The Legal Limitation of Fortunes (Fr. John Ryan)
Note: The following article has been taken from Fr. John Ryan’s 1916 book, Distributive Justice: The Right and Wrong of Our Present Distribution of Wealth. The year of publication should be kept in mind, particularly when the author mentions figures that seem out of sync with today’s economic situation.
If the taxation and other measures of reform suggested in Section I were fully applied to our land system; if co-operative enterprise were extended to its utmost practicable limits for the correction of capitalism; and if the wide extension of educational opportunities, and the elimination of the surplus gains of monopolies restricted the profits of the business man to an amount strictly commensurate with his ability and risks,—if all these results were accomplished the number of men who could become millionaires through their own efforts would be so small that their success would arouse popular applause rather than popular envy. Their claim to whatever wealth they might accumulate would be generally looked upon as entirely valid and reasonable. Their pecuniary eminence would be pronounced quite as deserved as the literary eminence of a Lowell, the scientific eminence of a Pasteur, or the political eminence of a Lincoln. In such conditions there could be no disconcerting discussion of the menace of great fortunes.
In the meantime, these reforms are not realised, nor are they likely to be even approximately established within the present generation. For some time to come it will be possible for the exceptionally able, the exceptionally cunning, and the exceptionally lucky to accumulate great riches through clever and fortuitous utilisation of special advantages, natural and otherwise. Moreover, a great proportion of the large fortunes already in existence will persist, and will be transmitted to heirs who will in many cases cause them to increase. Can nothing be done to reduce the size and lessen the number of these great accumulations? If so, is such a proceeding socially and morally desirable?
The Method of Direct Limitation
The law might directly limit the amount of property to be held by any individual. If the limit were placed fairly high, say, at one hundred thousand dollars, it could scarcely be regarded as an infringement on the right of property. In the case of a family numbering ten members, this would mean one million dollars. All the essential objects of private ownership could be abundantly met out of a sum of one hundred thousand dollars for each person. Moreover, a restriction of this sort need not prevent a man from bestowing unlimited amounts upon charitable, religious, educational, or other benevolent causes. It would, indeed, hinder some persons from satisfying certain unessential wants, such as, the desire to enjoy gross or refined luxuries, great financial power, and the control of immense industrial enterprises; but none of these objects is necessary for any individual’s genuine welfare. In the interest of the social good such private and unimportant ends may properly be rendered impossible of realisation.
Such a restriction would no more constitute a direct attack upon private ownership than limitations upon the use and kinds of property. At present a man may not do what he pleases with his gun, his horse, or his automobile, nor may he invest his money in the business of carrying the mails. The limitation of fortunes is just what the word expresses, a limitation of the right of property. It is not a denial nor destruction of that right. As a limitation of the amount to be held by an individual, it does not differ in principle from a limitation of the kinds of goods that may become the subject of private ownership. There is nothing in the nature of things nor in the reason of property to indicate that the right of ownership is unlimited in quantity any more than it is in quality. The final end and justification of individual rights of property is human welfare; that is, the welfare of all individuals severally and collectively. Now it is quite within the bounds of physical possibility that the limitation under discussion might be conducive to the welfare of human beings both as individuals and as constituting society.
Nevertheless the dangers and obstacles confronting any legal restriction of fortunes are so real as to render the proposal socially inexpedient. It would easily lend itself to grave abuse. Once the community had habituated itself to a direct limitation of any sort, the temptation to lower it in the interest of better distribution and simpler living would become exceedingly powerful. Eventually the right of property might take such an attenuated and uncertain form in the public mind as to discourage labour and initiative, and thus seriously to endanger human welfare. In the second place, the manifold evasions to which the measure would lend itself would make it of very doubtful efficacy. To be sure, neither of these objections is absolutely conclusive, but taken together they are sufficiently weighty to dictate that such a proposal should not be entertained so long as other and less dangerous methods are available to meet the problem of excessive fortunes.
