An Endowment for the State
I
THE American people display a remarkable aversion to thought on matters pertaining to the income and outgo of the public treasury. Customs and internal revenue, income and corporation taxes, are types of the subjects we prefer to have discussed out of our hearing. It is enough that we must pay the taxes. Among the immunities and privileges guaranteed to us by the Constitution are surely to be found freedom from the din of financial debate, and the right of ignorance concerning public ways and means.
It is true that at various periods in our history great popular interest has been aroused by proposed reforms which were essentially financial. Such interest was excited by Alexander Hamilton’s project for a revenue system upon which national unity might be based; by Henry Clay’s plan of a tariff that would establish the economic independence of the nation; by Henry George’s scheme for extirpating poverty and privilege at a single stroke. It was not, however, the financial logic with which these plans were wrought out that commanded the popular attention. When have we ever heard of popular enthusiasm for that most logical of all financial projects, a ‘ tariff for revenue only’? Hamilton and Clay and George wrought their miracles through a common device: the translation of their proposals into moral terms. And we may be assured that no financial programme of the future will excite great zeal in the American people unless it is subject to moral translation. However practical we may be in our private lives, in our public concerns we require the support of an ideal.
To the casual observer the present financial situation in the United States appears to be ethically colorless. One who reads the signs of the times must, however, foresee that the subject of public revenue will, in the near future, assume the vestments of a moral issue. The spirit of social justice is abroad. At present, to be sure, this spirit concerns itself with ends, not with means. The children of the poor must be fed and clothed and trained for life and work; the sick and the maimed must be nursed and solaced; and the aged must be restored to the serene dignity of old time, when gray hairs and pauperism were not, as now, substance and shadow. Such claims upon society were indeed made generations ago, but only by isolated reformers and philanthropists, whose sanity was questioned by their contemporaries. To-day they are presented by legions of men, among whom are numbered those who are accounted the sanest and most practical of us all.
The social demands upon government have already found partial recognition in the legislation of almost all the countries of Europe: Germany, France, England, the lesser nations, and even Russia, are taking up their social burdens one by one; and there is no record of such obligations as repudiated, after they have once been assumed. We are not more cynical than the nations of Europe; if we lag behind at present, we shall none the less, in another generation, be found in the forefront of the movement.
Social justice, however, is not to be had without cost. We have never attempted to number our destitute children, the sick and the wounded in our industrial army, our aged workingmen and workingwomen who, after a life of toil and sacrifice, are forced to eat the gritty bread of charity. If we did number them — and did no more — a curse of God would perhaps fall upon us, and deservedly. But when once we realize the gravity of the problem, we shall not be slow to assume the moral obligations which rest upon us. What the financial burden of these obligations will be we do not know, but it is a cautious surmise that it may overbalance all the other costs of our federal government combined. Within a third of a century, then, the nation will probably be confronted with the task of doubling its revenues.
It is not an easy matter, even at present, to procure adequate public revenues. Until recently the federal government appeared to enjoy inexhaustible financial resources. But four years ago we found it necessary to supplement the customs and excises with the somewhat onerous corporation tax; and now we have a still more onerous income tax. Further development of federal taxation is likely to impair, in some measure, the sources of slate and local revenues.
The local governments are in worse case; many of them are now levying taxes very nearly up to the limit of tolerance of the tax-paying public. By readjustment of burdens, to be sure, some increase in the tax revenues of the local governments is possible, but it is doubtful whether by such readjustment we can do much more than make provision for the expansion of ordinary governmental expenditures. Legally, the power of taxation is unlimited; but practically its limits are very narrow indeed. This is why every one who anticipates a great development of expenditures for the purposes of social welfare, is seeking new sources of public revenue. And such a search must inevitably result in a criticism of our system of distribution, from a moral as well as from an economic point of view.
II
In periods of serious and unfavorable environmental changes, every organism tends to revert to an ancestral type. To this rule, human institutions are not exceptions. The hardships of early-nineteenth-century industrialism aroused in the minds of men an eager zeal for the establishment of communal institutions resembling the social organization of primitive man. Similarly the growing burden of taxation has resulted in a sentiment in favor of the creation of revenue sources practically identical with those of the mediæval state.
