251

Certain of the independent establish- partisanship can never fail to be above ments should be incorporated into suspicion. existing or new departments. Others These changes in administrative or- must remain wholly or in part outside ganization would probably save the the framework of departmental or- Federal Government little, if any, ganization, but, where necessary, should money. On the other hand, they would be resolved into their several elements. certainly improve the efficiency of the Quasi-legislative functions should be services concerned. But most impor- assigned to agencies organized for the tant of all, they would greatly performance of such functions. Quasi- strengthen the government in the con- judicial functions should be assigned to fidence of the people. For the moment, agencies organized for the performance public opinion seems disposed to make .of such functions. The Interstate fewer demands upon the government Commerce Commission, for example, for the increase of administrative activ- and the Federal Trade Commission, ities than for a long time past. The perform certain duties which might opportunity should be seized to intro- not improperly be transferred to the duce sound methods of administration, Department of Justice. Others may to strengthen the administrative ma- be vested in any suitable partisan or chinery, and to accumulate a stock of administrative agency. The purely public confidence in the administrative executive duties of the Interstate capacity of the government which will Commerce Commission alone would stand it in good stead when opinion furnish ample employment for a large presently demands the assumption of bureau in the Department of Com- new responsibilities towards the pub- merce. Still other duties ought to be lic, and heavier burdens again fall upon transferred to agencies whose non- our administrative system.

Earned and Unearned Income By WILLFORD I. KING Economist, N ational Bureau of Economic Research

division of income into two &dquo;unearned&dquo; and which, at the same THEbroad categories denominated re- time, possesses characteristics that make spectively as &dquo;earned &dquo; and &dquo; unearned &dquo; it desirable or necessary to place it in finds little or no sanction in standard a separate category and perhaps to texts on economics, but nevertheless, measure its importance or volume. this classification is treated by many If there really is such a thing as &dquo; un- semi-scientific publicists as an accepted earned &dquo;income, where may it be found? form of differentiation, and a consid- The Single Taxer will assure us that it erable number of economists show a consists wholly, or at least principally, tendency either to use it in their writ- of rent of land or of profits made ings or tacitly to admit its validity. through speculation in land. The Since, then, the usage of this termin- Marxian will insist that it is made up ology is becoming increasingly common, of interest and the unreasonable gains it seems worth while to inquire whether of &dquo;profiteers.&dquo; The view, however, or not there exists a type of income which seems to find most general ac- which may justly be designated as ceptance is that all income arising 252 through the ownership of property is tion of whether or not, in accordance perforce unearned. with this principle, the income derived Property may legitimately be defined from property can ever legitimately as a legal title to anticipated income. be classed as earned. We may take Property and its income are, therefore, first the case of a man who works dili- such closely related phenomena that gently for another and receives as part it necessarily follows that if one is un- of his pay a due bill or note. Such a earned the other must be also; for what certificate of indebtedness is a typical is true of one is true of the other. What form of property; yet it is hard to see are the facts about both? how the most rigorous Marxian could In order to answer this question, it is contend that such property has not necessary first to determine upon a been earned. Granted that the note satisfactory meaning to be attached to has been earned, suppose that the note the term &dquo;earned.&dquo; As a first step in is exchanged for a house, is not the this direction, it is worth while to look house also earned property? If so, into Webster’s definition of the world. does it not obviously follow that the We find in his dictionary the word services which the house yields to the &dquo;earn&dquo; defined thus: &dquo;To gain as a owner are earned to exactly the same just recompense for one’s labor, serv- extent? Similarly, if the note is ex- ice, etc.