Four of the nine members of the Federal Commission on Industrial Relations have suggested that the amount of property capable of being received by the heirs of any person be limited to one million dollars. If we assume that by heirs the Commission meant the natural persons to whom property might come by bequest or succession, this limitation would permit a family of ten persons to inherit one hundred thousand dollars each, and a family of five persons to obtain two hundred thousand dollars apiece. Would such a restriction be a violation of the right of private ownership? The answer depends upon the effects of the measure on human welfare. The rights of bequest and succession are integral elements of the right of ownership; hence they are based upon human needs, and designed for the promotion of human life and development. A person needs private property not only to provide for his personal wants and those of his family during his lifetime, but also to safeguard the welfare of his dependents and to assist other worthy purposes, after he has passed away. Owing to the uncertainty of death, the latter objects cannot be adequately realised without the institutions of bequest and succession.
All the necessary and rational ends of bequest and succession could be attained in a society in which no man’s heirs could inherit more than one million dollars. Under such an arrangement very few of the children of millionaires would be prevented from getting at least one hundred thousand dollars. That much would be amply sufficient for the essential and reasonable needs of any human being. Indeed, we may go further, and lay down the proposition that the overwhelming majority of persons can lead a more virtuous and reasonable life on the basis of a fortune of one hundred thousand dollars than when burdened with any larger amount. The persons who have the desire and the ability to use a greater sum than this in a rational way are so few that a limitation law need not take them into account. Corporate persons, such as hospitals, churches, schools, and other helpful institutions, should not, as a rule, be restricted as to the amount that they might inherit; for many of them could make a good use of more than the amount that suffices for a natural person.
So much for the welfare and rights of the beneficiaries of inheritance. The owners of estates would not be injured in their rights of property by the limitation that we are here considering. In the first place, the number of persons practically affected by the limitation would be extremely small. Only an insignificant fraction of property owners ever transmit or expect to be wealthy enough to transmit to their families more than one million dollars. Of these few a considerable proportion would not be deterred by the million dollar limitation from putting forth their best and greatest efforts in a productive way. They would continue to work either from force of habit and love of their accustomed tasks, or from a desire to make large gifts to their heirs during life, or because they wished to assist some benevolent enterprise. The infinitesimally small number whose energies would be diminished by the limitation could very safely be treated as a socially negligible element. The community would be better off without them.
The limitation of inheritance would, indeed, be liable to abuse. Circumstances would undoubtedly arise in which the community would be strongly tempted to make the maximum inheritable amount so low as to discourage the desire of acquisition, and to deprive heirs of reasonable protection. While the bad effects of such a limitation would not be as great as those following a similar abuse with regard to possessions, they are sufficiently grave and sufficiently probable to suggest that the legal restriction of bequest and succession should not be considered except as a last resort, and when the transmission of great fortunes had become a great and certain public evil.
It seems reasonable to conclude, then, that neither the limitation of possessions nor the limitation of inheritance is necessarily a direct violation of the right of property, but that the possible and even probable evil consequences of both are so grave as to make these measures of very doubtful benefit. Whether the dangers in question are sufficiently great to render the adoption of either proposal morally wrong, is a question that cannot be answered with any degree of confidence. What seems to be fairly certain is that in our present conditions legislation of this sort would be an unnecessary and unwise experiment.
Limitation Through Progressive Taxation
Is it legitimate and feasible to reduce great fortunes indirectly, through taxation? There is certainly no objection to the method on moral or social principles. As we have seen in chapter viii, taxes are not levied exclusively for the purpose of raising revenue. Some kinds of them are designed to promote social rather than fiscal ends. Now, to prevent and diminish dangerous accumulations of wealth is a social end which is at least as important as most of the objects sought in license taxes. The propriety of attempting to attain this end by taxation is, therefore, to be determined entirely by reference to its probable effectiveness.
