argument there is no assumption that the
individuals of each competing group have the same industrial
qualities, and an equal power to resist the pressure of competi-
tion. I make no use of the economic man of the older econo-
mists. The greater part of the workmen in a trade may be
unable to resist an increased pressure from competition, yet if
a necessary part of the workmen has that power, the wages of
all the workmen will be kept from falling. Wages are fixed by
the most costly part of the labor needed to produce the quantity
of goods needed by the public. Until the increase of the lower
class of workmen entirely drive the better workmen out of a
trade the lower class get the pay of the better workmen, as a
result of the same law which gives the American silver dollar
the value of a gold one.

The pressure of steam upon a boiler is a good illustration of
the pressure of competition upon wages. All over the boiler
except at the safety valve, the pressure of the steam might be
increased. This one point, however, limits the pressure of
steam to a given quantity. Any additional heat finds an escape
through the valve without adding to the pressure of the steam.
Certain individuals are to the men of their class what the safety
valve is to the boiler. They prevent any additional pressure
from competition and thus fix the wages of their fellows.

Notice again that there is no assumption on my part of the
perfect mobility of capital and labor. A nation may be divided
into many non-competing groups, yet the individuals of each
group have'a pressure 'upon them equal to the difference between
the best and poorest opportunities for labor of which they make
use ; and there is also of necessity an adjustment which will
equalize the increase of population and the number of opportu-

1 8 The Principles of Rational Taxation.

nities for labor. Each group has without taxation as great a
pressure from competition as'existing conditions will allow and to
which taxation can add nothing unless the whole industrial
structure is changed. My theory might be called the full pressure
theory of taxation, because it assumes that the general econo-
mic conditions of society press as heavily upon the individ-
uals of each group as it is possible, under existing conditions,
to do ; and any added pressure finds some escape without
increasing this pressure. Each group has a safety valve in its
standard of life which fixes a limit to the crushing pressure of
competition.* The gross amount of taxation, which a nation
can pay, reaches its limit before the standard of life is affected.
Any tax laid upon persons getting no more than their standard
of life must be shifted upon other parties or the national pros-
perity will be so reduced that the tax can add nothing to public
revenues and thus defeat its own end.

For these reasons the one class not protected from competi-
tion is subjected to the full pressure of competition, while the
other class protected from competition will get all the surplus
above the cost of living. The prices of articles produced by the
first class will remain at the lowest limit to which prices can
fall, while that of articles produced by the second class, tend to
rise to the upper limit of prices and this allows them to absorb
the gains from increased productive power. Under these con-
ditions the burden of taxation must fall upon the second class.
This class cannot raise the prices of the articles it produces
because the price is already as high as it can go. The first
class, however, can shift the burden of taxation because they
are subjected to as much pressure upon their incomes as exist-
ing social conditions will allow. A tax must, therefore, raise
the price of articles produced by laborers not protected from
competition, but cannot change the price of articles produced by
any monopoly. So long as the whole burden of taxation is
not greater than the surplus revenue which either passes into
the hands of monopolies, or is wasted by the endeavor of
dealers to supplant each other, this burden falls upon the par-

* See page 51 of my " Consumption of Wealth," (No. 4 of this series )

The Principles of Rational luxation. 19

ticipants in the gains of the monopolies or upon those who
waste national resources in useless competition. The same
causes which give the results of improved processes to the indus-
trial classes protected from competition, force them to give up a
part of these gains when a tax is levied. In other words the
line along which the benefits of improved production flows is
the line of least resistance in taxation and hence indicates where
the burden of taxation rests.

It is plain to be seen that this theory of taxation comes in
direct conflict with the popular opinion upon the subject. A
wrong notion of the power of monopolies strengthens the opinion
that they can always escape taxation by an increase in the
price of the articles they produce. At the same time inherited
prejudices against all taxation lead the public to imagine that
they have no protection from the burden of taxation. This
feeling is so strong that it prevents the introduction of a rational
system of taxation, and even makes difficult any discussion
pointing in that direction. Yet as economic theory has often in
the past come in conflict with popular opinion and finally con-
quered it, so in this case there is hope that its clear presenta-
tion may not be without some influence for the good.