&dquo; This concept doubtless ac- changed for a piece of land, is not the cords with the idea which the word land likewise earned? conveys to most of us and may be To once admit that any one kind of taken as a logical criterion in the clas- property may be earned, is thus evi- sification of income. dently equivalent to admitting that According to this definition, it is all property may be earned; and to ad- clear one earn unless he that does not mit that property may be earned is to renders a service. It is questionable, admit that the income from property if the rendition of a service however, may also be earned, for, as before makes the therefor always recompense stated, property is merely a title to truly earned. When one person serves such income. another inadvertently or unintention- At this point, however, the clever ally, he can scarcely claim to have Marxian will interpose an objection. earned a reward. most of us Probably While admitting that the face value of would agree that the act of re- earning the above-mentioned note quires that the service rendered shall may legiti- mately be referred to as earned, he require some effort or sacrifice on the will point out the fact that, when the part of the earner. With this idea in note falls due, the owner is to mind, we shall then set forth the follow- likely demand, not this earned ing definition of the term as the one only principal, but also an additional sum known as which will be adhered to in the suc- in the of the ceeding pages: Income is earned when interest, which, opinion has in no sense been it is obtained as a just recompense for Marxian, earned, but is extorted from the holder deliberate effort or sacrifice made by the merely income receiver for the benefit of the of the note. This analysis of the pay- payer of the reward. ment into two parts is entirely logical, and brings us face to face with the INCOME FROM PROPERTY question of whether or not all interest Having selected this definition of necessarily falls into the category of the term, let us next consider the ques- unearned income. 253

WEALTH AND ITS ACCUMULATION be contrary to the spirit of free peoples. Public sentiment in Presumably no student of economics general apparently considers them as undesirable will deny that a necessary entirely prerequisite institutions. What meth- to the advance of society from barba- satisfactory ods of about and rism to civilization is the saving of tan- bringing saving gible wealth and its accumulation into concentrated control over property are then available? relatively large masses, each mass under unified control. Thus, Many socialists advocate the idea being of these functions of efficient farming requires an aggrega- making processes tion of live stock, machinery, buildings, the state and of the state only. This solution of the is fences and other equipment, the pro- problem presumably a for the socialist state duction of which has required years of possible one, could retain each such of the in- work for some one. A modern factory year dustrial as the officials believed represents such a concentration of output it to devote to wealth on a much larger scale, since it necessary productive often embodies the results of millions processes. As yet, however, our elec- of days of toil. Modern productive torate have shown no disposition to the of the en- methods are therefore only possible place industry country in the hands of the because many persons have refrained tirely government. As as the voters remain of this from consuming some part of the out- long put resulting from their respective mind, saving and concentration must be secured in some other if civili- efforts, and because, in one way or way, another, single managements have zation is to continue. each been placed in control of large Now the fact appears to be indispu- aggregates of such savings. table that the vast majority of human Saving and concentration of the beings are so constituted that they pre- control (though perhaps not neces- fer present to future goods; that is, for sarily the ownership) of wealth are, example, they would sooner have their therefore, two foundation stones of cake today than a year hence; rather civilization. How can these two fun- see a play tonight than next season. damentals best be secured? Under these circumstances, the natural History affords examples of states in tendency is to consume all wealth as which powerful rulers or even private fast as it is created. individuals through arbitrary power Owing to this time preference for such as force of arms, the use of mo- present goods, individual initiative, nopoly or the enslavement of sections of unless stimulated by some special in- the population have accumulated prop- centive, fails to provide a sufficient erty on a scale sufficient to permit of a supply of saving to meet the needs of reasonable rate of economic progress. modern industry. It has, therefore, But feudalism and despotism have been been found just as necessary to pay slowly but surely yielding before the those who save for their sacrifice in march of democracy; hence, it is evi- refraining from following their natural dent that, as devices for saving and bent to use up all their income as soon concentration, they fail to satisfy as received, as it is to pay other persons modern public opinion. Uncontrolled for giving up their natural longing for private monopolies are almost univer- rest or recreation, as they must do sally detested, and have been declared when they work in a shop, office or in some of our state constitutions to factory. 254

