unfair to tax the inheritance of the children to as great an
extent as the inheritance of more distant relatives of the
deceased. Although there are possibilities of evasion, this
tax provides administrative advantages. Moreover, it is
contended that a tax upon legacies imposes no excessive
hardship upon the fortunate recipient of the estate.
By some writers the inheritance tax is regarded as a
direct attack upon the rights of private property. They
believe that the State should not attempt to i ts soc iai
limit the extent to which an individual may S1 Â§ mficaiice *
bequeath his own possessions. On the other hand, the
328 Problems of American Democracy
inheritance tax is regarded by another school of thinkers
as a great democratic advance, which forces each genera-
tion to stand upon its own feet. Equality of opportunity
means the ability of each individual to advance to the best
of his natural capacity. It is contended that the inheri-
tance of colossal wealth gives to certain fortunate indi-
viduals too great a start in the race of life. To that extent
they are sheltered from economic competition in the struggle
for existence. In this manner there is lessened the oper-
ation of the principle of natural selection, which seeks to
place the most naturally competent leaders in responsible
positions. The adherents of this school, therefore, favor
the imposition of inheritance taxes in order that the ine-
qualities of past ages may not become increasingly greater
with each generation. It must be remembered, however,
that they do not advocate complete confiscation of the
stored-up wealth of every generation.
QUESTIONS FOR DISCUSSION
1. Why has the burden of taxation increased for the nation?
2. For the state and local government?
3. Explain several methods of classifying taxes.
4. Contrast the ability to -pay theory with the benefit received
theory of taxation.
5. Explain the principle of progression.
6. What were Adam Smith's maxims of taxation?
7. Show the increase of federal expenditure due to the World War.
8. Show the increased federal revenue and its sources.
9. Contrast the relative importance of the tariff as a source of
revenue to-day with its importance a decade ago.
10. Show how the principles of protection and revenue may
n. What are excise duties? What are the principal objects of
this kind of taxation?
Meeting the Increasing Cost of Government 3 29
12. Trace the evolution of the income tax in the United States.
13. Explain the provisions of the income tax of 1919. Of 1921.
14. What are the principal sources of revenue for the states?
15. What are the principal sources of revenue for the cities?
16. Discuss the administration of the general property tax.
17. What arguments have been advanced for the inheritance tax?
18. Do you think such a tax fair? Why or why not?
TOPICS FOR SPECIAL REPORT
1. Changes in taxation in the United States since 1913.
2. The principle of progression as illustrated by surtax rates.
3. The present income tax law of the United States.
4. Income taxes abroad.
5. History of the excess profits tax.
6. Inheritance taxes at home and abroad.
7. The defects of the general property tax.
8. Fixing the local tax rate and the assessing of properties in
9. Disarmament and taxation.
10. New sources of taxation for municipalities.
Adams, H. C. Science of Finance.
Annals of the American Academy of Political and Social Science,
Bullock, C. J. Selected Readings in Public Finance.
Ely, R. T. Taxation in American States and Cities.
Hamilton, W. Current Economic Problems.
Plehn, C. Introduction to a Study of Public Finance.
SeligmanHS. R. A. Essays in Taxation; The Income Tax.
Taussig, F. W. Principles of Economics. Book VIII.
West, M. The Inheritance Tax. Chapters VII and IX.
The Distribution of the National Income
I. The general process
i. Meaning of distribution
2. Production and distribution
3. The law of variable proportions
II. The shares in distribution
a. The demand for capital
b. The supply of capital
a. Causes of differences
b. Different labor groups
c. Explanation of differences
d. Differences within the group
5. Earned and unearned incomes
The General Process. â€” The national income may be
regarded as a flow of goods, representing wealth produced
,, . by a nation in a given time. A considerable
Meaning Â» Â°
of distri- portion of this income finds its way into the
bution. x J
hands of the government in the form of taxes.
