# Popular Science Monthly/Volume 52/January 1898/Principles of Taxation: Double Taxation XXIII

Layout 4
* PRINCIPLES OF TAXATION.
By DAVID A. WELLS, LL. D., D. C. L.,
CORRESPONDANT DE L'INSTITUT DE FRANCE, ETC.
XIV.—DOUBLE TAXATION.
ONE of the inevitable characteristics of a "general property tax" is the opportunity afforded for inflicting double taxation—i. e., taxation at one and the same time on the same person or property, or taxation of the same property a second time in the same year—an opportunity which the believers in this system vigorously defend, and its administrators as a rule gladly take advantage of to practically enforce. These opportunities exist mainly through two assumptions, neither of which are warranted by either reason or justice, and are alike antagonistic to any equitable and intelligent system of taxation: the first, in respect to the situs of personal property, and the second, as to origin and nature of property; and to these, in the above order, attention is next invited.
Personal property for purposes of taxation is popularly divided into two classes—namely, things movable, tangible, and visible, and things wanting in corporality or bodily presence, and therefore, as a rule, intangible and invisible. To the former has been given the general name of "chattels," and to the latter that of "credits"; under which latter name or title are included not only book accounts, bills payable, promissory notes, bonds, mortgages, deeds, bank deposits, certificates of indebtedness, and the like, but also shares of corporate stock, and possibly shares in any partnership. Adopting a popular theory, that credits are property, their aggregate value in all civilized countries can not, probably, be reasonably estimated at less than one half of the aggregate value of all chattels and real estate.
Situs of Personal Property.—As has been already pointed out, it is in the nature of an economic axiom and a fundamental legal principle that the power of every state to tax must be exclusively limited to subjects within its territory and legal jurisdiction. This economic axiom and legal principle is recognized in nearly all countries claiming to be civilized; the principal exceptions being in the States of the Federal Union, where it is violated in respect to both theory and practice—more especially in the State of Massachusetts, the statutes of which define personal estate for purposes of taxation so as to include "goods, chattels, money, and effects, wherever they are; ships, public stocks and securities, stocks in turnpikes, bridges, and moneyed corporations, within or without the State." Thus, for ​example, if a resident of Massachusetts owns a cow which is bodily in another State, that cow is properly taxed in the State where the animal is; but Massachusetts, in virtue of the residence of the owner within her territory, imposes upon him a second tax for the same cow. Again, owners of shares in corporations chartered and located in Massachusetts are taxed through the corporation, and their shares are free from any further taxation. But if the same persons are shareholders in corporations created and established by other States, and the real and personal property of which are fully taxed where situated, they are subject to a second tax in Massachusetts on the assumed local value of the interest of their citizens in such extraterritorial corporations.
Under this system, moreover, the same property may be, and often actually is, subjected to not merely double but triple taxation, which sometimes practically amounts to confiscation. Thus personal property belonging to a citizen of Massachusetts, but located in Chicago, would be properly taxable there, because within the territory and under the protection of the taxing power. It would, however, be taxable to the owner in Massachusetts because of his personal residence in that State; and the owner would also be liable to taxation in Massachusetts by reason of his income from the same property. The following case of actual and comparatively recent experience constitutes both proof and illustration of the accuracy of this statement: A lady of a Western State, for the sake of availing herself of certain educational advantages, removed to a town in Massachusetts near Boston, and benefited the town by building a fine residence therein. Her property, which was held by a trustee in Indiana, was taxed to him by reason of his legal holding in that State. The property itself, mainly in another State, was taxed there, and properly, by reason of its location; but at the end of her first year's residence the lady was horrified to learn that a third tax on her income was demanded of her by the tax laws of Massachusetts. "And this," the person communicating these facts adds, "will, if enforced, be a decree of my personal banishment from the State as effectual as that which the State formerly launched against Roger Williams and the Quakers." Can any one doubt that human nature, as ordinarily constituted, will protest against, and successfully evade such laws? Would it not be well in discussing this subject to mention also that it was a question of taxation that gave liberty to the American colonies, and that the principle that the people of Boston and their ministers once mainly relied upon to justify their destruction of imported tea, which they regarded as unjustly taxed by even a small amount, was "that resistance to tyranny was obedience to God"?
The claim or argument, however, which the advocates of such ​an unjust system now set up in its defense is not a theological one, but that personal property (more especially what is termed in law choses in action, or credits, titles, notes, bonds, mortgages, which are in their nature incorporeal, and therefore invisible and intangible) has no situs away from the person or residence of the owner, but is deemed to be present with him at the place of his domicile.
This rule or fiction of law originated, according to Savigny, in Rome, and acquired the designation of "mobilia personam sequunter"; but its applicability to property was never held to extend beyond Roman territory. Subsequently it became a device of international comity, which the Supreme Court of Vermont (Catlin vs. Hall, 12 Vermont, 152) has declared was subsequently "adopted from considerations of general convenience and policy, and for the benefit of commerce"; and which, according to every principle of common sense and equity, was never invented with a view of its being used as a rule to govern and define the application and scope of taxation, or was intended to have any other meaning than that for the purpose of the sale, distribution, and other disposition of property any act, agreement, or authority which is sufficient in law where the owner resides shall pass the property in the place where the property is; and more especially to facilitate the distribution of decedents' estates, by enabling parties to dispose of their property without embarrassment from their ignorance of the laws of the country where it is situated.
