taxation has produced. It has been a fairly good-sized sum of money. I say without hesitation that next to the inheritance tax,-what we call the succession tax,-the severance tax is the most just form of taxation I am able to conceive of.

[Adjournment of Session.]

FOURTH SESSION, WEDNESDAY MORNING, JUNE 18, 1919

PERMANENT CHAIRMAN ARMSON: Gentlemen, will you please come to order. It affords me pleasure to introduce as chairman of the session Senator Thomas of the Louisiana Tax Commission. Senator Thomas will please take the chair.

CHAIRMAN THOMAS OF LOUISIANA: We have some very live topics up for consideration this morning and will be led by those who have made a profound study of the subject. The first subject for consideration is Registration Taxes on Intangibles, with special reference to the Connecticut Chose-inAction Tax, by Fred R. Fairchild, former secretary of the association.

REGISTRATION TAXES ON INTANGIBLES, WITH SPECIAL REFERENCE TO THE CONNECTICUT CHOSE-IN-ACTION TAX

FRED R. FAIRCHILD

Professor of Political Economy, Yale University

A dozen years of study under the auspices of the National Tax Association have brought us to a fairly clear understanding of the nature and practical defects of the American general property tax. Summed up in a sentence, the general property tax has failed because all taxable property is not in actual practice discovered and assessed at its true value. This fact needs no demonstration here. A second proposition, equally established, is that the degree of failure varies with the different classes of property. The assessment of real es

tate is moderately successful. Tangible personal property is treated less efficiently. When we come to intangible personalty, the break-down is complete. While difference of opinion may still exist regarding the need of radical reform in the taxation of tangible property, there are now few to deny the necessity of some special treatment of intangibles.

For the present I wish to avoid discussion of such questions as whether intangible property should be taxed at all, or what kinds of intangibles should or should not be taxed. I am concerned rather with the practical problem of determining the best method of reaching the tax-paying ability represented by the possession of intangible personalty. For the attainment of this end, two proposals are now before us; namely the classified property tax and the state income tax. A few years ago classification had the inside track. Today it has perhaps been crowded aside by the income tax. Be that as it may, each plan has its advocates and deserves a hearing. What I shall say is devoted to the plan of classification.

The idea of the classified property tax is to separate taxable property into classes for the sake of applying different methods or different rates of taxation. As regards intangible personalty, the main idea is to classify such property in order to tax it at a distinctly lower rate than is imposed upon other kinds of property. The argument for this is two-fold. In the first place, it has been demonstrated that intangible personalty cannot be taxed at the high rates generally prevailing under the property tax, whereas it is claimed that at a low rate (say from two to five mills) such property can be successfully taxed. This we may call the administrative argument. On the other hand, it may be urged that justice demands a low rate for intangibles, since such property, if assessed at all, must almost necessarily go in at its full value, whereas tangible property is generally assessed far below its value. Discrimination in the tax rate is thus urged to offset discrimination in assessment.

Some dozen states have so far tried the experiment, either by means of simple classification for taxation at a flat rate (as in Pennsylvania, Maryland, Minnesota, Iowa, Rhode Island, and North Dakota) or by means of a registration tax (as in Connecticut, New York, Michigan, and Alabama).

The experiences of some of these states have been recounted and discussed at previous Conferences. The advocates of the classified property tax have, I believe, demonstrated (1) the utter failure to tax intangibles under the uniform rule of the old general property tax, and the causes thereof, and (2) that classification and low rate taxation, wherever tried, have brought improvement, increasing the number of owners and the amount of property reached and even swelling the revenue obtained in spite of the reduction in rate. There has been, however, a readiness, altogether too optimistic I think, to assume that the low rate taxation of intangibles has been a success and that this part of our tax problem has been solved. This conclusion, I believe, should not be allowed to stand. without material qualification. It is not enough to show improvement. The very rottenness of the former state makes easy a good showing for the new device, even though it may still be so imperfect that at best we have only mitigated, not removed, the evil. I am reminded of the prize offered in a certain school to that pupil who should show the greatest improvement in scholarly attainment. The prize was a badge, not of present eminence, but of original degradation. Of course we all know that perfection is not to be hoped for in the practical affairs of this sinful world, least of all in the realm of taxation. Nevertheless I submit that the true measure of a tax device is the degree of its approach to the ideal. This is the point at which we need more light upon the results of the low rate taxation of intangibles. To what extent has it succeeded in taxing the property in question? Of course it has not reached the last dollar. But has it reached 90 per cent, or 75 per cent, or 50 per cent, or 25 per cent? We may differ as to what we will call success. But, whatever our standard, this I submit is the question that must be asked and in some measure answered, before we can call the device a

success.