Money is the mere medium of exchange. What the various
governments desire is not the currency, but economic goods,
such as armaments, roads, and school houses. A consider-
able portion of the national income goes for providing for
The Distribution of the National Income 331
the national defence and for other cooperative activities of
government. After the taxes have been deducted, the
remainder of the national income is enjoyed by the citizens
of the nation. This also takes the form of a flow of goods,
for which the money income has been spent. It is an obvious
fact that this stream, which we call the national income,
divides itself into branches of different sizes. To some
individuals, it brings automobiles and fine clothing, while
to others only the barest necessities of life. Later we shall
discuss the extent of these differences in incomes and the
resulting standards of living. At present we are attempt-
ing merely to see how the system operates and to get a bird's
eye view of the process of distribution.
There are two primary factors in production, land and
labor. Originally wealth was created by the direct appli-
cation of labor to land. With the development Production
of industry, a secondary factor known as capital and distn-
came into existence. This has been defined as
the product of past labor used for further production, and
it is represented by such forms of wealth as tools and machin-
ery. It is to be contrasted with what may be called con-
sumption goods, that is, wealth ready for immediate enjoy-
ment in the form of food, clothing, and other necessities,
comforts, and luxuries of life. A final factor in production
is business enterprise which brings together the three factors
in production. Each of these factors gets some share in the
distribution of the wealth which it has helped to produce.
The share going to labor is known as wages, that to land,
as rent. Business enterprisers receive profits, and the
owners of capital interest.
In chemistry the elements combine in some fixed pro-
portions. Thus, two atoms of hydrogen, one of sulphur,
2,2,2 Problems of American Democracy
and four of oxygen unite to form a molecule of sulphuric
acid. The various elements in economic production, such
. as land, labor, and capital, may be combined in
variable varying proportions. For any known time or
conditions there may be a given but temporary
ratio, which will give the maximum production. This ratio
cannot be permanent, however, for conditions of supply
and demand are constantly changing. In our early history
land was abundant and labor scarce. Hence, rents were
low and in some cases non-existent, while wages were high.
Agriculture was therefore developed extensively rather than
intensively. In Europe, on the other hand, the production
of food was characterized by a combination of relatively less
land and more labor. Under conditions of free competition,
the scarcity of any factor of production, in proportion to
the need for it, determines its relative share of the national
income. Thus, in a new country, rent is generally low,
while wages and interest rates are higher than in older lands.
The law of variable proportions may also be illustrated by
combinations of labor and capital. It is frequently possible
to substitute machinery for certain types of labor performed
by hand. If wages are high and the interest rate low, this
substitution is more apt to be made than if the reverse is
true. The value in exchange of any commodity is determined
by conditions of supply and demand. In a similar way,
one school of economists has attempted to explain the
process of distribution. The apportionment of the national
income among the various factors in production depends
theoretically upon their relative abundance and produc-
tivity. Thus, the rate of wages, interest, or rent is a measure
of the supply of labor, capital, or land in proportion to the
demand for each of these factors.
The Distribution of the National Income $?,$
The Shares in Distribution. â€” Rent is the share of the
national income which goes to the owners of land for its
share in the production of wealth. There is a
i â€¢ i i i Rent -
scarcity element in rent, because, where natural
resources are abundant in proportion to the population,
rent is low. Where the reverse is true, rents are high. Rent
is primarily due, however, to differences in the productive
capacity of the various lands. Nature has given of her
fertility in varying degrees to different pieces of land. If
one acre of land will yield, to the same expenditure of labor
and capital, twenty dollars' worth more of wheat in a year
than another acre similarly located, it will yield twenty
dollars' more rent to its owners. The varying rent of mines
is a similar rough measure of their different degrees of
productivity. With urban land the determining feature is
site value. A plot of ground upon Wall Street will bring
more rent than the same size piece of ground located some
distance from the financial center.
