196 PUBLIC FINANCE 



they proved to be a dismal failure. The English administrators 

 consider the principle of their tax far superior to that of the Prussian; 

 and to the extent that this contention is justified, the superiority 

 rests upon the fact that the tax is not one on personal income. Even 

 in Prussia itself, the home of efficient bureaucracy, the tax is some- 

 times called the Lug und Trug System. The same repugnance to 

 the personal element in the income tax which is found in England 

 explains why it has been impossible to introduce the system int9 

 France, with its still lively recollection of the abuses of personal taxa- 

 tion under the ancien regime, and explains also why the income tax 

 is beyond the range of practical politics in the United States. 



We thus find the remarkable fact that while the science of finance 

 has been elaborating its fundamental principles, it has succeeded in 

 some respects, but has failed in others in imprinting its conclusions 

 upon legislation. It has brought the actual taxes on consumption 

 and production, to a great extent, into line with its conclusions, but 

 it has spent most of its time during the nineteenth century in working 

 out the principles of an income taxation, which is either not accepted 

 in legislation, or which, if accepted, is realized to so small an extent 

 and in such a half-hearted way as to be on the whole of little conse- 

 quence. 



The conclusion is hence forced upon us that the fiscal analysis has 

 not proceeded sufficiently far. We are indeed grateful for what 

 has been accomplished, but we have evidently not yet reached the 

 goal. We need, therefore, a fourth and final economic principle to 

 help us thread our way through the maze of actual fiscal facts. 



This fourth principle is that of the social versus the individual 

 basis of taxation. The conception which has dominated fiscal sci- 

 ence until lately is the individual conception. Direct taxes have in 

 theory been preferred to indirect taxes, because they were supposed 

 to rest where they were imposed, and thus to help in securing justice 

 as between individuals. The goal of all taxation was the attain- 

 ment of a method in harmony with individual faculty. The first 

 serious breach in this doctrine was made by the diffusion theory of 

 taxation. The diffusion theory erred, indeed, in that it went too far, 

 attempting to show that every tax is always and inevitably shifted 

 off from the shoulders of the original payer. The value of the dif- 

 fusion theory, however, consists in the fact that it put the problem 

 in the right way, by presenting the societary aspects of taxation. 



Nevertheless, the diffusion theory made the situation too simple. 

 It has quite correctly been termed superficial and one-sided. To 

 make it at all serviceable, it needs to be supplemented by another 

 theory, w,hich I have taken the liberty of calling the absorption 

 theory of taxation. The absorption theory rests upon the doctrine 

 of capitalization. That is to say, where the tax is not shifted from 



