CHAPTER XIV.

CLASSIFICATION BY AMOUNT-PROGRESSIVE RATES.

64. Validity in General.

65. From the Aspect of Political Economy. § 66. Increased Rate Applied to Excess Only. § 67. Tax Proportioned to Amount Received. 68. Classification by Amount of Whole Estate. § 69. The Pennsylvania Doctrine.

$70. Confiscatory Rates.

Sec. 64. Validity in General.

A graduated progressive tax is valid, and constitutes equal protection of the laws,2 and is not invalid even under a constitution providing that taxes shall be in proportion to the value of the property. Our own supreme court has said of it: "The review which we have made exhibits the fact that taxes imposed with reference to the ability of the person upon whom the burden is placed to bear the same have been levied from the foundation of the government. So, also, some authoritative thinkers, and a number of economic writers, contend that a progressive tax is more just and equal than a proportional one. In the absence of constitutional limitation, the question whether it is or is not is legislative and not judicial. The grave consequences which, it is asserted, must arise in the future if the right to levy a progressive tax be recognized, involves in its ultimate aspect the mere assertion that free and representative government is a failure, and that the grossest abuses of power are foreshadowed unless the courts usurp a purely legislative function."4

1Union Trust Co. v. Durfee, 125 Mich. 487, 84 N. W. 1101, 7 Detroit Leg. N. 597, following with some reluctance Magoun v. Savings Bank, 170 U. S. 301, 18 Sup. Ct. 601.

In re McKennan, (S. D. 1911), 130 N. W. 33, reversing judgment on rehearing, 25 S. D. 369, 126 N. W. 611. Nunnemacher v. State, 129 Wis. 190, 222, 108 N. W. 627, 9 L. R. A. N. S. 121. Knowlton v. Moore, 178 U. S. 41, 20 Sup. Ct. 747, 44 L. Ed. 969.

In New Hampshire. On the question whether in view of the constitution as it was construed and understood prior to 1903, it was intended by the amend

ment then made to authorize a progressive tax, the court is divided in opinion and therefore declines to express any opinion whatever. In re Opinion of Justices (N. H. 1911), 79 A. 490.

There is no difference in principle between an exemption given to direct inheritances and a progressive tax. The same inequality exists in the one case as in the other; and if there is unjust discrimination in the one case there is also in the other. The difference is one of degree and not of principle. In re Fox, 154 Mich. 5, 11.

Authority to classify persons and property for the purpose of taxation is well settled and graded or progressive taxation is intimately associated with that of classification and perhaps amounts substantially to the same thing. State v. Bazille, 97 Minn. 11, 106 N. W. 93, 6 L. R. A. N. S. 732. State v. Vance, 97 Minn. 532, 106 N. W. 98.

The following cases have been cited to show that an unequal graduated rate is unconstitutional: Black v. State, 113 Wis. 205; State v. Ferris, 53 Ohio St. 314; Drew v. Tifft, 79 Minn. 187; State v. Bazille, 87 Minn. 503.

In a recent case, State v. Bazille, 97 Minn. 11, the court has explained and somewhat modified its former holdings. The same may be said of the Wisconsin and Ohio courts in their recent utterances. Nunnemacher v. State, 129 Wis. 190. State v. Guilbert, 70 Ohio St. 229. See In re Fox, 154 Mich. 5, 12. The Mo. St. 1895 is void as contravening Mo. Const. a. 10, s. 3, as it is not "uniform upon the same class of subjects within the territorial limits of the authority levying the tax" within the Mo. Const. a. 10, s. 3. It is clear that where the amount of property received is made the basis of the tax, uniformity is only attainable by levying the same per cent upon all property belonging to persons bearing the same relation to the decedent. State v. Switzler, 143 Mo. 287, 332, 45 S. W. 245, 40 L. R. A. 280, 65 Am. St. Rep. 653, relying on State v. Ferris, 53 Ohio St. 314, 30 L. R. A. 218.

2 Nunnemacher v. State, 129 Wis. 190, 108 N. W. 627, 9 L. R. A. (N. S.) 121. Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 18 Sup. Ct. 594.

History and Principles. “It is insisted that the proviso authorizing the inheritance tax must be construed in connection with the equality mandate, and that, properly construed, the tax, although it may be graded or progressive, must, as respects graded or progressive features, be made as nearly equal as may be, and that the statute does not conform to this requirement. Counsel contend that this construction is sustained by the Drew case. In this we do

not concur.