The mediæval financial system, it is well knowm, was based upon the revenues from landed domains. The royal estates provided for the private expenditures of the prince and his household, including many of the high officers of the state; the landed domains of the vassals of the prince supported the expense of the military organization and the administration of justice; other landed revenues were assigned to the Church and to public charity, to universities and hospitals. In Russia the public domain is still an important element of finance; but west of Russia only vestiges of it remain, in the national forests and wastes, and in various communal landed holdings. Such holdings are insignificant as elements in the financial system of progressive states; but under the pressure of the growing burden of taxation they are beginning to exert a powerful influence upon the popular imagination. They seem to point to a solution of our problems. Let us revert to the mediæval financial order and reconstitute our public domain. This is the impulse which, in last analysis, gives strength to the movement for land nationalization.
Such tendencies to reversion are a natural accompaniment of the spontaneous efforts of the organism toward a new adjustment. They never can be fully realized, but they can aid in shaping the new order. The nineteenth-century experiments in communism were failures; primitive communism will never return to the world. But they helped to deliver humanity from the moral doctrine of laissez-faire, a doctrine branded ages ago as the philosophy of Cain.
The assumption by the group of responsibility for the welfare of its members is approaching realization, but in a way not dreamed of by the Communists. There are excellent reasons for believing that a state with its revenue system based upon a landed domain would be a failure. It does not, however, follow that a policy of state endowment is fundamentally unsound. What does follow is that the modern state, in seeking an endowment, must choose from among the numerous current sources of income those which are most appropriate to its purposes.
III
One of the most remarkable tendencies in modern economic life is the segregation of productive property into two classes: that which yields a fixed income, and that which gives claim to an income that is uncertain, contingent. Thus the property right in a piece of land is often divided between the mortgagee and the owner of the equity. The mortgagee receives his income, whatever the ups and downs of the enterprise, while the owner of the equity must content himself with an income that is dependent upon the success of the year’s operations. Where real estate is let under long leases to persons who are financially responsible, the rent assumes a stability not unlike the income of the mortgagee, and the tenant’s interest in the property assimilates itself, economically, to that of the owner of a real-estate equity. The distinction appears most clearly of all in the division of income rights in corporate earnings into interest on bonds and dividends on stocks. Even the rights to the public revenue are divided between the state and the holder of public obligations. The sovereign state itself is forced to bestow upon its creditors the most certain part of its income, and content itself with income that is in some measure contingent.
This process of differentiating a productive property into its kernel of certain income and a husk of contingent income is of comparatively recent origin. In the late Middle Ages there were certain money charges settled upon land, but their volume was insignificant. The process first gained head with the formation of public debts, in the seventeenth and eighteenth centuries. Since that time the differentiation has proceeded apace. In some fields of enterprise, the tendency is held in check by law, as in banking; in other fields, by reactionary traditions and the survival of cumbersome institutions of an earlier epoch, as in agriculture. In spite of all restrictions, however, the mass of rights to certain income appears to gain steadily upon the mass of rights to contingent income.
It would be difficult to estimate the volume of rights to fixed income now existing in the United States. This volume cannot, however, be less than one tenth of all our capital values, that is, between twelve and fourteen billions. By devices well known to practical financiers, such, for example, as the creation of investment institutions holding so wide a range of uncertain securities that unanticipated losses are balanced by unanticipated gains, the volume of fixed income rights could easily be increased to twenty-five or thirty billions, representing an annual income falling between one thousand and fifteen hundred millions.
IV
Rights to contingent income are usually what we have in mind when we defend private property against socialistic attacks. Private ownership, we say, increases the productivity of wealth. This is not necessarily true of private property in government consols, in corporation bonds, in long-term mortgages, or in leased estates. The owners of such property are relieved of practically all concern in the management of productive operations. It is the tendency of modern financial institutions, seconded by governmental regulation, to remove whatever insecurity still attaches to such investments, and thus to render still more remote the interest of the investor in the course of wealth production.
For the protection of contingent property incomes, on the other hand, there is need of the watchful eye of private interest. One whose fortune consists in the equity in a bonded enterprise must be constantly on the alert lest his income be lost through mismanagement. He it is whose interest requires him to make the enterprise as fruitful as possible, and thus to serve the public well.