The precise method of taxation available here is a progressive tax on incomes and inheritances. By a progressive tax is meant one whose rate advances in some definite proportion to the increases in the amount taxed. For example, a bequest of 100,000 dollars might pay one per cent.; 200,000 dollars, two per cent.; 300,000 dollars, three per cent., and so forth. The reasonableness of the principle of progression in taxation has been well stated by Professor Seligman:
“All individual wants vary in intensity, from the absolutely necessary wants of mere subsistence to the less pressing wants which can be satisfied by pure luxuries. Taxes, in so far as they rob us of the means of satisfying our wants, impose a sacrifice upon us. But the sacrifice involved in giving up a portion of what enables us to satisfy our necessary wants is very different from the sacrifice involved in giving up what is necessary to satisfy our less urgent wants. If two men have incomes of one thousand dollars and one hundred thousand dollars respectively, we impose upon them not equal but very unequal sacrifices if we take away from each the same proportion, say ten per cent. For the one thousand dollar individual now has only nine hundred dollars, and must deprive himself and his family of necessaries of life; the one hundred thousand dollar individual has ninety thousand dollars, and if he retrenches at all, which is very doubtful, he will give up only great luxuries, which do not satisfy any pressing wants. The sacrifice imposed on the two individuals is not equal. We are laying on the one thousand dollar man a far heavier sacrifice than on the one hundred thousand dollar man. In order to impose equal sacrifices we must tax the richer man not only absolutely, but relatively, more than the poor man. The taxes must be not proportional, but progressive; the rate must be lower in the one case than in the other.”
The principle of equality of sacrifices which underlies the progressive theory does not justify the levelling and communistic inferences that have sometimes been brought against it. Equality of sacrifice does not mean equality of satisfied, or unsatisfied, wants after the tax has been collected. If Brown pays a tax of one per cent. on his income of two thousand dollars, it does not follow that Jones with an income of ten thousand dollars should pay a sufficiently high rate to leave him with only the net amount remaining to Brown; namely, 1980 dollars. Equality of sacrifice means proportional equality of burden, not equality of net resources after the tax has been deducted. The object of the progressive rate is to make relatively equal the sacrifices caused by the tax itself, not to equalise the sum total of burdens or unsatisfied wants that exist among men.
Another objection to progressive taxation is that it readily lends itself to confiscation of the largest incomes. All that is necessary to produce this result is to increase the rate with sufficient rapidity. This could be accomplished either by large steps in the rate itself or by small steps in the income increases which formed the basis of the advances in the rate. For example, if the Federal income tax, which at present levies two per cent. on incomes of more than three thousand dollars, and three per cent. on incomes of over twenty thousand dollars, should thereafter progress geometrically with every geometrically progressive increment of income, the rate on incomes above $640,000 would be 96 per cent.! Or if the rate should progress arithmetically with every ten thousand dollars of increase above twenty thousand dollars, it would be 100 per cent. on incomes of over $990,000!
To this objection there are two valid answers. Even if the rate should ultimately reach one hundred per cent. it need not, and on progressive principles it should not, effect confiscation of an entire income. The progressive theory is satisfied when the successive rates of the tax apply to successive increments of income, instead of to the entire income. For example, the rate might begin at one per cent. on incomes of one thousand dollars, and increase by one per cent. with every additional thousand, and yet leave a very large part of the income in the hands of the receiver. Each one thousand dollars would be taxed at a different rate, the first at one per cent., the fiftieth at fifty per cent., and the last at one hundred per cent. If the hundred per cent. rate were applied to the whole of the higher incomes, it would be a direct violation of the principle of equality of sacrifice. In the second place, the progressive theory forbids rather than requires the rate to go as high as one hundred per cent. While the sacrifices imposed by a given rate are greater in the case of small than of large properties, they become approximately equal as between all properties above a certain high level. After this level is reached, additional increments of wealth will all be expended either for extreme luxuries, or converted into new investments. Consequently they will supply wants of approximately equal intensity. For example, the wants dependent upon a surplus of 25,000 dollars in excess of an income of 100,000 dollars, and the wants dependent upon a surplus of 75,000 dollars above the same level do not differ materially in strength. To diminish these surpluses by the same per cent., say, ten, would impose proportionally equal burdens.
Hence the rate of progression should be degressive; that is, it should increase at a constant pace until a certain high level of income is reached, then increase at a steadily diminishing pace, and finally become uniform on the very highest incomes. For example; if the rate increased one per cent. with every additional five thousand dollars, reaching fifteen per cent. on incomes of seventy-five thousand dollars, it should be on eighty thousand dollars, not sixteen but fifteen and one-half per cent. On 85,000 dollars the rate should be 15¾ per cent.; on 90,000, 15⅞ per cent.; on 95,000, 1515⁄16 per cent.; and on all sums of 100,000 and over, 16 per cent. The point at which the increments in the rate began to decline would be that at which differences in wants began to diminish, and the point at which the rate became stationary would be that at which wants fell to the same level of intensity.