Now it is obvious that this is the very question upon which it is most difficult to get evidence. We can tell easily enough. how much property is reached. The difficulty is in forming any estimate of the amount that escapes. What I am urging is the importance of more evidence as to the real measure of

the success of the low rate tax on intangibles, a matter which has been passed by altogether too lightly in previous discussions.

It is in the hope that I may be able to make some very modest contribution to this evidence that I offer some results of recent study of the Connecticut four-mill investment tax. Connecticut was the pioneer in the adoption of the registration tax, and her law furnishes one of the best examples of this device. The law was adopted in 1889, and has been amended from time to time in matters of detail, the most important being the change of the rate from two to four mills in 1897. Under its provisions, bonds, notes, and other choses in action (otherwise liable to taxation under the general property tax) may be registered with the state treasurer and a tax paid at the rate of four mills a year. The treasurer's receipt attached to the document exempts it from taxation under the local property tax. The revenue goes into the state treasury.

It should be noted that the bonds of Connecticut corporations and the shares of stock of practically all corporations are exempt from the property tax in Connecticut and are therefore not subject to the investment tax. The same is true of mortgages on Connecticut real estate. On the other hand the law has been so interpreted as to permit the registration of money, deposits, credits, and, in fact, virtually all forms of intangible property subject to the property tax.

Note further that the registration is optional with the owner. If he registers, he pays a four mill tax. If he does not, his securities are subject to the local property tax, at a rate which averages about fifteen mills throughout the state, and he takes his chances on discovery by the assessor. If such discovery were a certainty, there would appear to be no reason for any owner declining to register his intangibles and no reason for any local listing of such property, unless the local tax rate were four mills or less, or some deal could be made with the assessor, or the owner were ignorant of the law and its interpretation. As a matter of fact, no town has a tax rate of less than four mills, although one town has a rate of just four mills; of which more later. Nevertheless a considerable amount of this class of property gets into the grand

list every year. In the list of 1917, "bonds, notes, credits and other choses in action and excess of credits over debits of merchants', were assessed at a little over seven million dollars, and the list also contains over five and one-half million dollars of "money at interest, on hand, and on deposit." Without doubt, ignorance of the law and its interpretation and sheer inertia, are important influences.

It is interesting to find that nearly two million dollars of the bonds and credits and half a million of the money, almost one-fifth of the total for the whole state, are listed in a single little town of about a thousand population. A sagacious Sherlock Holmes would soon arrive at the deduction that this must be the town that has the four-mill tax rate. Such is the fact. Investigation further discloses that nearly all of this is the property of one citizen, who, upon inheriting a large estate, made an agreement with the local assessor by which, on condition of a town tax rate of four mills, he listed all his choses in action in the town, instead of with the state treasurer. The case is thus described by Tax Commissioner Corbin in his report for 1915-16.

"The lowest tax rate of any town in the state for many decades is that of Willington, the grand list of which in 1915 was increased 636.7 per cent, the largest increase of any town of the state of Connecticut in any one year. The reason for this notable increase is unprecedented. A taxpayer of considerable wealth, in the town of Willington, died, and his entire estate, consisting largely of intangible property, was placed on the local tax list, rather than registered with the state treasurer. This enabled the town to lower its tax rate from 20 mills to 4 mills, the result being that the additional property which caused the increase in the grand list and the corresponding change in the tax rate, is now paying the same tax as if registered with the state treasurer. The town, however, is receiving the advantage of the tax, which, if paid to the state, it would lose."'

The Connecticut law makes no provision for any effort by state officers to discover taxable choses in action and compel their registration. We have, therefore, a clear case of the appeal to the taxpayer's honesty. It is commonly argued that the ordinary rates of the general property tax, are so utterly exorbitant, when applied to investments, that no taxpayer's conscience can stand the strain; whereas, at a reasonable rate,