How comparatively recent, moreover, has been the extra-territorial application of the rule or principle under consideration to taxation, is shown by the fact that the first English colonists and lawmakers who came to America do not appear to have brought with them any of the narrow and illogical views which have characterized their descendants. Thus, for example, one of the earliest laws of the Massachusetts colony reads as follows: "No man shall he rated here (Massachusetts) for any estate or revenue he hath in England, or in any forreine partes, till it he transported thither." (Massachusetts Historical Society Collections, vols, vii and viii, page 213.) And in the first provincial codes of Pennsylvania especial care was taken to confine taxation to land, and a very few articles of personal ​property of a visible character, as slaves, horses, and cattle, and to exempt from taxation debts, accounts, merchandise, and all other items susceptible of concealment, and which would necessitate inquisitorial methods for assessment. And it was not until 1847, when the State had become financially embarrassed by large expenditures, that any change was made in such system. But in later days, when laws came to be made by legislators who could not conceive that anything more was involved in taxation than the raising of a given amount of money, the discriminating rule in respect to the situs of real and personal property was generally adopted and has resulted in the before-mentioned absurdities. Another involved absurdity is that those States which adopt in their systems of taxation the rule of ​taxing property beyond their sovereignty or territorial jurisdiction, by reason of the possession of its owner, do not follow to a logical conclusion the principle they have adopted; for they do not hold that real estate, as well as personal property, follows the domicile of its owner for taxation But for this distinction no good reasons can be given, although pretexts, claiming to be reasons, may. One claim, however, is obviously as good as another. A robber who should draw romantic distinctions between watches and purses would fail in business. If we are to be robbers in practice, let us, at least, secure some grace by honesty in our professions, and admit that what we thus take is not a tax received as the just recompense of a benefit conferred, but a compulsory levy, having its cause in our greed and its justification in our power; and as these reasons are as good for a large levy as a small one, and the whole of a man's estate is greater than its part, why not take the whole? Still further, if it is right to tax a man in Massachusetts, who has come for a lengthened stay from another State or a foreign country, for the property he has left behind, why not the man who has come for a week? If we are to do business upon the principle that "might makes right," would it not be a brilliant stroke to station ourselves at all the avenues of ingress to a State, and cry "Stand and deliver!" to the passengers? From the above citations and arguments, the conclusion, would seem to be inevitable that when a State assesses property situated beyond its territory and jurisdiction, and which its laws and processes are not competent or able to either reach or protect, or assesses one of its own citizens in respect to such property, the act has no claim to be regarded as taxation, but is simply arbitrary taking, in no respect different in principle from confiscation.
It will also be interesting here to recall some of the antecedents of this fiction of law, that personal property, irrespective of its situs, follows the owner for the purpose of taxation. Its prototype was the ancient taille, or tax of servitude, imposed on persons originally bondmen, or on all persons who held in farm, or lease, or resided on lands of the suzerain, and from which proprietors or suzerains of the land were exempt. And as no vassal could at will divest himself of servitude or allegiance to his lord or suzerain, so the obligation to pay taxes always remained upon him as a personal servitude, whatever might be the location of his property. In other words, the condition of the masses all over Europe during the middle ages was not unlike the condition of the slaves in the United States previous to emancipation. They (the slaves) had property in their possession, and spoke of themselves as owners of property, but in reality their property followed the condition of the servitude of their persons, and both persons and property belonged equally to ​the masters. The taille, furthermore, as a badge of servitude, was supposed to dishonor whoever was subject to it, and degrade him, not only below the rank of a gentleman, but that of a burgher, or inhabitant of a borough or town; and "no gentleman, or even any burgher," says Adam Smith, "who has stock, will submit to this degradation." Now, the idea embodied in the word servitude is an obligation to render service, irrespective of or without compensation; and the idea upon which the taxation of personal property in this country has been based is, that the property owes a servitude to the State where the owner resides, irrespective of its actual location, in virtue of the obligation which its owner, as a citizen, may owe to the State by reason of the protection which the State gives him in respect to his person.