The indirect or roundabout method of producing wealth
is to create capital first, and then by the aid of such capital
to make the finished goods. Land, labor, and ,. re
capital working together have been found to be The demand
far more effective than the old method of apply-
ing labor directly to land. The effort, time, and material
spent in the making of capital have been found well worth
while. The Industrial Revolution intensified the capitalis-
tic process. Goods were no longer made by hand, but by
machinery. Capital came to play a more important role
in production than ever before. To-day any business man
will admit that capital is productive. Let us take, for ex-
ample, the case of a tailor who has been pressing clothes by
hand, but finally decides to install a pressing machine. He
334 Problems of American Democracy
immediately discovers that, in a given time, he can easily
increase the amount of work done. He is thus enabled to
pay the interest on the capital he has borrowed, which is
represented by the machine, and to increase his own returns.
Hence we say that capital is productive. Labor is an
original source of wealth, for capital is itself the product of
labor applied to land. Nevertheless, labor aided by capital
is far more productive than labor working alone. Interest,
therefore, represents this additional productivity.
The productivity of capital, or rather of labor used in a
capitalistic form, explains the demand for it. Turning
The supply now to the supply of capital we find that it
of capital. originates by saving. The capitalistic process
is roundabout and consumes time. The making of capital
involves an immediate abstaining from present enjoyment.
The choice must be made between reserving goods for
future production or consuming them for present use.
Only the latter can afford immediate enjoyment, and the
creation of capital means deferring consumption from the
present to the future. A nation may demand the pro-
duction of luxuries, or it may be saving enough to direct
production into the channels of capital. Each individual
faces the same problem. He can receive his share of the
national income in the form of consumption goods or in
the form of capital. He may never see the capital, but he
can hold in his possession a claim upon it in the form of
securities or a bank deposit which pays interest. Each
individual has the choice of spending his money for the
immediate gratification of his \\ ants or of depositing it in
a savings bank. The bank will invest the money in some
productive enterprise and thus further the creation of
capital. From the additional wealth created by this pro-
The Distribution of the National Income 335
ductive enterprise, the bank will not only enrich itself, but
it will also pay interest to its depositors. As the savings
increase, that is, as the supply of capital increases in pro-
portion to the demand for it, the lower will be the rate of
Profits may be characterized as the uncertain share in
the process of distribution. They arise because of changes
in prices, or in the popular demand. Every
enterpriser must be a speculator to the extent
of taking industrial risks. Losses balance profits. A new
venture must offer an extra reward in the form of profits,
or the investor will be content to accept merely the cur-
rent rate of interest. The return upon bonds is an exam-
ple of fixed interest, but the more uncertain returns in the
form of varying dividends on stock represent profits.
The share of the national income which goes to labor is
known as wages. Just as land in its economic sense includes
all forms of natural resources, so labor, in a w â€žâ€ž .
' wages :
similar sense, includes all kinds of human pro- Causes of
j u Â±-L -u â€¢ 1 -l. J ^ differences.
ducers, whether bram workers or hand workers.
The distinction between salary and wages is a social dis-
tinction rather than an economic one. The return of
labor is measured in terms of wages. Nevertheless we
find great differences in wages, for an explanation of
which under a regime of free competition we must largely
turn to conditions of supply and demand. The number of
competent men for certain types of work is limited, either
because of a lack of natural ability or because of a lack of
proper training. On the other hand, the supply of some
of the lower types of labor is great. We have seen the
tendency of population to grow from the bottom, that is
to increase more rapidly among the lower economic groups.
336 Problems of American Democracy
According to Professor Carver, wages in such occupations
will therefore remain low as long as the number of workers
in these groups continues to increase either by an advanc-
ing birth rate or by an increasing immigration.