"The history of taxation, in harmony with all human affairs, is one of evolution. Its progress from the earliest times to the present day is one of constant development, in keeping with the advancing intelligence of man, unrolling step by step, with changing economic and social conditions, tardily, however, new methods and means of subjecting untaxed property to the tax rolls. Originally public revenue was raised by voluntary contributions from the citizens; later, in response to appeals and solicitations of the rulers; and finally, when voluntary contributions ceased, as at the present day, by compulsory assessments, enforced by the operation of law. With this latter method came the demand, born of injustice and oppression, for uniformity and equality, and provisions securing it have long been a part of the fundamental law of all democratic forms of government. Formerly tangible property only was taxed. Ability or faculty

It is

to pay has come to be the test in determining the justness of taxation. 'not only the basis of taxation, but the goal toward which society is steadily working. It lies instinctively and unconsciously at the bottom of all of ourRendeavors at reform.' [Seligman, Tax. 72.]

"The equity and fairness of this theory, in its broadest sense, when we reflect upon the vast fortunes accumulated as the result of especially advantageous opportunities and facilities, not possessed by people in general, is apparent and obvious. It works no injustice or harm to those thus fortunately situated, does not injuriously affect productive or industrial agencies, and relieves in a measure those with lesser opportunities, and those to whom taxation is always an extreme burden. This theory does not, however, harmonize well with a strict application of the fundamental mandate of equality, as applied more particularly to the proportional system of taxation in force in this and other states. We mean by 'proportional system' a tax at a fixed and uniform rate, in proportion to the amount of taxable property, based upon a cash valuation, and legislatures and courts have been not a little embarrassed in attempts to apply it.

"But an examination of the books discloses that the equality mandate has been expanded and made to yield, from time to time, to new and advancing social and economic conditions. The general principle is retained, but is applied with less rigor and strictness. In our own state it has been enlarged, extended, and departed from by the people. As it originally stood, our constitution in this respect prevented the assessment of property for local improvements, and it was amended by expressly excepting such assessments from the equality rule. Bidwell v. Coleman, 11 Minn. 45 (78); Sperry v. Flygare, 80 Minn. 325, 83 N. W. 177, 49 L. R. A. 757, 81 Am. St. Rep. 162. The equality mandate applies as a general rule to taxes upon property only, and is generally held by the courts of this country to have no application to inheritance taxation, because a tax of that nature is not one upon property but upon the right of succession or inheritance (27 Am. & Eng. Enc. (2d Ed.) 338), though in this state it was held to apply to inheritance taxes in Drew v. Tifft, supra, and also to a similar statute in State v. Gorman, 40 Minn. 232, 234, 41 N. W. 948, 2 L. R. A. 701, precisely as in other taxation, except as otherwise provided by the amendment under consideration." Per Brown, J., in State v. Bazille, 97 Minn. 11, 16, 106 N. W. 93, 6 L. R. A. N. S. 732.

The Contrary View. While the legislature might perhaps distribute the collaterals according to the different degrees of kinship to the decedent, and levy a different rate upon the different degrees, yet when it ignores all such natural classification and makes the amount of money received by each the test of classification, it runs counter to another principle that is wellnigh universally accepted, that a uniform rate of taxation secures equality of burden. To levy a different rate simply because the amount of each man's holding is different would produce favoritism and destroy that principle of equality before the law which is the boast of free government. If it be urged that the one receiving the larger bounty enjoys the greater privilege,still the principle of uniformity answers that the value of his right to receive is in direct proportion to the value of the property to which he succeeds, and must, if taxation is to be uniform, be taxed in that proportion or according to one uniform rate. State v. Switzler, 143 Mo. 287, 333, 45 S. W. 245, 40 L. R. A. 280, 65 Am. St. Rep. 653.

A tax which affects the property within a specific class is uniform as to that class and there is no provision of the constitution which precludes a tax on that particular class. No want of uniformity with one living who owns property can be urged as a reason why the statute makes an inconsistent rule. No person inherits or can take by devise except by statute and the state having power to regulate this question may create classes and provide for uniformity with reference to classes which were before unknown. Kochersperger v. Drake, 167 III. 122, 47 N. E. 321, 41 L. R. A. 446.

Per White, J., in Knowlton v. Moore, 178 U. S. 41, 109, 20 S. Ct. 747, 44 L. Ed. 949.

Sec. 65. From the Aspect of Political Economy.

The progressive tax, charging a higher percentage on large estates than on small ones, has the best of economic endorsement.