The Proper Rate of Income and Inheritance Taxes
While the principle of equality of sacrifices forbids a rate of tax that would reach or approximate confiscation, it gives no definite indication of the proper scale of progression, or of the maximum limit that justice would set to the rate. Under our Federal law the highest rate on incomes is now 13 per cent.; under the Wisconsin law it is 6 per cent.; under the law of Prussia it is 4 per cent.; and under the British act of 1909 it is about 8½ per cent. Evidently a much higher rate than any of these would be required to make any impression upon swollen fortunes. The British government recently (September, 1915) made the maximum rate about 33⅓ per cent. To be sure, this is a war measure which probably will not continue after the restoration of peace. However, if it were made permanent it could not be proved to be unjust, provided that it were applied to the increments of income above a certain high limit, but not to these incomes in their entirety.
Our present inheritance taxes are very low, averaging less than 3 per cent. throughout the United States. Probably the highest rate is to be found in Wisconsin, where bequests to non relatives in excess of half a million dollars are subject to a tax of fifteen per cent. It is clear that all the existing rates could be raised very considerably without causing a violation of justice. Some years ago Andrew Carnegie recommended a tax of fifty per cent. on estates amounting to more than one million dollars. No country has yet reached this high level of inheritance taxes. Nevertheless we cannot certainly stigmatise it as unjust either to the testator or his heirs, nor can we prove that it is in any other manner injurious to human welfare. All that can be said with confidence concerning the just rates of inheritance taxation must take the form of generalisations. The increments of the tax should correspond as closely as possible to the diminishing intensity of the wants which the tax deprives of satisfaction; in the case of each heir a certain fairly high minimum of property should be entirely exempt; on all the highest estates the rate should be uniform, and it should fall a long way short of confiscation; and the tax should at no point be such as to discourage socially useful activity and enterprise.
Effectiveness of Such Taxation
The essential justice of the measures is not the only consideration affecting high income and inheritance taxes. There remain the questions of expediency and feasibility. Under the first head the objection is sometimes raised that taxes which appropriated a considerable portion of the larger incomes and inheritances would diminish very materially the social supply of capital. Immense sums of money would go into the public treasury which otherwise would have been invested in commerce and industry. Two questions are raised by this situation: first, whether it might not be better for society to have these sums devoted, through public works of various kinds, to consumptive uses instead of to an increase in the supply of capital; second, whether the reduction in the savings and capital provided by the persons paying the taxes could be offset by increases in saving among other classes. Even if it be assumed that the first question should receive a negative answer, it is not improbable that the second should be answered in the affirmative. In other words, the increased saving which the poorer and middle classes would be enabled to make as a result of the shifting of some of their burden of taxation to the large incomes and inheritances, might very well counterbalance the curtailment in the investments of the wealthy classes. Even if this possibility were not fully realised, even if the net volume of capital in the community were somewhat diminished, this disadvantage might be more than neutralised by the wider social benefits of the taxation policy.
With regard to the feasibility of very heavy income and inheritance taxes, it is sometimes contended that neither of these measures can be made effective toward the reduction of abnormal fortunes. It is held that the successful collection of these taxes requires the co-operation of the persons affected by them; that if the rate should go above ten or twelve per cent., the income receiver would evade the tax in a great variety of ways, while the owner of a large estate would transfer his property outright to a trust company, which would after his death make the desired distribution. The man who urges these objections is a very high authority on taxation, especially on its administrative side; nevertheless his contentions are not absolutely conclusive. In particular, it does not seem probable that high inheritance taxes could be evaded by the simple devices that he mentions. It ought not to be beyond the power of administrative ingenuity to find methods of defeating such subterfuges. However, it is altogether likely that the possibilities of evasion would be sufficient to prevent the imposition of tax rates that approached within measurable distance of the borderland of confiscation.
The sum of the matter seems to be that the reduction and prevention of great fortunes cannot prudently be accomplished by the method of direct limitation; that these ends may wisely and justly be attained indirectly, through the imposition of progressive income and inheritance taxes; but that the extent to which these measures would be genuinely effective cannot be estimated until they have been given a thorough trial.