Again, in old times, the division of property into real and personal was wholly unknown; and under the common law all property was classed as lands, tenements, hereditaments, and goods and chattels. "In the course of time, however, leases of land for a term of years were classed as chattels, and were distinguished as chattels real; while other chattels, which did not savor of lands, were called chattels personal, ‘because,’ says Lord Coke, ‘for the most part they belong to the person of a man, or else for that, they are to be recovered by personal actions.’ And Blackstone tells us that ‘chattels personal are property, and, strictly speaking, things movable, which may be annexed to, or attendant on, the person of the owner, and carried about with him from one part of the world to another’; and as instances he mentions money, jewelry, garments. Personal property, in fact, consisted almost entirely of such things as could be, and actually were, carried about with the person of the owner, or could be easily secreted. And Blackstone also tells us that the amount of the personal estate of our ancestors was so trifling that they entertained a very low and contemptuous opinion of it; and that our ‘ancient law books do not, therefore, often condescend to regulate this species of property.’ Nothing of an incorporeal nature, as credits, bonds, and mortgages, certificates of stock, was anciently comprehended within the class of personal chattels, and in fact there were few or no such instrumentalities for representing or facilitating the exchanges of property. It was otherwise as to lands or real property, as to which ‘incorporeal hereditaments’ occupied a conspicuous place from the earliest times. Such was personal property in the early history of our laws. It was of comparatively small importance, and its laws were few and simple; while real property, being of a fixed and permanent nature, was regarded as immeasurably more valuable, and was governed by laws of its own, of the most intricate and abstruse character. And because of ​the feudal tenure by which lands were held arose the notion, which became a fiction of the law, that property, merely personal, always attended the person of its owner; while lands, tenements, and hereditaments, being fixed and immovable, and of infinitely more consideration, were held, from their very nature, as well as from motives of political policy, to have a situs of their own, from which they derived their laws and incidents, wholly regardless of the domicile of the owner. Growing out of the same reasons, it was also the prevailing opinion that, while immovables were exclusively governed by the law of locality, movables were controlled, according to the same maxim, by the law of the domicile of the owner, and not by that of its situs." In the changed condition of wealth and property, such a fiction, however suitable and useful in primitive times, would now, in many cases, work the greatest injustice, and impair the supremacy which every government should maintain over everything within its territory, both on the ground of public expediency and the private interests of its citizens. And, according to Wharton (Treatise on the Conflict of Laws, 1872), this fiction of law has been universally abandoned upon the continent of Europe, except in cases as to rights in respect to personalty which sprang from marriage and succession, and would not, furthermore, in Europe, find a place in any discussion of the principles of taxation, except possibly in a review of curious tax experiences, and for the reason that nowhere, except in the United States, is there any system of extra-territorial taxation, or any tolerance given to the ideas upon which it is founded.
This question of extra-territorial taxation has been raised repeatedly before the highest courts of the United States, and its illegality in respect to visible, tangible property is believed to have been in every instance affirmed.
Thus in the State of New York, up to the years 1861-’62, the rule of assessment of personal property appears to have been in accordance with that now recognized in Massachusetts—viz., that it follows the owner under all circumstances; but in that year a case of much importance was carried up to its Court of Appeals under the following circumstances: One Hoyt was taxed in the city of New York for personal property, and resisted the taxation on the ground that, although he had personal property outside of the State, he had none within the State in excess of his just debts and liabilities; the property in question without the State being capital employed in business in New Orleans, and farm stock and household furniture in New Jersey, each taxable by local law in the States where situated. The Court of Appeals decided the assessment to be illegal, and held (Comstock, C. J.) that the property was actually ​situated in other States, in other sovereignties, protected by their laws and taxable there, and therefore it ought not to be subject to a second taxation in New York.
The court also, in rendering the decision, used the following language: "There seems to be no place for the fiction" (that personal property follows the owner) "in a well-adjusted system of taxation. In such a system a fundamental requisite is that it be harmonious, but harmony does not exist unless the taxing power is exerted with reference exclusively either to the situs of the property or to the residence of the owner. Both rules can not obtain, unless we impute inconsistency to the law and oppression to the taxing power. Whichever of these rules we find to be the true one, whichever we find to be founded in justice and the reason of the thing, it necessarily excludes the other; because we ought to suppose, indeed, we are bound to assume, that other States and governments have adopted the same rule. If, then, proceeding on the true principles of taxation, we subject to its burdens all goods and chattels actually within our jurisdiction without regard to the owner's domicile, it must be understood that the same rule prevails everywhere. If we proceed in the opposite rule, and impose the tax on account of the domicile, without regard to the actual situs, while the same property is taxed in another sovereignty by reason of its situs there, we necessarily subject the citizen to a double taxation, and for this no sound reason can be given."
In further support of its position the court made use of the following illustration: "A citizen, a resident of Massachusetts, may own a farm in one of the counties of this State, and large wealth belonging to him may be invested in cattle, in sheep or horses, which graze the fields, or are visible to the eyes of the taxing power. Now, these goods and chattels have an actual situs as distinctly as the farm itself. Putting the inquiry, therefore, with reference to both, ‘Are they real estate, and personal?’ so as to be subject to taxation under that definition. It seems that but one answer can be given to this question, and that answer must be according to the actual truth of the case. If we take the fiction instead of the truth, then the situs of these chattels is in Massachusetts, and they are not within this State. The statute means one thing or the other; it can not have double or inconsistent interpretations; and as this is impossible, so we can not, under and according to the statute, tax the citizen of Massachusetts with respect to his chattels here, and at the same time tax the citizen of New York in respect to his chattels having an actual situs there. In both cases the property must be within the State, or there is no right to tax at all."
