EVERY one who has had any experience knows that nothing is more difficult than to attempt to excite popular interest in any question involving social, political, or moral reforms by presenting and arguing the matter abstractly. People in general act very much like the crows in the fable. So long as the wood-chopper and his sons talked about cutting down the trees, the crows did
not much concern themselves; but when the blows of the axe began to be heard in their immediate vicinity, the question of changing their roosting-place became a matter of practical individual importance. For centuries the church has denounced war, and yet there was really no effectual obstacle interposed to war until the mercantile interests found out by experience that it was for their pocket interests to have peace. Slavery, also, so long as it was maintained at a distance, moved but comparatively few in the free States to active efforts for its abolition; but slavery practically illustrated by men and women fleeing from bondage and appealing personally to individual sympathies for succor and protection soon roused a nation to irresistible indignation and opposition. And so in respect to the evils of injudicious taxation. That there are evils, that their toleration makes sinners faster than the pulpit can make saints, that they sap the foundations alike of public morality and national prosperity, and unequally affect the distribution of the results of industry is not disputed. But the difficulty here, as with other similar moral and economic questions, is that actual illustrations, involving time and place, and specific details and effects, are not readily obtainable; and without them argument goes for little. It is a matter of congratulation, therefore, that in the course of events a case has recently occurred which practically and clearly brings before the public the full bearing and effect of the present generally accepted theory of state taxation, and involves at the same time details of interest adequate, it would seem, to command the attention of all interested in having good government, just laws, and continuous economic progress. In what this case consists, it is now proposed to tell; and then to consider what inferences in the way of economic principle, law, and equity are deducible from it.
STATEMENT OF THE CASE.
In 1869, or previous, Charles W. Kirtland, a citizen of Woodbury, Litchfield County, Connecticut, loaned money, through an agent, a resident and citizen of Illinois, on bonds secured by deeds of trust on real estate in the city of Chicago. Each of these bonds declared “ that it was made under and is in all respects to be construed by the laws of the State of Illinois; ” and that the principal and interest of the obligation were payable in the city of Chicago. The deed of trust also contained a provision that all taxes and assessments on the property conveyed should be paid by the obligor (borrower) without abatement on account of the mortgage lien; that the property might be sold at auction, in Chicago, by the trustee, in case of any default of payment, and that a good title, free from any right of redemption, on the part of the obligor, might in that case be given by the trustee. Another interesting feature of the case, not to be overlooked, was, that pending the proceedings to be next related, the loans as originally made became due and were paid; when the proceeds, without being removed from Illinois and returned to Mr. Kirtland in Connecticut, were reinvested in Chicago by his agent, under terms and conditions as before.
These facts becoming known to the tax officials of the town of Woodbury, they added in 1869 to the list of property returned by Kirtland for the purpose of taxation, as situated within the State, the sum of eighteen thousand dollars; and in 1870 the sum of twenty thousand dollars, to represent the amount of property owned and loaned by Kirtland, in each of these years, as was conceded, without the territory of the State. The sums thus added were subsequently assessed in the town of Woodbury in the same manner and at the same rate as was other property which Mr. Kirtland owned within the State and there situated.
Payment of the taxes thus assessed on the amount of these Illinois loans being refused by Kirtland, the tax collector (Hotchkiss), in April, 1873, levied his tax warrants on the real estate of the alleged delinquent in Woodbury, and advertised the same for sale; and on petition for injunction to restrain the collector from such proceedings, on the ground of the illegality of the tax in question and its assessment, the case came for the first time before one of the inferior courts (the superior) of Connecticut. There, upon hearing, it being agreed by all parties concerned that the only question in the case was whether the bonds owned by Kirtland, drawn in the form and secured in the manner stated, were liable to taxation in Connecticut, the cause, by agreement, was referred (for advice) to the court of last appeal in the State, known as the Supreme Court of Errors, a temporary injunction, in accordance with the prayer of the petitioner, being at the same time granted. After further hearing and argument, this latter court, in June, 1875, dismissed the petition and dissolved the injunction, one judge (Foster) out of a full bench of five alone dissenting. Sent back to the superior court, the record of the case was then on motion transmitted again to the Court of Errors for revision of errors in respect to involved questions of constitutional law; and the decision being here again adverse (the judges dividing as before), the case was next appealed to the Supreme Court of the United States, on the docket of which it now stands entered for trial in order. With this brief statement of the origin of a case (Kirtland v. Hotchkiss) which is certain to become historical, inasmuch as according to the future decision of the United States Supreme Court in respect to it, the arbitrary, unjust, and economically unsound system of taxation at present existing in most of the States will either receive a new lease of life and continuance, or else be so far broken in upon and changed as to necessitate a new and better system, attention is next asked to the economic and constitutional questions involved in the case, and to the light which their discussion sheds upon the general principles of taxation and upon the sphere within which the several States of the Union, under the federal compact, are limited in their exercise of this function. And in this discussion, little more can be attempted or achieved than to follow and enlarge upon the opinion of the single dissenting judge of the Connecticut Court of Errors (Hon. L. F. S. Foster, formerly president of the senate and acting vice - president of the United States), which in point of legal and economic wisdom, and cogency and clearness of reasoning, is confessedly equal to any similar opinion that has heretofore emanated from the Connecticut bench. (See Connecticut Reports, 1876, vol. xlii., part ii.)
THE QUESTIONS OF INTEREST INVOLVED.