The average poor workingman would wealth amassed. His power has col- be just as ready to put in two hours of lected it, but the aggregation of re- overtime as to wait four years to receive sources has been secured only because the five dollars which is coming to him others have been compelled to refrain as an ordinary day’s pay. The dollar from consumption. He himself may that he is paid as wages for overtime have given nothing-may have made or the dollar that he receives as interest no sacrifice. Likewise, not all amounts on the five dollars because he waits collected as wages are actually earned. four years for his daily wage both repre- Many an employe loafs on his job or sent payments for something which he does such poor work at times that he will only do if pay therefor is in pros- adds nothing to the output. Hence, pect. In many instances, therefore, we are forced to the conclusion that payments for saving and payments for some parts of property income are labor are both alike rewards paid to earned and some parts unearned; that those who have suppressed their nat- even wages and salaries, while perhaps ural desires in order to serve the needs usually earned, are also frequently of others. If one is earned, so is the unearned. The distinction between other also. The man who gathers earned and unearned income can not, wealth by refraining today from buy- therefore, be validly based upon the ing the things which he desires to con- premise that one comes from labor sume at present, benefits society by while the other is received in the form accumulating property rights which he of interest payments or other returns himself may use in bringing about more from property. If earned income is to effective processes of production, or be distinguished from unearned income, which he may loan to others who may the line of demarcation must be other- use them for a like end. This service wise drawn. to society involves real sacrifice, and INCOME FROM MATERIAL WEALTH the interest which he receives in pay- ment for this sacrifice is earned just The followers of Henry George at- as truly as are the wages for his labor. tempt to divide income from material However, it does not necessarily wealth into two classes: that received follow that all accumulation of wealth as payments for the use of the gifts of represents sacrifice. Some persons are nature, and that derived from artificial so wealthy that it would be a great improvements on the land. The first burden to be compelled to spend their type of income, they contend, is entire income upon consumption goods. wholly unearned and therefore ought Saving by this class can not be said to to be confiscated by the state. involve abstinence. Their saving is Their doctrine rests entirely upon inadvertent and the interest which two assumptions: first, that all prop- they receive for the use of property erty in natural resources was originally rights thus accumulated can scarcely be acquired without making any adequate classified as &dquo;a just recompense for return to society therefor, and hence services rendered.&dquo; that most land titles rest originally on Similarly, when a monopolist, by theft; second, that no valid transfer can use of his peculiar power, gathers to- be made of property acquired through gether property, he may be doing soci- theft. The first assumption, while ety a real service by such accumulation, based largely upon surmise, presum- but it is a stretch of the imagination to ably corresponds fairly closely to the say that he has necessarily earned the facts; the second premise, if carried to 255 its logical conclusion, leads to results UNEARNED INCREMENT not at all in conformity with the usual While the contention of Henry tenets of the Taxers. It Single requires George, that all land rents are un- but little acumen to perceive that if earned, has been given relatively little title can not be to stolen legal given support by orthodox economists, an- goods, likewise legal title can be given other doctrine originating in the ranks to no thereof or derived part product of the Single Taxers has received more therefrom. If all the land is stolen serious consideration. This is the so also are all the property, obviously theory that increases in land value con- minerals from the all the dug land, stitute an &dquo;unearned increment.&dquo; The wood cut from the land, all the crops truth or falsity of this assumption may on the land. Our grown monetary perhaps best be ascertained if we first rests on stolen our houses system gold; consider the case of the coal merchant. are built of stolen wood and brick; our He buys coal for twelve dollars and sells clothes are made of stolen cotton and it for fourteen dollars a ton. Does he wool; and our bread is of composed get an unearned increment? Most stolen wheat. This drives us logic economists will at once that he into the of the anarch- agree perforce camp does not. He is paid for his service in ists who condemn all private property holding the coal in readiness for the because it rests on force. customer-a process in which time The that to establish valid theory utility is added to the coal. In exactly title we must hark back to the begin- the same way, the land merchant who of is so absurd ning things palpably buys urban land in large tracts, and as to seem of the considera- unworthy sells it off in small parcels on terms tion of serious thinker. Yet, any convenient to purchasers of limited strangely enough, a recent writer of means, earns a reasonable profit on the recognized ability has apparently en- transaction. dorsed this very doctrine in a disguised The Single Taxer will at once reply form.’ The courts, however, are more that such instances are purposely in back a logical carrying over only chosen to avoid his contentions short of time their in- meeting relatively period He will that the term &dquo;un- into the of fairly. say vestigations validity titles. earned increment&dquo; is applicable mainly Modern business is on the only possible to those cases in which the land has theory that unquestioned possession risen in value, not because of any effort soon becomes practically equivalent of the but as an effect of to legal ownership. owner, solely the in the demand for land, a We are then forced to the conclusion growth factor over which the owner manifestly that, as long as men are permitted to has no control. To illustrate, he will exchange labor for money, and money cite the instance of the man who for land, the property in the land and pur- chases a and does to the rent of the land are neither more city lot nothing it but nevertheless even- nor less earned than the property in whatever, a thousand cent the money itself. The effort to place tually reaps per profit in the category of unearned incomes all on his investment. Here, we are told, rents arising from gifts of nature evi- is a typical example of unearned dently, therefore, results in absolute increment. failure. The Single Taxer’s contention in case has 1 Brown, Harry G. The Theory of Earned this much weight, though his and Unearned Incomes, pp. 205-208. opponents can argue with some reason 256 that, under existing social arrange- in a given locality, even though land ments, any speculative gains made by rents are steadily rising, they are not an owner of earned property through going up as rapidly as people have ex- its use are also earned. But if, for the pected ; the town no longer promises to sake of argument, we endorse the posi- become soon the great metropolis which tion of the Single Taxer in this respect, its promoters predicted as its not dis- we can not stop without carrying the tant goal; and hence, the value of city principle to its logical conclusion: lots is falling tremendously even while namely, that all speculative or chance rents are still rising. In such an in- gains are unearned. There is no logical stance, not only does the expected un- reason whatever for distinguishing earned increment fail to materialize, between gains in the value of land and but the speculator suffers a net loss. increases in the value of securities or Furthermore, even though land val- commodities held for profit or specula- ues have risen tremendously through- tion. If one is unearned increment, out the United States, it does not fol- the other must be also. low that most land speculators have It may be remarked in passing that made easy money any more than that only he who has never tried his hand we can assume that stock speculators at speculation will lean to the theory on the &dquo;long&dquo; side are all profiting that unearned increments vastly ex- hugely during a &dquo;bull&dquo;rr~arket. Losses ceed unearned decrements in point of on the reactions are numerous, and im- size. The Single Taxer will assert that mense paper profits are frequently right at this point lies the distinction never converted into anything more between unearned increments accruing tangible. from rising land values and those ob- There seems no reason, whatever, tained from other lines. Increasing then, for diff erentiating speculative population, he will say, makes land profits in land from speculative profits rents, and therefore land values rise in any other field, or for supposing that continuously, and hence the purchaser land speculation has, in general, proved of land gains easily and certainly. more lucrative than other forms of or even for that LAND VALUES speculation; assuming the excesses of speculative gains over Such an assumption is apparently speculative losses in any line are more founded upon poor mathematical train- than sufficient to pay ordinary wages ing. It can easily be shown by the use for the time devoted by the speculators of elementary arithmetic or algebra to their dealings. It is, in fact, not at that land value is the discounted sum all impossible that speculative losses of all anticipated future rents and this may, in amount, fully equal speculative sum is likely to differ widely from the gains. present rent divided by the current In this connection, it may be well interest rate-a formula which is too to call attention to the fact that super- commonly assumed to be universally ficial thinkers very commonly fail to applicable. If land values always distinguish between purely nominal varied in proportion to land rents, gains and speculative profits. During vacant city lots would evidently be the period 1914 to 1920, many owners practically valueless. Experience am- of lands, stocks, etc., saw their property ply verifies the conclusion that the