Again, the interest in private property exercises, under our system, the important function of distributing the industrial resources of the country to the several industries. This distribution of resources, however, is the result of an endless series of experiments; and the fruits of the successful experiment are all enjoyed by the claimant of contingent income, as the costs of experiments that fail are borne by him. If the United States Steel Corporation develops a new branch of export trade, it is the stockholder who will gain the profits or bear the losses from the venture. The bondholder will neither gain nor lose.
The income from private property is often defended as a reward of enterprise. Enterprise obviously exists only where the exercise of discretion is required. Very little discretion is demanded from the holder of the title to certain income. New York City bonds yield up their fruits with equal readiness to men who work and to men who play; to shrewd men of affairs and to ladies of a sheltered life; to persons who reside in New York and to persons who reside on the Riviera. Not so with the fruits of a factory or a shop or a farm. Let the owner’s eye blink, and some of these fruits are gone.
In short, were we not already accustomed to it, we should find ground for astonishment in the fact that the rights to fixed incomes are still in private hands. We have not nationalized stores and factories, mines and railways, and for the excellent reason that most of us believe that such properties are better managed in private hands. Why have we not nationalized consols and bonds and realty loans? There is no question as to the competence of the public authorities to manage such forms of property. And that these are the natural elements from which to constitute a new public domain is attested by the fact that there is, even now, an unmistakable drift of such property toward quasi-public institutions — hospitals, universities, insurance reserves, and the like, paralleling the mediæval drift of landed property toward the Church. There is not the least complaint that such properties are mismanaged, although their control is commonly lodged with disinterested trustees. And even where the trustees have not been wholly disinterested, as in the case of the life-insurance companies a decade ago, mismanagement of property has not developed into a serious evil.
V
The same economic forces that have rendered the life of the worker insecure, and hence have imposed upon society the duty of succoring him, have also segregated from the mass of productive property a fund of wealth yielding a fixed and certain income. The income yielded by this fund would be abundantly adequate to the support of the social obligations that the state must assume. Of this fund it may be said that its essential function is distributive, rather than productive; and therefore it is more appropriately destined for public than for private uses. It is, however, still in private hands, and the practical question which arises is, how can it be transferred to the possession of the public?
Men with socialistic leanings will find a simple solution for this problem: expropriate the private owners, on the ground that all property is robbery. Men who have been trained to the Single-Taxer’s mode of reasoning will hardly hesitate in accepting the same solution. Much of this property — and indeed a considerable share of every form of property — has originated in privilege, if not in force and fraud. The fact that all productive operations would go on without disturbance if the income from this fund were covered into the public treasury, instead of enriching private purses, should be decisive from the point of view of SingleTax logic.
But confiscation of property, unless it is universal, as the Socialists would have it, is properly reserved to itself by the state as a penalty for unlawful acts; and it would be absurd to say that illegality attaches to any form of property which has been established by the state and recognized by it. It would be equally absurd to say that the moral claims of the holders of one class of property are inferior to those of the holders of property of another class, since all property is acquired with a sole view to private gain, not to public service.
In the course of history the sphere of private property alternately expands and contracts. In Russia a reform required by the times is the alienation of the public landed domain; and this reform, manifestly, should be effected through sale at a fair price to private persons. A reform that will no doubt be required by the industrial state of to-morrow will be the absorption by the public of a large share of the sources of fixed income. And this can be effected only through purchase at a fair price from private persons.
If, however, it is granted that the state may not acquire its endowment through confiscation, does it not become impracticable for the State to acquire an endowment at all? That this is a common belief is indicated by the contemptuous rejection by land-nationalists of the proposal of compensation to private owners. Our present revenue systems are barely adequate to current need. How then are we to stretch them sufficiently to provide means for the acquisition of a vast fund of income-yielding property?
VI
There is one element in our modern revenue systems which is still capable of great development, but. for which an appropriate use has not yet been found. This is the inheritance tax. Inheritance taxes are levied in almost all the countries of Europe, and in many of the states of our own Union. The revenue from such taxes, like that derived from other imposts, is applied to the current needs of the state. There appear, however, to be good reasons why the inheritance tax should not be used as a means of meeting current expenditures. Other taxes are, for the most part, paid out of the annual income of society; the inheritance tax is paid out of its capital.