Assuming this theory of taxation to have some degree of
truth, the question naturally arises what application can be
made of it in forming a better system of taxation. A theory is
of little value if it does not furnish a guide to the solution of
some practical difficulties. Of course in the application of this
theory to practice it must be modified by the many conflicting
causes which become prominent in the world about us, yet the
leading characteristics of the new system of taxation ought to
become manifest from the development of the theory alone.

At this time I wish to make two applications of this theory.
First, taxation may be so placed as to give a greater stability
of prices for articles which have lost the natural conditions
which make prices stable ;* and such taxes will not be a burden
upon the public. At the bottom, the cause of the instability of
prices in many of our leading industries lies in the present rela-

* See " Stability of Prices," page 5.

2O The Piinciples of Rational Taxation.

tion of production to consumption. As soon as the price of an
article sinks below the cost of production of any producer the
quantity of the article produced is reduced. At each additional
fall in the price other producers will be affected, and at last the
reduction of the quantit)^ produced will be so great that prices
cannot sink an}^ farther. There is thus a lower limit to the
fluctuation of prices caused by the gradual withdrawal of the
articles from the market through the action of producers. On
the other hand when prices rise, it is the action of consumers
which fixes a limit above which prices cannot go. With each
increase of price some consumer ceases to buy or at least reduces
his consumption of the article, until at last the demand is so
small that any further rise in price will not add to the net profit
of the seller.

Influenced by these conditions prices will be stable if the
price below which the production of an article would be seriously
checked, is the same as the price above which the consumption
wrould rapidly fall off ; suppose if the price of sugar fell below
six cents, a much smaller quantity of sugar would be put upon
" the market by producers, while if the price rose above six cents
the consumption of sugar would rapidly diminish. Under these
conditions the price of sugar would be stable since it could not
rise or fall without affecting consumption or production in such
a way as to bring the price back to six cents. Suppose, how-
ever, that the production of sugar would not be greatly reduced
unless the price fell below five cents, while the consumption of
sugar would not be materially affected until the price rose to
seven cents. Now there is a margin of fluctuation between five
and seven cents within which the action of the producers and
consumers would not determine the movement of the price.
There is merely an upper and lower limit of prices beyond
which they cannot go, but within which other causes besides
the legitimate action of production and consumption must come
in to fix the price. The inability to foresee the course of future
prices now turns industry into speculation and sets in operation
many disturbing causes which retard the growth of industry
and of capital.

If upon an industry suffering from unstable prices a tax be

The Principles of Rational Taxation. 21

levied the stability of prices will be increased. In my illustra-
tion of sugar, if a tax of a cent a pound be levied, the action of
producers in reducing production would begin when the price
fell to six cents instead of at five cents, as would be the case if
there were no tax. Fluctuations in price could not now exceed
one cent as it could not fall below six nor rise above seven
cents. If a tax of two cents were levied the price would be
stable at seven cents, since any rise in price would affect the
consumers while any fall in price would immediately act upon
the producers.

There is no way that prices can be steadily kept at the lower
margin of fluctuation of unstable prices, but a tax can hold
prices firmly at the upper margin and thus free the industry
from the evils of unstable prices. Such a tax \vould not be a
burden upon producers or consumers since it merely absorbs a
quantity of wealth which would go to speculators and to com-
binations, or be wasted by useless competition. It might even
in the end be ?k. source of public gain. With stable prices, the
steady growth of industry would add much to the productive
power of each individual, and the increased regularity in all
productive enterprises would favor the growth of those qualities
in men upon which national prosperity depends.

To secure a stability of prices through taxation, the taxes
must be national. Such a tax upon the products of any one
state would place its industries at a serious disadvantage
without attaining the desired result. The increase, however, of
national taxation is not an evil since in some way we must make
a greater use of it if the revenue needed for local improvement
is adequately supplied. Since the formation of our national
government, the responsibilities of the local governments have
increased much more rapidly than have those of the nation, yet
at the same time the sources of local taxation have increased
much more slowly. The necessity of public instruction, public
parks, good roads, and better sanitation have increased enor-
mously the burden of local taxation, while the increase of
commerce and the intercourse between states and cities make
local indirect taxation inadvisable if not impossible.