double in money value and they natur- ratio of land values to rents is an ex- ally felt that they had made great tremely variable one. For example, profits. But if they sold in 1920, they 257 quickly discovered that each dollar The distinction, then, while not espe- would buy only half as much as in cially difficult in theory, is extremely 1914. They had no unearned incre- hard to apply to actual cases of income ment, no speculative profit whatever, of individuals. Is there any real reason -nothing had happened but a change for attempting such a differentiation? in the measuring stick of value-yet The only plea that seems to have many of these unfortunate individuals been advanced for making such an had to pay heavy taxes on this imagi- attempt is in order that a higher tax nary increase in assets which would rate may be levied on unearned than be pointed out by many as a splendid on earned incomes. Is a differentiation example of unearned income. for this purpose wise? At first thought, it seems only rea- INHERITED INCOME sonable that unearned incomes should A type of income commonly referred bear a heavier burden than earned. to as wholly unearned is that received If they have been gained without effort, through inheritance. While it must be why not take them wholly or in part granted that much inherited income is for the use of the state? Let us see, unearned, it is just as certain that very however, how such a policy will work considerable amounts of inherited prop- in practice. erty represent earnings of the heirs. INHERITANCE TAX When, for example, a man and wife, working together, accumulate property In the case of inherited incomes, it is during a lifetime of hard work, the quite evident that earned incomes title commonly rests in the husband ought to be exempt from the inherit- and, at his death, is often transferred ance tax, but is it feasible to measure to the wife. Although she is nominally the exact fraction earned? Further- an heir, yet it is absurd to say that this more, minor children who, in the nature entire inheritance is, to her, unearned of things, can have earned no part of income. The same situation holds to their father’s estate, have been in his no inconsiderable extent as regards mind when he saved for their benefit. property inherited by grown sons and Evidently, it would be unjust to sub- daughters who, by their efforts, have ject their inheritance to heavy burdens contributed materially to its accumu- simply because they have not earned it. lation. Other bases for grading the inheritance From the preceding discussion, it tax rate, as for example, size of the becomes evident that earned and un- estate, closeness of relationship, etc., earned income can not be separated seem to furnish equally logical criteria from each other by means of any rough for this purpose, and they are much and ready rule. Wages, salaries, in- less difficult to apply. terest, rent, profits from the purchase SPECULATIVE PROFITS and sale of land or other commodities, property acquired through inheritance, Another important fraction of un- all represent classes including some earned income consists of speculative earned and some unearned incomes; profits. Shall we tax those gains at a and only by a searching analysis of each burdensome rate? If so, we shall dis- individual case can it be determined courage speculation unless we are pre- even approximately as to what propor- pared to pay out about the same tion of the income in each class is justly amount of money to speculators who entitled to be designated as unearned. lose as we receive in taxes from those 18 258

who win. Is this desirable? Specula- sumably no one is seriously anxious to tion tends to degenerate into gambling establish any such differential tax if a and gambling is generally recognized scientific basis of income classification as an anti-social form of activity. The is to be attempted. suppression of speculation would, then, perhaps lessen this evil. On the other TAX ON PROPERTY INCOMES hand, is not freedom to purchase and The whole movement for a higher sell commodities at will essential so tax rate on &dquo;unearned&dquo; incomes is long as we prefer to maintain the com- merely a plan to put more burdens petitive order? It is next to impos- upon incomes from property and less sible to maintain even an approxima- upon receipts from salary or wages. tion to freedom of trade without also This procedure is sometimes justified having much speculation. Most econ- upon the theory that the income from omists agree that speculation tends to property is more regular in its flow and take the burden of risk from the shoul- hence can better stand taxation. Can ders of industry and to place it upon it logically be said, however, that the specialists who are willing to carry it; regularity of receipt of income neces- also, that speculation tends to stabilize sarily increases tax-paying ability? prices. To crush out speculation by May it not, in fact, be true that the means of taxation, is, therefore, a reverse is more commonly the case? policyof doubtful merit. Furthermore, Under a progressive system of taxation, it is extremely difficult to tell in any unusual gains in an exceptional