Moralists have universally condemned the private heir who squanders his inheritance instead of keeping it intact, to yield a permanent income. But when the state constitutes itself a coheir, as is the case when it levies a tax on inheritances, it follows the example of the unthrifty heir. This waste of capital may seem to be an altogether negligible matter in a country where accumulation is rapid. Our national wealth is increasing now at the rate of $5,000,000,000 yearly, while the estates which pass through the probate courts can hardly amount to much more than $4,000,000,000. Even a heavy tax on such estates could not check the progress of accumulation, however wastefully the proceeds of the tax might be employed. In a country in which the volume of wealth increases slowly, if at all, as in France, the wasteful use of a heavy inheritance tax might easily result in a progressive decrease in the national capital. And every modern country will eventually reach a point where the tendencies toward accumulation are evenly balanced by the tendencies toward a higher standard of living. When this point has been reached, any tax which dissipates the national capital will work manifest injury to society.
It has indeed been urged that the levy of an inheritance tax makes possible an equivalent relief from other forms of taxation, and hence gives opportunity for new savings to counterbalance the old savings dissipated by the tax. But this argument will not appear cogent to those who realize that the accumulation of capital is chiefly the work of the few, not of the many, and that relief from the taxes which fall upon the many, leads not to increased savings, but to a rise in the standard of living. We are justified in regarding sums collected through inheritance taxes and appropriated to current expenditures as practically a net deduction from the national capital. And a reduction in capital means deterioration of the whole mechanical equipment of society, with consequent loss in efficiency and general impoverishment. Even a slight, slackening in the rate of accumulation is to be accepted only if there is no way of avoiding it.
VII
In spite of its unthrifty character, the inheritance tax recommends itself so strongly to the sense of justice that it is making steady progress throughout the civilized world. Beginning with trifling burdens on legacies to strangers and inheritances of heirs remote in kin, it gains in popularity, and places its burdens upon nearer heirs, and finally upon direct heirs, retaining, however, discriminations in rates against the remote. Then it borrows the spirit of the democratic movement of the age and devises heavier burdens for the large estates than the ordinary estate could well bear. In the German Empire the state appropriates one fourth of a very large estate inherited by a distant relative or bequeathed to a stranger; in Italy, over one fifth; in France, almost a fifth; in some of our own states, as much as an eighth. It would be idle to suppose that the inheritance tax has anywhere reached the limit of its development; in the United States it is only at the inception of its course. That the progress of the tax lags behind the spirit of the times is attested by the hundreds of millions in bequests to public and semi-public institutions — an inheritance tax self-imposed in default of a law imposing it.
The inheritance taxes now levied in Great Britain, ranging from nominal rates on moderate fortunes falling to direct heirs, to heavy rates on large fortunes falling to remote heirs, take for the public about six per cent of the wealth passing by death. Similar rates levied in the United States would probably represent as high a percentage, since the aggregation of wealth in large estates appears to be as marked here as in England, and since the American family is certainly not more stable than the British, and hence direct heirs are not more certain. Six per cent on $4,000,000,000 would yield a revenue of $240,000,000. Suppose that we allow $40,000,000 for the inheritance taxes now levied by the States: we shall still have $200,000,000 added to our ordinary federal revenues. There is, furthermore, no reason why we should not develop the tax to a point where it will yield twice this revenue, provided that we can liberate it from the vice of capital-wasting.
Twenty years ago, Spahr estimated that one half the wealth of the United States consisted of fortunes of over $50,000. This estimate was regarded as radical at the time, but would be accepted as very conservative now. We may assume that the same proportions hold for estates passing by death, although there are reasons why this assumption should be regarded as excessively conservative. Now a graduated tax averaging five per cent on estates under $50,000 would work hardship to no one. It would yield $100,000,000. A graduated tax averaging 15 per cent on estates above $50,000, would be entirely reasonable, and would yield $300,000,000. It is unnecessary to dwell longer upon this phase of the question, as there are few who would deny that a revenue of $400,000,000 could easily be raised in the United States by a federal inheritance tax, if this were regarded as socially desirable.