A number of attempts have been made to classify the
different kinds of labor. Professor Seager distinguishes
Different between five different grades of workers, as fol-
labor groups. i ows: (-,-) men having superior capacity for
planning and carrying out large undertakings; (2) men
competent to carry out small undertakings or to administer
large commercial and industrial undertakings in sub-
ordinate positions, as well as men having average pro-
fessional ability; (3) men trained for mechanical or clerical
labor; (4) men without special training, but possessing the
required strength and endurance for manual labor; (5) men
who lack the mental and physical qualities necessary for
continuous labor of any kind. However, no such classi-
fication can be absolute, but is merely suggestive. One
group fades into the other, and there is considerable over-
lapping. Again, in a democracy individuals are constantly
moving up and down from one group into another. The
romance of American history lies in the absence of social
castes. A rail splitter becomes president, and many of
the great captains of modern industry rise from the ranks.
Just as there are differences in land which explain rent,
so there are human differences which explain wages. The
^ , . really important question is whether these dif-
Explanahon J L x
of differ- f erences are the result of heredity or of environ-
ences. . ....... . .
ment. Are certain individuals m society
"hewers of wood and drawers of water" because they are
mentally incapable of doing anything else? Or, is it
merely that they never received the education or inspira-
The Distribution of the National Income 337
tion necesssary to do something better? Mental and
physical differences between individuals will always exist,
because the force of physical heredity is as enduring as life
itself. Perhaps some day we may be able to measure,
with a fair degree of accuracy, these inherent differences.
Environment, however, as well as heredity determines
these labor groups. Low wages are the result of low
standards of living as well as the cause. A certain mode
of life is as much a part of the social heredity, as a dark
skin may be of the physical heredity. Although it is
possible to overcome the former and not the latter, com-
paratively few individuals succeed in rising above the
social standards of their group. Social workers speak of the
problem of mental inertia. A democracy must seek not
only to improve the social environment, but also to extend
the advantages of the public schools system. Equality
of opportunity depends upon the diffusion of knowledge,
which tends to eliminate as far as possible the human
differences which are the result of environment.
Under certain conditions, differences in wages within a
group are fostered by the immobility or fixity of labor.
Workers are human beings and form attach- _.â€ž
" m Differences
ments for certain communities, fellow workers, -within the
and kinds of work. Change is not always easy.
Therefore, within the same general group of labor there
are differences of wages because the laborers do not want
to move to a new place, even though they could get more
money. The immobility of labor is one cause of such
differences, but there are numerous other reasons. For
example, regularity of employment must be considered.
All other things being equal, positions which offer steady
employment will pay lower wages than those which are
33& Problems of American Democracy
seasonal. The chance of promotion is another factor to be
considered. Employments which are "blind alley" jobs
should pay more than positions which have the possibility
of advancement. Again, certain kinds of work are held
in higher social esteem than others. Some men are con-
tent to receive smaller salaries in order to hold " white
collar" jobs. If the same grade of labor is demanded in
two occupations, wages will be lower in the more pleasant
or safer occupation. Again, if a long period of preparation
is required, wages will be higher than when no such pre-
liminary training is necessary. For this reason the
physician is seldom overpaid, in spite of his brief consulta-
tion with his patient. The difference in wages between
men and women in the same occupations is gradually dis-
appearing. The explanation of the old difference lay in
the overcrowding of women into relatively fewer occu-
pations. Again, they frequently had fewer dependents
and usually abandoned their occupation after marriage.
Of recent years there have been attempts to classify the
various shares in distribution as either earned or unearned
â€ž , ,, incomes. This influence has made itself chiefly
unearned felt in the realm of taxation in the form of
inheritance, super-income, and land taxes.
Wages, however, are the result of one's own efforts and
can therefore generally be called earned incomes. Rent
is due to the superior productivity of land. Because it
represents nature's part in production rather than that of
man, it has been frequently designated unearned income.
In profits there are both earned and unearned elements.
This is true because profits may be due to the foresight,
ability, or efficiency of the enterpriser, or they may be the
result of risk and speculation. When profits are the
The Distribution of the National Income 339
result of monopoly, they represent a distinctly anti-social
and unearned income. Capital is the result of saving, and
hence interest is earned by the one who does the saving.