Since this decision by its highest court, personal property, though ​owned in the State of New York, is not taxable to its owner there, provided it is capable of and has a permanent situs away from the owner or his domicile.
The United States Supreme Court (Hayes vs. Pacific Mail Company, 17 Howard, 713) decided that the situs of a vessel for State taxation is only at the port where it is registered, and not where it may happen to be.
In the case of The City of New Albany vs. Meekin (3 Indiana Reports, 481), the defendant was a resident of New Albany, and was assessed for personal property in respect to a steamboat enrolled at Louisville, Kentucky, and which touched only occasionally at New Albany. It was held that the tax was illegal, the Supreme Court observing that "the only question we have to consider is whether the boat or the defendant's share is within the city."
It is also an interesting circumstance that this legal controversy concerning the situs of a ship for the purpose of taxation has its almost the exact counterpart in the records of English law; case after case having formerly come up before the English courts in which the question involved was: Shall the ship or her owners be taxed at the place of the vessel's registry, or at the domicile of her proprietors? The ultimate decision was, that the only situs of a vessel for taxation is the port of her registry, and this decision was recognized in practice until Parliament and the people arrived at the conclusion that it was for the interest of the nation that ships should no longer be taxed directly in any manner.
The United States Supreme Court, in the case of the Northern Central Railroad vs. Jackson (7 Wallace 262), also affirmed the principle that two States can not tax at the same time the same property, nor can a State tax property and interest lying beyond her jurisdiction. The railroad corporation in question, extending from Baltimore in Maryland to Sunbury in Pennsylvania, was the result of the consolidation of four railroad companies, one incorporated by the State of Maryland and three by the State of Pennsylvania. The latter State imposed a tax of three mills per dollar of the principal of each bond issued by said road, which tax the company, at their office in Baltimore, deducted from the coupons of the bonds of said consolidated road held by Jackson, an alien, resident in Ireland. The court, by Mr. Justice Nelson, decided adversely to the tax, on the ground that the bonds were issued upon the credit of the line of the road, a portion of which was within the jurisdiction of the State of Maryland, and that the security, bound and pledged for the payment of the bonds and of the interest on them, embraces the Maryland portion of the road equally with that portion situated in the ​State of Pennsylvania; respecting which condition of affairs the court used the following language:
"It is apparent, if the State of Pennsylvania is at liberty to tax these bonds, that to the extent of this Maryland portion of the road she is taxing property and interest beyond her jurisdiction. Again, if Pennsylvania can tax these bonds, upon the same principle Maryland can tax them. This is too apparent to require argument. The consequence, if permitted, would be double taxation of the bondholder, and its effect is readily seen. Thus a tax of three mills per dollar of the principal, at an interest of six per centum, payable semiannually, is ten per centum per annum of the interest; a tax, therefore, by each State, at this rate, amounts to an annual reduction from the coupons of twenty per centum; and if this consolidation of the line of the road had extended into New York or Ohio, or into both, the deduction would have been thirty or forty. If Pennsylvania must tax bonds of this description, she must confine it to bonds issued exclusively by her own corporations. Our conclusion is, that to permit the deduction of the tax from the coupons in question would be giving effect to the acts of the Pennsylvania Legislature upon property and interests lying beyond her jurisdiction."
Again, the national (United States) bank act acknowledges, and the courts of the United States have so held, that a bank has a situs and its shares a situs where the bank is located, and not where the stockholders reside. The national bank act, therefore, discards the usual State principle of taxation, that personal property follows the owner.
A debt incurred for stock in a corporation has recently (1897) been held by the Appellate Supreme Court of New York as non-taxable, because the assets represented by the stocks are assessed and taxed.
But are credits, in any or all of the various forms in which they are exemplified, property? This question brings us face to face with another of those curious anomalies of opinion and practice that characterize this whole subject of taxation.
In most of the States of the Federal Union credits are generally regarded as property, and are made the subject of taxation at the residence or domicile of their owner, and are held to embrace all debts due from solvent debtors, whether on account, contract, note, bond, or mortgage, and stocks in moneyed corporations, irrespective of the place where such securities may be at the time the assessment shall be made. In States, however, like New York, which reject the assumption that the situs of movable, visible, personal property for taxation follows the owner irrespective of its actual location, and accept the decision of its own courts, that the situs of such property ​for taxation is where it is, and independent of the domicile of its owner, the opposite rule is held to apply to credits.
On the other hand, in all other countries of high civilization, credits are not regarded as property in the sense of an actuality, and are not subjected to direct taxation. In France, which is at the present encumbered with a greater national debt than has ever before been borne by any nation, and where almost every expedient for raising revenue to defray its extraordinary national expenditures has been resorted to, no attempt or even a proposition has been made to tax credits. It is, therefore, of the first importance that the American public, and especially that portion of it that enacts tax laws, shall have a clearer and more correct idea of the nature of property than it now possesses; and that there shall be eliminated from all such laws the idea that extensively prevails in the United States, but in no other country, that "nothing" can be "something," if a statute will only so provide.