year case where normal mercantile profits are likely to mean heavy contribu- (or pay for the expense of carrying tions to the public treasury, but most goods) end, and where speculative of this money has been easily obtained profits begin. On the whole, we could and can, therefore, be turned over scarcely expect a differentiation of the to the government with relatively tax rate on earned and unearned in- small sacrifice. comes to remedy any of the evils con- It is no doubt true that the larger nected with speculation unless the tax the proportion of the tax burden laid is sufhcient to practically abolish upon funded incomes, the less it will be speculation, and the doing away with necessary to vary the tax rate from speculation seems almost certain to year to year in order to meet the nor- be impracticable as well as detri- mal expenditures of the government. mental so long as we are not prepared This lightening of the duty of adminis- to convert industry to a completely trative officials scarcely seems, however, socialistic basis. to be a matter of primary importance, It appears, therefore, that a law re- and the advantages gained in this quiring a differential tax rate upon direction are much more than offset earned and unearned incomes would by the discouragement to saving, give rise to such a host of difhculties which would result if the income from in the classification of income that it present labor were taxed less and the would be wholly impracticable to make fruits of past labor were burdened more assessments with any reasonable ap- heavily. Were the tax differential proach to justice, and that even if large enough to reduce saving radically, assessments could be fairly made, the the necessary result would soon be differentiation in the tax rate would be either to lessen the average income of as likely to be harmful as beneficial. the people of the nation or else to bring As a matter of fact, however, pre- about the substitution of governmental 259

for private saving. The proposal to property by subtly coupling with the tax property incomes at a higher rate name of the receipts derived there- than other incomes is, then, appar- from an adjective having a derogatory ently intended merely as an entering implication. wedge leading eventually at best to so- Economists who carelessly use the cialism ; at the worst, to Bolshevism, or term &dquo;unearned income&dquo; as a synonym anarchy. Those favoring such a pro- for income arising from property are gram should then do so because they unwittingly playing into the hands of favor one or the other of these ends, those who are thus attempting by in- and not because they are attempting sidious and devious methods to under- to install a less burdensome fiscal sys- mine the institution of private prop- tem or to secure a more equal distribu- erty. It goes without saying that tion of wealth among the people. If the scientists should avoid such a course, last mentioned program is deemed desir- unless they deliberately desire to de- able, it can be much more logically and stroy this fundamental basis of the effectively accomplished by means of existing economic order, and, in that progressive income taxes and by a scien- case, the correct policy would seem to tific system of inheritance taxation. bring the attack into the open and As a matter of fact, the attempt to fight out the issue on its merits and divide incomes into categories desig- demerits. nated as &dquo;earned&dquo; and &dquo;unearned&dquo; When economists unite in insisting seems to serve no practical purpose and upon a logical use of the term &dquo;un- this classification appears to have been earned&dquo; as applied to income, it is devised, not with any intent to aid sci- more than probable that the term will ence or statecraft, but in an effort to soon be discarded as a superfluous stigmatize the institution of private addition to economic terminology.

Better Methods of Municipal Bonding By H. W. DODDS Secretary, National Municipal League

leaders have not given urge that the province assume their POLITICAL-t. sufficient thought to the advan- debts, will depress the market for all tages which would flow from the adop- municipal bonds issued in northwestern tion of an approved uniform municipal Canada for some time to come. indebtedness law by the various states. If there is need for uniformity as While municipal bonds as a class will between the various states, how much perhaps never be considered as secure more pressing for any particular state an investment as United States bonds, is the matter of sound bonding practice there is, in many states, room for for the cities within its borders. Large improvement. Improvident and un- cities may develop a credit of their sound municipal financing in one part own, but with average cities credit is a of the country reacts upon the market mutual accomplishment. Only by un- for all municipals. The recent diffi- iformly sound practice can the munic- culties experienced by several British ipalities (cities, counties and school Columbia cities, so serious as to cause districts), within a state create a mar- the provincial minister of finance to ket for their issues one hundred per