Let us assume, then, that the United States levies an inheritance tax yielding $400,000,000 annually, and invests the proceeds in bonds, mortgages, etc., the annual income of which is applied to the support of gradually developing social services. If the wealth of the country remained stationary, the public endowment would, after thirty years, amount to twelve billions of dollars. At the present rate of increase, the wealth of the country will double in a little over twenty years; and this means that the yield of the inheritance tax would steadily increase. Even if we allow for some slackening in the rate of accumulation, the tax would be twice as productive after thirty years as at present. On this assumption, the public endowment at the end of a generation would be over twenty billions, a sum of wealth capable of yielding an annual revenue of $800,000,000. Whether this revenue would be adequate to the support of the social needs of the time or not, is of course something that we cannot tell with certainty. A social insurance scheme as liberal as that recently adopted by Great Britain, would cost the United States not more than $150,000,000 at the present time. If we make all due allowance for increasing liberality of provision, it appears none the less plausible that all reasonable needs of a generation hence would be covered by $800,000,000.
The objection may be raised that the sources of fixed income, now in private hands, do to a certain extent subserve a public purpose. As savings-bank investments they represent a stimulus to thrift; as investments of insurance companies, they provide that security without which large classes would be exposed to grave risks from the death or disability of breadwinners. Securities in private hands also are frequently little more than a reserve against untoward chances. Accordingly it would be highly undesirable to assign all such income-sources to the public.
It has already been indicated that we possess means for greatly increasing the volume of fixed-income sources. At present the volume is limited chiefly by the demand; the appearance of a new demand, on the part of a public investment agency, would merely give an impetus to the segregation of fixed from contingent income. There is no reason for fearing that the volume of secure investments will ever fall short of all legitimate needs, private or public. Even if the progress of accumulation should be arrested, and the national endowment should begin to absorb an increasing proportion of the social wealth, the fund of secure investments would probably increase proportionately. For a decline in progress of accumulation is an indication of increasing economic stability, and such a tendency toward stability implies less serious fluctuations in contingent income, or, what amounts to the same thing, a larger proportion of fixed-income sources.
The assumption by the public of the rôle of an investor would nevertheless have a tendency to raise the price of stable investments and hence to reduce their returns. In so far it would give a motive to all who are capable of taking an active part in business to release their funds from such investments. Thus the fixed investments would be set aside for public purposes, not by the harsh method of prohibition of their private possession, but by an automatic process in the field of investment values prejudicial to the interests of no one. No private person would need to surrender his city or railway bonds; but the condition of the market would make it to his interest to do so, if he had even a moderate capacity for active business affairs.
VIII
Possession by the state of an endowment so vast would doubtless seem to many to involve serious political dangers. At the very outset the state would have funds to invest amounting to $400,000,000, and these funds would steadily increase. If investments were confined at first to the obligations of the state itself and its various subdivisions, five or six years would suffice for acquiring the entire existing volume of such obligations. The state would be forced to enter upon the field of private investments. In its choice of such investments it is highly probable that the state would not invest its funds with a view to financial return alone, but would use its new powers to influence the course of industrial development. It might, for example, give a preference to agriculture over industry, or to the small enterprise over the large; it might grant loans to workingmen desiring to erect dwellings, while withholding them from men of wealth desiring to erect office-buildings. That such a spirit would be likely to determine governmental distribution of investment funds is not ungrounded surmise. In Germany a large part of the social-insurance funds is actually invested in such a way as to further social, as well as financial, ends.
Exception might properly be taken to an investment policy partly controlled by social motives, if there were anything sacred in the unmixed financial motive, and if that motive did, as a matter of fact, rule the whole conduct of existing private financial institutions. Every one, however, is familiar with the foreign loan designed to serve a political purpose. In domestic financiering productiveness and security are not by any means the sole criteria upon which decision is made to extend support to an enterprise or to withhold it. There is not the least doubt that finance is often a means of industrial control; or that discriminations are frequently made between competing bidders for funds. In private financiering, however, discriminations are most likely to favor the large enterprise as against the small, industry as against agriculture, and business construction as against the construction of dwellings. That public financiering would have the opposite tendency is accordingly a strong argument in favor of its introduction.
IX
Those who oppose every extension of the powers and activities of the state would naturally regard a public endowment fund as dangerous for another reason: that it would provide the means necessary for ambitious public undertakings, such as nationalization of railways or municipal ownership of public utilities, and hence would trench upon the field of private enterprise. Opposition to public enterprise as such is, however, anachronistic. So long as government was removed from popular control, and, in a sense, alien to the general interest, as under the absolute monarchy, every extension of governmental enterprise was dangerous, since it strengthened the powers of an existing tyranny. With the state subject to democratic control, there can be no valid objection to a policy of public enterprise in itself. Rational opposition to such a policy can be based upon only one ground, the relative inefficiency of public enterprise.