That there is some warrant and defense for such an idea is to be found in the fact that there is not a unity of opinion among economists on this subject; and that in common parlance and dictionary use the term "property" is made applicable to the qualities, rights, and titles of "things" equally with the things themselves. Thus, according to the ancient though still existing law of Scotland, what is termed "real property" in England is termed "heritable rights" in Scotland, and what is termed "personal property" in England is termed "movable rights" in Scotland. Ancient usage is, however, no warrant for the continued use of definitions not applicable to new conditions, and the acceptance of which as authority for conduct is provocative of immorality, injustice, and unsound fiscal policy. Prof. H. Dunning Macleod, a distinguished English economist, who has many adherents, has vigorously advanced the idea that everything that can be bought and sold is property, and assigns to the old Greek philosopher Aristotle the honor of its original conception; but without mentioning that at the period at which Aristotle lived there was practically nothing bought or sold except things tangible and visible, and that credits were practically unknown.
Attractive as this idea may be in theory, it needs but practical application to demonstrate its absurdity. Thus, when the Church sold "absolution" from sin, did the buyer, to quote from old Wycliffe, "have property in ghostly goods, in which no material or property may be regarded as inhering"? Service, again, is bought and sold; but when its purchase, as in the case of the hire of incompetent or dishonest persons, results in the impairment or complete waste or destruction of property, is it entitled to be regarded as property? When a ticket to a theater or concert is sold and bought, can the temporary ​right to a seat, or the brief sense of pleasure which the purchaser receives in return, and which he can not perpetuate without renewed buying, and can not transfer to another person, be entitled to be called property? "When socialists and communists," says Professor Macleod, "wish to destroy property, it is not the material things they wish to destroy, but the exclusive right which private persons have in them." If this assertion is warranted, the question is pertinent, Why is it, when socialists or communists have the opportunity to destroy property, they rarely proceed against property over which private persons have exclusive control—like private dwellings—but rather against monuments or buildings, and constructions which are acknowledged to be public as respects use and control? Again, Professor Macleod further holds that not only is the right to a thing, which is not at the time of sale in existence, but is to be acquired in the future, property; but also that a mere promise to deliver a commodity is property of the same general nature as money and an actuality.
The Foreign-held Bond Case: a New Chapter of Progress.—Any review of this general subject of "double taxation" would be imperfect that failed to particularly call attention to a decision of the United States Supreme Court which, although of the first importance as touching the correct administration of a free and intelligent government, has thus far attracted little attention, even among members of the American bar.
The subject in question, furthermore, illustrates the historical principle that changes in free governments have more often been effected through the decisions of their highest courts than by direct legislation. Thus it is known to all who have examined the theory and practice of local taxation in the United States, that a hundred years ago or less, the lawmakers of England entertained very generally the same opinion in regard to this subject which is yet popularly accepted in this country, namely, that in order to secure exact justice and equality it is essential to attempt to subject all property of the taxpayer—real and personal, tangible and intangible, visible and invisible—to one uniform rate of valuation and assessment; although it must then, as now, have been evident to every one on reflection that, in order to attempt to do this, it would be necessary to endow the assessors with more than mortal powers of perception, so as to enable them to see what was invisible, and measure what was intangible and incorporeal (debts and credits, for example); and that, in default thereof, any practical application of this theory must result in rank absurdity and injustice. And yet it is curious to note that the change in English taxation, when it came about, was not due to any such process of reasoning on the part of the people, or to ​any positive sentiment on the part of the state, but rather to, a series of legal decisions by its courts, which gradually undermined the whole system of British local tax assessment, until it tumbled down, as it were, imperceptibly, and gradually became replaced, from necessity, by a theory which approximated more closely to the principles of sound political economy and the dictates of common sense.
Thus, one of the first of the old-time maxims which gave way under these decisions was the fiction of law that all property for the purpose of taxation followed the person or domicile of the owner (in virtue of which real estate was once taxed, under the British system, where the owner resided, in place of where the property was situated, used, and protected), and its replacement by the more rational principle that for all purposes of assessment the situs of property is where the property actually is; while other decisions of a similar character, following one another by intervals of years, forbade the taxation, for local purposes, of all evidences of national indebtedness, or "consols"; affirmed the situs of a vessel for taxation to be at the port of its registry, irrespective of the domicile of the owner; and declared that all negotiable instruments are chattels personal, and the like; until the British system of local taxation, like the French, Belgian, and German, has come to be based on the assessment of comparatively few objects, and the avoidance in assessment, to the greatest possible extent, of all personal inquisition and arbitrary treatment.