Local taxation in its present form has about reached its

22 The Principles of Rational Taxation.

limit. Unless the nation comes in to aid localities in their
development many of the most pressing responsibilities ©f local
government cannot be met. The near future must see either a
re-adjustment of duties between national and local authorities
by which the nation will assume a share of the whole responsi-
bility fully equal to its relative power of taxation, or it must aid
in the development of localities by the distribution of revenue.
In no other way can our government meet the just demands of
our civilization, and be that power for good which its best
citizens expect of it.

The other application of the theory of taxation has no consti-
tutional difficulties in its way, still it runs counter to so many
of our feelings and notions that it has many obstacles to its
adoption. I have in the first part of this paper carefully pointed
out the effect of waste in our retail trade. The tendency is no
longer to seek custom by reducing prices, but to resort to many
expensive methods of attracting trade. In this way retail prices
have been gradually raised above the necessary cost of produc-
tion until they are at the upper limit, beyond which the public
would reduce their demand for its commodities offered for sale.
If a tax were levied upon retail dealers they could not raise
their prices because they now ask all that the public will give.
By taxing them they would be compelled to economize the
waste now lost in their rivalry for customers. Less rents would
be paid for attractive locations ; less advertising used to divert
trade from others to themselves and a smaller number of petty
dealers would be found scattered throughout each community
wherever they can gain a foot-hold. If one-half the small
stores in the city were closed, not only would the community
save the rent on one- half the stores, but the rent of the other
half would be greatly reduced. There would be but little need
to advertise as all the existing stores would have a paying busi-
ness. The stock of goods carried by the whole trade would be
greatly reduced, without affecting its variety, from which there
would be a great saving of capital. Perhaps the greatest saving
of all would arise from the reduction of the force of salesmen, and
from the reduction in the cost of delivering goods. Think of all
these elements of economy in conjunction and an idea can be

The Principles of Rational Taxation. 23

formed of the amount of taxes that could be levied upon retail
dealers without raising the price of goods or putting the public
to any inconvenience.

We are at the present time fortunate enough to have a good
example of the effects of shutting out competition by a reduction
of the competitors in a business. I reter to the effect of the
high license movement upon saloons and their business. There
are now many states and cities which have a high license, but
I have never heard of an instance where it resulted in a higher
price of liquors. And the reason is plain. Under the old sys-
tem, competition did not tend to lower prices. It merely
enabled a greater number of persons to get a living out of the
liquor trade. Through the high license the public is enabled
to secure to itself, without any cost, a revenue which before had
been wasted by competition.

Should the public act in the same way toward the milk trade
the like result would follow. A tax high enough to drive out
a half of our dealers of milk would not raise the price of milk.
The useless duplication of stock, wagons and drivers would be
spared. Instead of having a dozen milk wagons drive by each
door every morning the choice would be limited to half that
number, yet the large trade which they could secure would
enable them to give better milk for the same money. I have
often thought that if there was a trade in the city where a
monopoly would be a public benefit, the milk business was that
one. Could an intelligent trust be formed, they would find it
to their interest to low^er, not to raise the price of milk. The
public would get as much benefit from a half dozen firms com-
peting to carry the mail as they do from having a dozen milk
wagons pass each door, competing to deliver milk.

Perhaps the next best illustration of the waste of competi-
tion is in the retail drug trade. Certainly if there is an article
about which the average man hesitates as to whether the pur-
chase will pay him, it is his medicine. The immense number of
useless drug stores not only doubles the necessary cost of each
article but it reduces the variety and freshness of the stock in a
way most detrimental to the efficiency of the medicines.

The same duplication of stock, the growth of rents and the

24 The Principles of Rational Taxation.

useless increase of salesmen are to be seen in every branch of the
retail trade. Our meat, eggs, butter and groceries are not as
fresh as they might be, if the dealers in these articles were half
their present number. The quiet of our resident streets is dis-
turbed by the rumble of useless wheels used in delivering goods
and by the persistent efforts of hucksters to dispose of their
wares. At every turn ugly advertisements obtrude themselves
into our view and destroy the bfeauty of our streets. In every
household expenditure, we face some useless waste forced upon
us by the costly aggressiveness of those who supply our daily
wants.

Without a complete social reorganization we cannot stop
waste and secure low prices. We can, however, by judicious
taxation of retail trade put into the public treasury a large part
of the present waste. A high license imposed upon retail stores
would close a large part of the useless stores and force the
remaining dealers into more economical methods of business
and largely reduce their rents and number of salesmen. The
reduction of cost and increase of trade would give them higher
profits and still enable them to serve their customers better and
to reduce prices.