A learned discussion of progressive rates is contained in the monograph by Max West on the Inheritance Tax, at pages 221 et seq. Mr. West points out that the progressive tax was supported by John Stuart Mill. He remarks on the dangers to general business and society of inexperienced young men inheriting their fathers' fortunes; and states that there is no reason why the right of inheritance should be unlimited; that a progressive tax can be justified as a compensation for the inequality of taxes which fall more heavily on the poor than on the rich; that if the inheritance tax be regarded as a payment of back taxes the justice of progression is especially evident, because large fortunes undoubtedly escape taxation during the owner's life to a greater extent than small ones. Progressive taxes may also be explained on the simple principle that the tax paying ability increases more rapidly than wealth, or that the sacrifice involved in paying a proportional tax is less for the wealthy than for the poor. Mr. West points out that the most effective argument against the progressive tax is the political argument that it is a step towards socialism.

Sec. 66. Increased Rate Applied to Excess Only.

A distinction has been attempted between cases where the increased rate is on the whole legacy and where it is applied only to the excess over the portion taxed at the primary rate,1 but this view has not prevailed.2

1State v. Ferris, 53 O. St. 314. Cf. s. 291.

There are two methods of progression provided for in the statutes of the several states: one found in South Dakota wherein the higher rate in the case of transmission of a greater devise or bequest is levied upon the whole value of the property transmitted; the other, like that found in the Wisconsin statute, where the increased rate applies only to the excess in value of property transmitted over the amount subject to the next lower rate. The court remarks that if any difference is to be made in the rate of taxation between a large legacy and a small legacy on the theory that the increased ability to pay is greater in the case of the large beneficiary than of the smaller, that it cannot be said that the increased ability to pay of a devisee receiving $20,000 over that of one

receiving $10,000 comes from the receipt of his first $10,000. The increased ability to pay does come solely from the receipt of the second $10,000. "It is ridiculous to say that a man who receives a devise or legacy of a thousand and one dollars is as well able to pay a tax of $594.06 as is a man who receives ten thousand dollars to pay $396. We have never discovered any method of making one dollar pay $198.06."

If the progressive tax is based on the theory that it is against public policy to allow large estates to be held together by transmission after the death of the owners, which is the theory that seems the more reasonable to the court, the court replies that "if one person receives $20,000 and another $10,000 it was no greater privilege for the first to receive his first $10,000 than for the second. The increased privilege is all found in receiving of the extra $10,000, and it is the exercise of this extra privilege, the transmission of the extra $10,000, that should receive the extra burden of taxation." In re McKennan, 25 S. D. 369, 126 N. W. 611, 618, reversed, however, on rehearing, 130 N. W. 33.

2 Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 18 Sup. Ct. 594, 42 L. Ed. 1037.

The progressive tax under South Dakota statute of 1905, where the increased rate applies to the whole legacy in a large estate, is valid. The court holds that this is logically, legally and constitutionally in the same category as classification, based on the net increased amount of a higher, over a lower, class. In re McKennan, (S. D. 1911,) 130 N. W. 33, reversing judgment on rehearing, 25 S. D. 369, 126 N. W. 611.

As to the progressive feature of the act, there are four classes created and there is equality between the members of each class. It was pointed out that the tax is not in proportion to the amount, but varies with the amount arbitrarily fixed, and hence that one who is given a legacy of $10,001 by the deduction of the tax receives $99.04 less than one who is given a legacy of $10,000. But the court holds that this is not contrary to the rule of equality of the fourteenth amendment and that rule does not require, as we have seen, exact equality of taxation. It only requires that the law imposing it shall operate on all alike under the same circumstances. The tax is not on money; it is on the right to inherit, and hence a condition of inheritance; and it may be graded according to the value of that inheritance. The condition is not arbitrary because it is determined by that value; it is not unequal in operation because it does not levy the same percentage on every dollar; does not fail to treat all "alike under like circumstances and conditions, both in the privilege incurred and the liabilities imposed." Per McKenna, J., in Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 298, 300, 18 Sup. Ct. 594, 42 L. Ed. 1037.

Sec. 67. Tax Proportioned to Amount Received.

The fact that the tax is fixed at a certain percentage of the property passing to the beneficiary does not invalidate it1 or deprive it of the requisites of equality and uniformity, as the legislature has a right to classify the privilege taxed according to the value of the property received.3

1 Union Trust Co. v. Durfee, 125 Mich. 487, 493, 84 N. W. 1101, 7 Detroit Leg. N. 597.