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The taxation of mortgages condemned by most economists, 1-3; but retained on the statute books of most States, 3–4; the experience of Wisconsin throws light upon this conflict of authority and practise, 4-12; and indicates that taxation of mortgages under the general property tax will prove innocuous in some places, 12–15; but harmful in others, 16; the conditions under which shifting will probably occur, 17–20; leading to the conclusion that mortgage taxation should be limited in rate, if imposed at all, 21; and is generally inexpedient not because the tax is necessarily shifted, 22, 23; but because it is part of a vicious system of personal taxation, 25–27.

AMONG the academic economists who have expressed decided opinions concerning mortgage taxation, the seeker for guidance in this troublesome problem finds not only a normal difference of opinion concerning remedies and reforms, but curiously contradictory impressions about the fundamental facts which condition the problem. According to Professor Plehn, “mortgages are generally easily taxable.”1 According to Professor H. C. Adams,


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1 Introduction to Public Finance, p. 225.


“it is impossible for assessors to discover mortgages.' Professor Ely sees in this problem an unpleasant alternative between overtaxing the debtor and permitting the creditor to escape. According to Professor Daniels, however, the mortgagees actually are tempted to rush into debt in order to escape taxation. Between the Massachusetts system and the California system the average economist usually finds all the difference that distinguishes virtual mortgage exemption from effective (even tho costly and undesirable) mortgage taxation, but in the same breath Professor Seligman commends both, seeing between them apparently a bond of real economic kinship.

And so similarly with respect to the vital question of shifting. Many, if not most, authorities agree with Professor Plehn that "shifting is always possible when any one form of capital is taxed, leaving other forms untaxed,”4— that is to say, in practically every commonwealth. On the other hand, there is a respectable and erudite minority who contend that a tax on mortgages will be shifted only in part or shifted in some locations and not shifted in others, altho the degree or places in which shifting is likely to take place are not specified.

On the whole, however, there is something approaching a consensus of opinion against any form of mortgage taxation now employed in the United States. Casual reference by writers in other branches of economic investigation indicate their belief that the problem is finally settled in favor of exemption. Thus Professor Zartmann, in a field so far removed from mortgage taxation as that of insurance investments, feels justified in asserting, without argument, that mortgage taxation is unwise. “That mortgages should not be taxed has often been demonstrated by experience. A loan upon real estate does not create any new wealth, and to tax both the real estate and the mortgage is double taxation. It has been found that the borrower gains when the tax is placed upon real estate and when no attempt is made to levy upon the mortgage.”ı

1 The Science of Finance, p. 442.

? This unusual, not to say startling, construction of the problem is worthy of full description: “Another piece of unfairness involved in the general property tax is that those who hold their property unencumbered by mortgages or debts pay taxes on the entire property. Those whose property, on the contrary, is mortgaged, pay taxes only on the unencumbered part of their estate; and, if the mortgagee pays any tax at all upon the mortgage, he is probably more honest than most of his class. The result of the system is a premium on indebtedness and an incentive to dishonest y" (p. 124).

3 Essays on Taxation, pp. 101-103.
* Introduction to Public Finance, p. 165.

* Particularly if we disregard some of the earlier and premature indorsements of the California system which have since been rescinded by their authors.

Legislation upon the subject, however, is strongly at variance with economic doctrine. Among the laws on the subject, as among the theories, we find a normal difference of method, with a large majority, however, persisting in the system of double taxation. Alabama, Virginia, New York, and Minnesota levy recording taxes, paid once for all when the mortgage is recorded, and collected alike on money borrowed from resident and non-resident mortgagees. In the above States, mortgages are effectively taxed, whether the results are harmful or beneficial. At the other extreme are commonwealths like Idaho, Washington, Colorado, New Jersey, Connecticut, Massachusetts, Wisconsin, Arizona, Alaska, Hawaii, and Maryland, in which virtual exemption of mortgages is accomplished either by specific exemption, as in Idaho and Washington, or by taxation of the property and the mortgage as a unit in some of the many ways which in practise relieves the mortgage and mortgagee from taxation. In all other States of the union the system of so-called double taxation is employed. Property is taxed at its situs to the owner: the mortgage is taxed as personal property to the mortgagee at his domicile. In Indiana the mortgagor is allowed to deduct from the value of his real estate the amount of any mortgage indebtedness, provided such mortgage indebtedness does not exceed $700, nor one-half the value of the real estate; and in Pennsylvania the tax upon mortgages is limited to şof 1 per cent. The old method of double taxation, then, is still employed in about three times as many States as all other methods combined. The system which is the particular bête noire of the economist and the creditor classes ' generally is still distinctively the American system.

1 Zartmann, The Investments of Life Insurance Companies, p. 224.

2 In ten counties in Maryland a tax of 8 per cent. is imposed on the annual interest earnings of mortgage loans. The Connecticut system is rather complex, but results, I understand, in virtual exemption. In most of the above commonwealths mortgages owned by residents, but secured by property situated in other States, are legally subject to taxation, tho in practise they escape. The California law is at present, to an outsider at least, in great confusion, owing to the repeal of the clause of the Constitution (Sect. 5, Art. XIII.) which prohibited contracting out. In Virginia, mortgages are also taxable under the property tax, but the rate is limited to 45 cents on the $100.

Upon the real character and persistent retention of what I shall hereafter refer to as the "double tax method" of mortgage taxation the recent history of mortgage taxation in Wisconsin throws particular light, and the remainder of this paper will be devoted to an analysis of its workings. In discussing the double tax method, it is very necessary to recall and constantly keep in mind the following familiar facts concerning its operation. (a) In most States mortgage credits may be offset or cancelled by bona fide debts of the mortgagee; (b) the tax does not reach non-resident mortgagees nor, usually, domestic banks, trust companies, insurance companies, and a number of other corporations subject to gross receipts, license, or other forms of special taxation; (c) practically, the only class of mortgages which the assessor

1 Carefully framed inquiries submitted to 478 Wisconsin bankers and real estate dealers elicited the fact that fully 70 per cent. earnestly oppose the double tax method and recommend exemption, altho a large majority of the bankers believe that the double tax method would help their own business.

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