Picture our city as it might be if the present productive power
of its people were used to a better advantage. Suppose the brick
and labor used to build a half of our stores had been used to extend
and enlarge our sewers. Suppose three-fourths the men and
horses now wearing out our streets by delivering goods were
put to work improving them. Suppose the larger part of the
space now occupied by our stores were turned into public parks
and the men employed in them were set to work beautifying
these parks, building school houses or digging a canal by which
pure water might flow into the city. Suppose the men engaged
in printing and distributing the great mass of present adver-
tising, were employed in furnishing the public and especially
our school children with cheaper books. Suppose all these and
many other needed improvements were made, could any one
say that the whole labor performed by the citizens of our city
would be any greater than the present system of aggressive
competition requires of them ? Are all the extra persons

The Principles of Rational Taxation. 25

required by our stores any less tired when night comes than if
they were employed in making the city more useful and beau-
tiful to its inhabitants. Would not the unnecessary capital now
absorbed in business and in buildings be fully sufficient to
furnish us with pure water, lovely parks, fine art galleries and
a perfectly equipped system of schools ?

We do not fail to secure these desired objects because of any
lack of productive power of our citizens. There has been a
marvelous increase of productive power during the present age.
Enough men have been set free from our progressive industries
to have secured all of the much needed improvements in the
city. The trouble is it has not been so applied. The growth
of waste has almost kept pace with the increase of productive
power. Instead of any organized effort of the public to use this
increase of productive power in an efficient way, it has passively
looked on while the action of individual self-interest has forced
the increased productive power into channels bringing but little
return to the public. Is it not time for this passive neglect of
public interest to cease ? Can we not by a more rational view
of taxation bring into use a new system which will secure a
greater share of the results of improved production for public
purposes ? Certainly the need of more revenue is so urgent that
we ought to seek light in any quarter even though a few of our
old feelings must be conquered before getting into the light.

THE FOLLOWING IS A LIST OF THE PAPERS READ
BEFORE THE ASSOCIATION.

Those Marked * out of Print, f Not Printed.

i8fi. Compulsory Education. By Lorin Blodget. *

Arbitration as a Remedy for Strikes. I5v Eckley B. Coxe. *
The Revised Statutes of Pennsylvania. By R. C. McMurtrie. *
Local 'Faxation. By Thomas Cochran. *
Infant Mortality. By Dr. J. S. Puny.

1872. Statute Law and Common Law, and the Proposed Revision in Pennsyl-

vania. By E. Spencer Miller, f
Apprenticeship. By James S. Whitney.
The Proposed Amendments to the Constitution of Pennsylvania. By Francis

Jordan.

Vaccination. By Dr. J. S. Parry. *
The Census. By Lorin Blodget. *

1873. The Tax System of Pennsylvania. By Cyrus Elder. *

The Work of the Constitutional Convention. By A. Sydney Biddle.
What shall Philadelphia do with its Paupers ? By Dr. Isaac Ray.
Proportional Representation. By S. Dana Horton. *
Statistics Relating to the Births^ Deaths, Marriages, etc., in Philadelphia.

By John Stockton- Hough, M. D.

On the Value of Real Scientific Research. By Dr. Ruschenbergcr.
On the Relative Influence of City and Country Life, on Morality, Health,

Fecundity, Longevity and Mortality. By John Stockton Hough, M. D.
iSjj.. The Public School System of Philadelphia. By James S. Whitney.

The Utility of Government Geological Surveys. Professor J. P. Lesley.

77/(? Law of Partners/tip. By J. G. Rosengarten. *

Methods of Valuation of Real Estate for Taxation. By Thomas Cochran.

The Merits of Cremation. By Persifor Frazer, Jr.

Outlines of Penology. By Joseph R. Chandler.

1875. Brain Disease and Modern Living. By Dr. Isaac Ray. f

Hygiene of the Eye, Considered with Reference to the Children in our

Schools. By Dr. F. D. Castle.

The Relative Morals of City and Country. By William S. Pierce.
Silk Culture and Home Industry. By Dr. Samuel Chamberlaine.
Mind Reading, etc. By Persifor Frazer, Jr.