A case in question determining definitely, as it would appear, the hitherto questionable situs for State taxation of all that large class of personal property comprised under the general term "negotiable instruments"—i. e., State, municipal, railroad, and other corporate bonds, circulating notes of banking institutions, promissory notes payable to bearer, etc.—is reported in the fifteenth volume of Wallace, under the title of State Tax on Foreign-held Bonds, and in brief may be thus stated:
The State of Pennsylvania, by a law passed in 1868, required the officers of every company, except banks or savings institutions, incorporated and doing business in that State, to retain a tax of "five per cent" upon every dollar of interest paid by such company to its bondholders or other creditors, and to pay over the same to the State Treasurer for the use of the Commonwealth. The plaintiff in this specific case—the Cleveland, Painesville, and Ashtabula Railroad Company—denied the legality of the tax, and, appealing to the State courts, alleged, among other things, the following in support of its position:
"That the greater portion of the bonds of the company having been issued upon loans made and payable out of the State to ​nonresidents of Pennsylvania, citizens of other States, and being held by them, the act in question, in authorizing the tax upon the interest stipulated in the bonds, so far as it applied to the bonds thus issued and held, impaired the obligation of the contracts between the bondholders and the company, and was therefore repugnant to the Constitution of the United States and void."
The several State courts of Pennsylvania, however, affirmed the validity of the tax; but the case having then been carried on writ of error to the Supreme Court of the United States, the latter in December, 1873, reversed the judgment of the State courts, and decided in favor of the plaintiff; the opinions of the court, as expressed by Mr. Justice Field, being substantially as follows:
I.The power of taxation of a State is limited to persons, property, and business within her jurisdiction; all taxation must relate to one of these subjects.
II.The tax laws of a State can have no extra-territorial operation; nor can any law of a State inconsistent with the terms of a contract made with and payable to parties out of the State have any effect upon the contract while it is in the hands of such parties or other non-residents of the State.
III.Bonds issued by a railroad company are property in the hands of the holders, and when held by nonresidents of the State in which the company was incorporated are property beyond the jurisdiction of the State.
It will be observed under the third head (the language above quoted being the official prefatory syllabus of the decision) that the court lays down the rule that negotiable bonds are property, not in the place where issued, as was claimed by the authorities of Pennsylvania, and not at the domicile of the owner irrespective of actual presence, as was generally claimed by the State tax officials, but in the hands of the holders at the place where the bonds are actually situated, whether the holders be actual, bona fide owners or otherwise. And the following is the exact language in which the decision was expressed:
"It is undoubtedly true that the actual situs of personal property which has a visible, tangible existence, and not the domicile of its owner, will in many cases determine the State in which it may be taxed. The same theory (i. e., the actual situs determinative) is true of public securities consisting of State bonds, and bonds of municipal bodies, and circulating notes of banking institutions; the former, by general usage, have acquired the character of, and are treated as, property in the place where they are found, though removed from the domicile of the owner; and the latter are treated and pass as money wherever they are.
​If, now, there is any meaning in words, and if the authority of the United States Supreme Court in defining the powers and jurisdiction of the States is as absolute as is generally supposed, it is clearly evident that the first clause of the above-quoted opinion effectually establishes the unconstitutionality and illegality of the theory and practice of Massachusetts and other States, namely, that in virtue of jurisdiction over the person and domicile a State has a right to tax so much of the visible, tangible, personal property of its citizens—i. e., horses, cattle, stocks of goods, money, bullion, and the like—as may be without its territory and jurisdiction: the law of Massachusetts, for example, defining personal property for the purpose of taxation to be "goods, chattels, money, and effects, wherever they are."
If it be objected that the court, by using the expression "in many cases," does not make its rule absolute and unqualified, the answer is that the exceptions, when understood, will be found to be of a character which proves and strengthens the rule, rather than antagonizes it. Thus, as has been already noticed, the United States Supreme Court has decided that the situs for taxation of vessels which move about on the high seas or navigable inland waters must be at the home port where they are owned and registered; and it also stands to reason that the situs of such property as railroad cars, or other chattels which as a condition of using are perpetually in transitu, in order to avoid duplicate taxation and conflicting statutes, must be taxed, if taxed at all, under the head of the franchise of the company or owners. But in all cases where fixity, or permanence are conditions of using, it may be unquestionably affirmed that the court intended to make no exception in its rule for determining where visible, tangible, personal property may be taxed, and where, also, it is of necessity exempted from taxation.
Taxation and Protection correlative.—It ought to be superfluous, but in view of existing opinions and practices it is nevertheless expedient to say that the reason of this rule is founded upon a circumstance alike conformable to law and common sense, which is that taxation and protection are correlative terms; or, in other words, according to the political theory of our governments, national and State, and, in fact, of every government claiming to be free, that taxes are the compensation which property pays to the State for protection; or, as Montesquieu, in his Spirit of Laws, has ​it, and as the United States courts have again and again expressed it, that "the public revenues are a portion that each subject gives of his property in order to secure and enjoy the remainder." When, therefore, a State like Massachusetts assesses property situated beyond its territory and jurisdiction, and which its laws are not competent or able to either reach or to protect, or assesses one of its own citizens in respect to such property, the act has no claim to be regarded as taxation, but is simply arbitrary taking, or confiscation, and a procedure which the United States Supreme Court has, at least in the case under consideration, declared to be unconstitutional, and therefore illegal and unwarranted. But the Supreme Court of the United States has placed itself on record before in respect to the principle that protection and taxation are correlative; and in another case, which appears almost wholly to have escaped the attention of the American bar and public, its decision is invested with a historical as well as a legal interest. Thus, in September, 1814, the country being then at war with Great Britain, the town of Castine in Maine was captured by the British, and remained in their exclusive possession until after the ratification of peace, in 1815. During this period the British Government exercised all civil and military authority over the place; established a customhouse, and allowed goods to be imported, which goods remained in Castine after it was evacuated by the enemy. After the re-establishment of the American Government, however, the United States collector of customs, claiming a right to American duties on the goods in question, demanded payment of the same from the owners or importers, and, the claim being resisted, the case went up to the Supreme Court, where Judge Story, then upon the bench, gave judgment for the defendants as follows:
"We are all of the opinion that the claim for duties can not be sustained. By the conquest and military occupation of Castine, the enemy acquired that firm possession which enabled him to exercise the fullest rights of sovereignty over that place. The sovereignty of the United States over the territory was of course suspended, and the laws of the United States could no longer be rightfully enforced there, or be obligatory upon the inhabitants who remained there and submitted to the conquerors. By the surrender, the inhabitants passed under a temporary allegiance to the British Government, and were bound by such laws, and such only, as it chose to recognize and impose. From the nature of the case, no other laws could be obligatory on them; for where there is no protection, or allegiance, or sovereignty, there can be no claim to obedience."