Critics of the present system, however, argue that such
is frequently not the case, for it is inaccurate to speak of
interest as the reward of saving in the case of those who
have inherited large fortunes. Here we come face to face
with the rights of private property. An individual may
have labored industriously and saved patiently in order
to accumulate a small fortune. Instead of spending his
share of the national income in the form of consumption
goods, he may have invested a large part of it in capital
goods because of their future income-producing power.
Shall society limit his right to bequeath this property to
his children? Again, another individual may have saved
his wages and invested them in land. Shall his income,
therefore, be called unearned?
QUESTIONS FOR DISCUSSION
1 . What is the real national income? How is it measured?
2. What is meant by the distribution of wealth?
3. What are the factors in production, and what shares in dis-
tribution correspond to these factors?
4. How are these shares in distribution roughly determined?
5. Explain and criticize the so-called law of variable proportions.
6. How do you explain the existence of rent? Give causes.
7. What is capital? Give illustrations.
8. Show how the capitalistic method of production is a round-
9. Show how capital is the result of saving.
10. Explain interest from the point of view of both borrower and
1 1 . What do you think would be the effects of the abolition of
interest by some socialistic law?
34Â© Problems of American Democracy
12. Differentiate between capital and consumption goods. Illustrate.
13. Do you think this distinction important? Why or why not?
14. How do you explain the various labor groups?
15. How do you explain the differences in wages between these
16. Why are wages different in different occupations within the
same labor group?
17. What do you understand by earned and unearned incomes?
18. Do you think this distinction is accurate and possible?
19. Do you think it is important? Why or why not?
20. Analyze the various shares in distribution upon this basis.
TOPICS FOR SPECIAL REPORT
1. Efficiency as an element in the creation of capital.
2. Monopoly as a factor in distribution.
3. The theory of interest.
4. The resemblance between the theory of rent and the theory of
5. The theory of wages from the standpoint of both productivity
6. Government regulation of profits.
7. Laws for the prevention of usury.
8. Wages and labor unions.
9. Present movements designed to effect changes in distribution.
10. Earned and unearned incomes as applied to taxation programs.
1 1 . The inequalities of wealth.
12. Civilization and the rights of private property.
Burch, H. R. American Economic Life, Chaps. XXXIX-XLIII.
Carver, T. N. Principles of Political Economy.
Carver, T. N. Essays in Social Justice.
Ely, R. T. Outlines of Economics, pp. 493-524.
Hobson, J. A. Work and Wealth.
Seager, H. R. Principles of Economics.
Taussig, F. W. Principles of Economics, Vol. II, pp. 3-43.
Withers, H. The Case for Capitalism.
Proposed Economic Reconstruction of the State
I. Single tax
i. Its program
2. The nature of economic rent
3. Alleged advantages
5. Progress of the movement
2. Its indictment of capitalism:
a. The lure of profits
b. Wastes of competition.
c. Inequality of wealth
d. Exploitation of labor
3. The development of schools of socialism:
a. Early Utopian socialists
b. Revolutionary socialism
c. Evolutionary socialism
d. Guild socialism
4. Alleged advantages of socialism:
5. Its hidden dangers
6. Political strength of socialism:
a. In Europe
b. In England and America
A number of protests have been made against the pres-
ent economic system. The single taxer would have society
342 Problems of American Democracy
appropriate rent, while the socialist would have the State
eliminate the private appropriation of all shares in the
distribution of wealth except wages. These theories rep-
resent more radical readjustments in the apportionment
of the national income than any of the recent changes in
taxation that have been discussed.
Single Tax. â€” The modern single tax movement may-
be said to date from the publication of Henry George's
its Progress and Poverty in 1879. The author of this
program. remarkable book raises the question as to why
the gaunt spectre of poverty has persistently accompanied