Legal Status of Married Women in Pennsylvania. By N. D. Miller.
The Revised Status of the United States. By Lorin Blodget.

1876. Training Nurses for the Sick. By John H. Packard, M. D.

The Advantages of the Co-operative Feature of Building Associations.
By Edmund Wrigley.

The Operations of our Building Associations. By Joseph I. Doran.

Wisdom in Charity. By Rev. Charles G. Ames. *
iSff. Free Coinage and a Self -Adjusting Ratio. By Thomas Balch.

Building Systems for Great Cities. By Lorin Blodget.

Metric System. By Persifor Frazer, ]r.
1878. Cause and Cure of Hard Times. By R. J. Wright.

House-Drainage and Sewerage. By George E. Waring, Jr.

A Plea for a State Board vf Health. By Benjamin Lee, M. D.

The Germ Theory of Disease, and its Present Bearing upon Public and

Personal Hygiene. By Joseph G. Richardson, M. D.
i8jq. Delusive Methods of Municipal Financiering. By William F. Ford, f

Technical Education. By A. C. Rembaugh, M. D.

The English Methods of Legislation Compared with the American.
By S. Sterne.

Thoughts on the Labor Question. By Rev. D. O. Kellogg.
On the Isolation of Persons in Hospitals for the Insane. By Dr. Isaac Ray.
Notes on Reform Schools. By J. G. Rosengai'ten. *
fSSo. Philadelphia. Charity Organization. By Rev. Wm. H. Hodge.

Public Schools in their Relations to the Community. By James S. Whitney.
Industrial and Decorative Art in Public Schools. By Charles G. Leland.
Penal and Reformatory Institutions. By J. G. Rosengarten.

1881. Nominations for Public Office. By Mayer Sulzberger.

Modelling for the Study of Human Character. By Edward A. Spring. f

1882. Municipal Government. By John C. Bullitt.

Result of Art Ediication in Schools. By Chas. G. Leland.
Apprenticeship at it Was and Is. By Addison B. Burk.

1883. The American Aristocracy. By Lincoln L. Eyre.

A Plea for a Neiv City Hospital. By Thomas W. Barlow.
Some Practical Aims on School Hygiene. By l)r. Lincoln, j-
The Pending School Problems. By Professor M. B. Snyder.
Municipal Government. By Wm. Righter Fisher.
Social Condition of the Industrial Classes. By Lorin Blodget.

1884. Progress of Industrial Education. By Phillip C. Garrett.
A Plea for Better Distribution. By Charles M. DuPuy.

Formation of Public Libraries in Philadelphia. By Lloyd P. Smith, -j-
Best Means of Regaining Health. By Dr. Walters, f
Milk Supplies of our Large Cities, etc., etc. By J. Cheston Morris, M. D.
1883. Alcoholism. By A. C. Rembaugh, M. D.

Sanitary Reforms in Large Cities. By Dr. Leffmann. f
Sanitary Influence of Forest Growth. Dr. J. M. Anders.
Outline of a Proposed School of Political and Social Science. By Edmund
J. James, Ph. D.

1886. The Organization of Local Boards of Health in Pennsylvania. By Benj.

Lee, A. M., M. D., Ph. D.
Manual Training a Vahiable Feature in General Education. By C. M.

Woodward, Ph. D.

The Gas Question in Philadelphia. By Edmund J. James, Ph. D.
Trade Dollars : The President's Power, etc., etc. By Dr. James C. Hallock.
The Balance of Power between Industrial and Intellectual Work. By Miss

M. M. Cohen.
Wife Beating as a Crime, and its Relation to Taxation. By Hon. Robert

Adams, Jr.

Defeat of Party Despotism. By Rev. Dr. Leonard W. Bacon, f
Land and Individualism. By Kemper Bocock. j-

1887. Chairs of Pedagogics in otir Universities. By Edmund J. James, Ph. D.

1888. Joitrnalists : Born or Made. By Eugene M. Camp.

1889. Industrial Education in Europe. By L. W. Miller.
Concerning Trusts. By Prof. Robert Ellis Thompson.

Ballot Reform Essential to Free and Equal Elections. By Chas. C. Binney.

Indians of Alaska. By William Righter Fisher.

Methods of Rational Taxation. By Simon N. Patten, Ph. D.

Prison Reform. By Hon. Francis Wayland, LL. D.

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