But to return to the subject more immediately under consideration. The court having thus affirmed the situs for the taxation of ​personal property which has a visible and tangible existence, has now taken a further step forward, and in the second clause of the opinion above quoted asserts that "the same thing is true of public securities consisting of State bonds, and bonds of municipal bodies, and circulating notes of banking institutions"; namely, that their situs for assessment and taxation is wholly irrespective and apart from any whereabouts of the owner or his domicile, but is where the securities actually are. So much, then, is so clear that even the most obstinate of assessors under the present arbitrary system will find it difficult, in respect to the items specified, to interpret the law and rule of action otherwise. But it is to be observed that negotiable railroad bonds are not, in the opinion quoted, specifically mentioned.
That they, however, follow the same law as municipal and State bonds, and were intended by the court to be included in the same category, is, however, obvious, for the following reasons:
1. The subject-matter of the case and of the decision was a railroad bond. 2. The character of a railroad bond as a negotiable instrument is in all respects the same as a State or municipal bond. 3. The reason which undoubtedly led the court (as it must every unprejudiced reader who thinks upon the subject) to the conclusion that State, municipal, and railroad bonds and bank notes follow the same rule, in respect to their situs for taxation, as other personal property of acknowledged visible and tangible character is that the property of all such instruments runs with the instrument, wholly irrespective of the residence of the owner, and consequently, in respect to title, passes by delivery. By public securities, also, the court undoubtedly meant all negotiable securities which are payable to the public—that is, to bearer wherever he may be; or, in other words, a public security, from its very nature, is subject to no previous equities between the original parties creating or issuing it, and the sum agreed to be paid is a liquidated and adjusted sum which must be paid to the public—that is, the holder; and the situs of such property from necessity follows the instrument to the public, and can be nowhere else than where the instrument actually is. On the other hand, if the instrument was subject to equities, the property might be where the parties creating it or owning it resided. And if this position is not correct, dealings in all such securities or upon the stock exchange, or in open market would be impracticable; inasmuch as the purchaser would be obliged to institute an investigation as to whether the title for each specific bond vested in the vendor or some other person; and as there is no registration of the transfer of such property, as there is in the case of real estate, the ​investigation must be practically impossible. So, also, in the case of circulating notes of banking institutions: if their title did not pass by delivery, or, in other words, if their situs as property was not under all circumstances accepted as in the hand of the holder, their use as money would be impossible; and the courts, recognizing this principle most fully, have always held that in cases where negotiable instruments or money have been stolen, and in consideration for value received have come into the hands of innocent third parties, the title to such property in the hands of the holders is perfect and irrevocable.
Again, the circumstance that State, municipal, and railroad bonds, and all other strictly negotiable instruments, even warehouse receipts payable to bearer, are subject to attachment by legal process only at the place where they actually are, and without regard to the whereabouts of the owner or his domicile, of itself also clearly defines and limits the situs of such property for taxation; for clearly a State which has the power to make a legal attachment operative against a given property has also the power to tax such property; while, on the other hand, a State which through lack of possession and jurisdiction, can not attach a specific property, certainly can not enforce its tax laws against it, or give protection in case its rights or the rights of its owner are violated. And, again, can the right to tax personal property exist in a State from which the property is so confessedly absent that there is neither right, power, nor possibility of passing title to it within the territory of the State by delivery?
That the view thus taken respecting the situs of negotiable instruments, and especially of railroad mortgage bonds, for taxation, is in strict conformity with the opinion of the Supreme Court, is also evident from the fact that in summing up the court held that not only was a mortgage bond issued by a railroad chartered by Pennsylvania, and in the hands of a non-resident, property out of the State, and as such beyond the jurisdiction of the taxing power of the State, but also that the State could not tax such property even when owned by a citizen and resident, unless the bond was at the time of assessment actually within the territory of the State. And as this point is a most important one, it is desirable to ask attention to the exact language of the court establishing it.