Public industries are indeed frequently mismanaged, and it may be taken for granted that the disinterested character of public management will produce results technically less satisfactory than those of private enterprise at its best. It is, however, not merely technical inefficiency that weighs against public enterprise. Its most serious handicap is the popular doctrine that a public enterprise should not be conducted with a view to profit. This doctrine is unexceptionable if it means that the public may often content itself with an immaterial return, diffused throughout society, such as may be assumed to arise from public sanitation or from general education. The doctrine is vicious when it is extended to services that confer a concrete monetary gain upon limited classes of individuals. A city which should provide rapid transit free of charge for suburban dwellers would not greatly improve the condition of the poorer classes for whose benefit alone such a policy might justly be adopted. The policy would redound rather to the advantage of holders of suburban lands. An irrigation scheme conducted without profit is either a wasteful scheme, or one which benefits particular landholders at the public expense. The capital supply of the world, like the land supply, is limited; hence, unless wastefully employed, it will yield a profit. For the state to remit profit on capital employed by it, is merely to bestow unearned gains upon privileged classes. A system of railway rates designed to yield no profits would be one of the most fruitful of all devices for robbing the whole public for the benefit of the few. So long as this principle fails to secure general recognition, public ownership is almost certain to be wasteful and destructive to the general interests of society.
With a policy of state endowment systematically carried out, the public would look askance at an unproductive employment of the national capital. Especially would this be the case if the revenue of a public endowment were assigned to a service so widely distributed as social insurance. All those receiving old age and invalidity pensions, all those receiving sickness relief, or expecting to rely upon it in case of need, together with all their relatives and friends, would throw the weight of their influence against a wasteful administration of public endowment funds. And this means practically all the members of the poorer classes — five sixths of the population.
Under these conditions, it is not at all certain that the existence of public funds would give a stimulus to government ownership of industries. Broad and vague considerations of public policy would not be granted undisputed sway in such matters, as at present. A statesman proposing a policy of national ownership of railways would be forced to demonstrate that such a policy would be more productive of revenues, and no more fraught with uncertainty, than investment of the same funds in first mortgage bonds of corporations privately operated. We should obviously have an additional check upon the tendency toward public enterprise at the same time that we should have means of facilitating it. It is impossible to determine whether the net effect would be to strengthen the tendency or to weaken it. Of this, however, we may be certain: the power of demagogism to plunge us into illconsidered public ventures would be effectively restrained.
X
Upon preliminary examination the plan outlined in the foregoing sections will doubtless appear Utopian. Yet it is nothing but a rational synthesis of tendencies now active in modern political thought and practice. It is proposed to create a public endowment for the support of social service. This is the fundamental idea underlying the powerful land-nationalization movement. It is proposed to bestow upon government a direct control over private finance through the disposition of a public investment fund. Under modern conditions such control must be exercised either by private or by public institutions, and we are already very restive under the control of the great private banking houses. It is proposed to develop in higher degree than heretofore the principle of the inheritance tax. Such a development is inevitable, as is indicated by the steady evolution of modern systems of taxation, as well as by the tendency of private individuals to tax themselves through bequests to public institutions. It is proposed to free such taxes from their unthrifty character, a defect recognized by only a few theorists at present, but widely recognized by the self-taxing benefactors of public institutions, who give willingly, not for current expenditures, but for endowments. It is proposed to draw a line between public property and private property on the principle of certainty of income and ease of administration, on the one hand, and the need for discretion, initiative, enterprise on the other. This, too, is in harmony with great tendencies in current thought.
The individualist sees in private property an institution which serves to stimulate production; to create an automatic adjustment of industrial resources to social needs; to develop the best energies of men; to create independence of character. This is a true view of some forms of property, but not of all. It is not true of the property which yields its fruits to men who have only to hold forth their hands to receive them. The Socialist sees in private property only a device whereby those who are idle may share in the gains of social production. This is a true view of a part of property, but not of that part which requires the constant vigilance and expert skill of the owner. By the plan here proposed, the system of private enterprise would surrender to Cæsar the things which are properly Cæsar’s, and would be vastly strengthened thereby.