PENDING PROBLEMS IN PUBLIC FINANCE 197 



the seller to the buyer and where the economic good has a rental 

 value as well as a capital value, the tax which remains on the com- 

 modity and which, therefore, to that extent diminishes the income 

 to be derived from it, i. e., its rental value, must also proportionally 

 diminish its capital value. The selling or capital value of anything 

 is always the capitalization of the actual and prospective rental or 

 income value. As a consequence, through this familiar principle 

 of capitalization the new purchaser of the commodity will buy it at 

 the reduced price, and will thus virtually buy himself free from 

 taxation. The tax is discounted, or absorbed, in the new and lower 

 price. 



A new tax on city real estate, for instance, will either be diffused 

 by increasing the rents of the tenants, or it will be absorbed in the sense 

 that when the property changes hands the new purchaser will pay 

 a price reduced by the capitalization of the tax. 



The combination of the diffusion and the absorption theories of 

 taxation explains several things. It explains why the theoretic 

 distinction between direct and indirect taxes based upon the alleged 

 facts of incidence is erroneous. It explains why in spite of this 

 theory the great mass of revenue to-day continues to be raised in the 

 shape of indirect taxes. It explains why in countries like the United 

 States the state and local taxes, although still in principle levied on 

 persons, are slowly coming to be imposed on things rather than on 

 persons; it explains why in France personal taxes have been impos- 

 sible since the Revolution; it explains why in England, with the 

 exception of a single schedule of a single tax, the whole system of 

 taxation is based on things and not on persons; it explains why, 

 even in Germany, where the personal and individual elements of the 

 problem have been emphasized in theory, the personal share in 

 actual taxation is so very insignificant; it explains, finally, why the 

 legal decisions on taxation in the United States are coming to be 

 in harmony with the truer economic doctrine of universality and 

 equality of taxation. For this does not mean that everybody must 

 be taxed alike, but only that all the members of a given class must 

 be taxed alike, while there may be the greatest diversity between 

 classes. An equal tax on all corporations does not imply that each 

 individual stock- or bond-holder who may have bought after the tax 

 was imposed pays equally, just as little as an equal tax upon real 

 estate implies that each individual land- or house-owner everywhere 

 and necessarily bears the burden of the tax. 



In short, the individual point of view in taxation, which assumes 

 that justice can be done by assessing each individual directly and in 

 first instance, rests upon an analysis suited only to primitive economic 

 conditions. The social point of view is that of modern economics, 

 which seeks to trace the workings of general economic law and to 