"We are clear," says Justice Field, "that the tax can not be sustained; that the bonds, being held by non-residents of the State, are only property in their hands, and that they are thus beyond the jurisdiction of the taxing power of the State. Even where the bonds are held by residents of the State, the retention by the company of a portion of the stipulated interest can only be sustained as a mode of ​collecting a tax upon that species of property in the State. When the property is out of the State, there can be no tax upon it for which interest can be retained. The tax laws of Pennsylvania can have no extra-territorial operation."
The decision of the United States Supreme Court, of which an analysis has been above given, ought therefore to be regarded as constituting a real chapter of progress in American local taxation; because, by contributing powerfully to break down the present popular system, which, founded on an erroneous and impracticable principle, never has been and never can be executed with justice and efficiency, the time is thereby hastened when a better system shall be accepted and inaugurated. The logic of this decision, moreover, will not only pervade courts—State and Federal—but will be felt in legislative halls, and be impressed upon the conscience of the people. The court itself, in referring to the tax under consideration, says with great point and truth: "It is only one of many cases where, under the name of taxation, an oppressive exaction is made, without constitutional warrant, amounting to little less than an arbitrary seizure of private property. It is, in fact, a forced contribution levied upon property held in other States, where it is subjected or may be subjected, to taxation upon an estimate of its full value."
But this new decision teaches us that all personal property, if taxed at all, must be taxed in the city or town where found, and not elsewhere. The injustice and oppression are also the same as in the case of State exterritorial taxation when the tax is levied upon a person for property not within the district where the property is actually located and protected. It is only a degree of oppression, and this authoritative opinion of the United States Supreme Court can not fail to give a new impulse to the feeling that taxation without protection is merely legalized brigandage.
* ↑ This subject, from its modern and strictly legal aspect, will be discussed hereafter.
* ↑ "No fiction," says Blackstone, "shall extend to work an injury; its proper operation being to prevent a mischief, or remedy an inconvenience, which might result from the general rule of law." At any attempt to misapply a fiction, it falls within, and is terminated by, that other authoritative maxim of logic and the common law, cessante ratione legis, cessat ipsa lex. Another great authority in law, Lord Mansfield, says: "Fictions of law hold only in respect of the ends and purposes for which they were invented; when they are urged to an intent and purpose not within the reason and policy of the fiction, the other party may show the truth."
* ↑ In a report of the law committee of the Common Council of the city of Philadelphia, submitted February 16, 1871, we find the following historical review of the tax laws of Philadelphia, under the government of William Penn and his successors in the colonial government: "These laws were framed to avoid repeating errors (in respect to the taxation of personal property) which had been proved by long experience in Great Britain and the Continental countries to be inquisitorial in their nature, and by concealment, evasion, and perjury demoralizing to the people. We find the Provincial Council (1683) first determining that ‘a publick tax on land ought to be raised to defray the publick charge,’ and the enactment of 1700, fixing county rates and levies (which law was not enrolled), is believed to have been not larger in the subjects of county rates than in the act of 1724, which were real estate, horses, cattle, sheep, negroes, and a poll tax. It will be noticed that the personal estate here enumerated was visible property not susceptible of concealment, and that debts, accounts, merchandise, and ships are nowhere mentioned. In the several enactments that followed in 1795, 1799, and 1834, the subjects of county levy were substantially the same, sheep and slaves being omitted in the last act, and officers added to the last two, and it was not until 1844, a period when the State, by large expenditures, had become embarrassed, that, by the act of 29th day of April, 1844, mortgages, money owing by solvent debtors, stocks, household furniture, public loans, watches, etc., were made taxable for county purposes. The attempted enforcement of this act was so injurious to the people, by driving capital and industrial establishments from the State, and so evaded in returns, that by common consent the law remained on the statute book a dead letter until the consolidation of the city. "At that time (1854) the question was again discussed, and although the councils of the city had the power to impose the tax rate upon all the subjects of taxation, in the thirty-second section of the act of 1844 we find, by the first ordinances, they limited the levy to real estate, furniture, horses, cattle, and pleasure carriages, and so continued until 1864, when an act was passed empowering the city to levy taxes on all the subjects of taxation contained in that section of the act of 1844, a power which they possessed before, but had not exercised. "Since that time the authority of the city to levy a tax on mortgages, stocks of Pennsylvania corporations, and occupations, has been repealed. In considering the enlargement of the subjects of levy in this city, the fact must not be lost sight of that the State does not impose any tax on real estate for State purposes, but derives all its revenue from corporation stocks and loans, mercantile license, tavern licenses, collateral inheritance, etc., and it is estimated that of the gross receipts for 1870 ($6,336,603) more than two fifths of the amount ($2,600,000) was derived from the property and business interests of the citizens of this city."
* ↑ In Massachusetts, within the last half century, a citizen has been threatened with arrest and imprisonment for objecting to pay taxes in that State on goods located in a store in San Francisco and paying taxes thereon in the State of California. Bullion in the vaults of the Bank of England has also been taxed to citizens of Massachusetts as personal property within a comparatively recent period.