A very cursory examination will satisfy that the questions of interest and importance involved in this case are mainly as follows: First, Was the debt due Kirtland from a citizen of Illinois property; or is any debt — abstract or particular — ever entitled, from a rational and politico-economic point of view, to be thus considered and treated? We say from a rational and economic point of view, because a complete sovereignty may, if it please, enact that black is white, and compel all persons within its jurisdiction to act in conformity with the enactment. Second, Did jurisdiction over the person of Kirtland by the State of Connecticut warrant the assumption that the State had jurisdiction over his transactions in Illinois, and that a debt due him from a citizen of Illinois had its situs in Connecticut and was so made subject to such laws as that State might enact in respect to taxation?
The first of these questions in turn involves a discussion of some interesting points in political economy; and the second, of the nature and sphere, under the federal compact, of state sovereignty and jurisdiction.
The Connecticut Court of Errors, with these questions clearly before them, decided first, that a debt was property; second, that the statutes of Connecticut, so naming and defining them, expressly subjected to taxation within the State all debts due citizens of Connecticut from parties without the State; and finally, reasoning, as the court expressed it, — “in the absence of any provision limiting and defining taxation in the constitution of Connecticut,” —from “principles of natural right and justice,” that the power to thus tax was legitimately inherent in the legislature of the State, and was by them lawfully exercised.
Following the path which the Connecticut court said should be taken, it is now proposed to inquire whether the conclusions the court arrived at were really in consonance, as claimed, with the principles of “ natural right and justice;” and for this purpose consideration is first asked to the question, Are debts property ? And, as helping to its correct answer, it is important to attempt to obtain at the outset what courts, legislators, lawyers, many writers on economic subjects, and the public generally, as proved by their decisions, enactments, and reasonings, do not now possess, namely, a clear conception and idea of the exact nature of property, or rather of what property consists.
WHAT IS PROPERTY ?
All investigation on this subject can, it is believed, lead to but one conclusion, and that is that property is always a physical actuality, with inhering rights or titles, the product solely of labor, and is always measured in respect to value and for exchange by labor. Thus, for example, a fish free in the ocean is not property; but when it has been caught through the instrumentality of labor, it becomes property. Property, furthermore, cannot be created, except by an application of labor of some kind to material substances, which because they are substances and in order to be substances must have both a corpus, or an entity, and a situs, or a situation. It is interesting also to note in this connection how the etymology of the Latin words possessus and possideo, namely, po and sideo, to sit by or on, and from which in turn we have the English word possession, — the common definition of property being something possessed, — curiously harmonize with and confirm the conclusion that property must be always a physical actuality. For it is clear that it is only a material something, a visible and tangible entity, that one can sit down on, and not an invisible, intangible nothing, the fiction of law or of the imagination.
Property, therefore, is not only always a physical actuality, but, to borrow the language of Judge Foster, is also always " embodied or accumulated labor.” And as political economy does not, and jurisprudence ought not, take cognizance of chateaux en Espagne, these are the only senses in which political economy and the law can legitimately reason about property.
Examples of property which is apparently not the result of accumulated or of any labor, and so militating against these conclusions, will doubtless suggest themselves : such, for instance, as a diamond found upon the sea-shore, land squatted upon and obtained by preëmption, bank-stock, patent rights, copyrights, annuities obtained by gift or purchase, franchises, monopolies, and debts; but an examination will soon prove that the objections embodied in them are more specious than real. Thus, in the case of the diamond accidentally picked up, which is perhaps one of the most striking of all the examples that can be adduced in favor of the position that property can come into existence without the agency of labor, it may be said: first, that an exceptional fact like this cannot constitute an adequate basis for the enunciation of a principle; and, next, that the value of this accidental diamond is solely determined by and represents the value of the labor which has been required to obtain all other existing diamonds. The moment the fact ceases to be exceptional, the moment diamonds can be had in abundance by merely picking them up, that moment their value will simply represent the cost of the physical effort requisite to pick them up. Again, if land squatted upon has any value as property whatever in the first instance, it is because it is the embodiment of the labor required to discover it, to conquer it, to defend and protect it; to effect all of which, taxes, which are the results of labor, may have been paid for centuries. If it acquires any additional value beyond this, after it has been squatted upon, it will be simply because the results of labor have become connected with it, or the value of other land or other property the products of labor, for the use of tvhich labor competes, are reflected upon it. In 1620 the land upon which the city of Boston stands could have been bought for a string of seashells. In 1877 its value as property was possibly six hundred million dollars. But in both instances the valuation was determined by one and the same standard: in the first, by the amount of labor required to collect and string the shells; and in the second, by the amount of labor and capital— which is the result of labor — which has been embodied in the land or become connected with it. Take away the labor and its accumulated results, and the site of Boston will be worth no more in 1877 than it was in 1628, when William Blackstone first obtained it.
Analyze next the. alleged property in hank-stock. The coin in the vaults of the bank, the vaults, the building, the books, the furniture, and other physical actualities—the results of labor —employed in transacting the business of banking are the real property of the bank. The bank-stock, so long as the bank exists, is merely a right to receive dividends. The creation of a bank obviously does not create any property. The notes discounted by the bank over its counter are inchoate titles to the debtor’s property or to his equitable rights to property; and the notes issued by the bank are inchoate titles to the bank’s property or to its equitable rights to property. The bank, apart from its physical actualities and machinery, is simply a ledger recording credits and debits. But credits and debits are only convenient forms of book-keeping, or the records of transfers of property and of rights, titles, and interests in property preëxisting. Credits and debits, moreover, stand to each other in the relation of an equation. There can be no credit without a debit, and no debit without a credit; strike out one side of the equation, and the other disappears of necessity. If there were no creditors there could be no debtors, and, vice versa, the moment debtors cease to be debtors, that same moment creditors cease to be creditors.
Copyrights and patents are simply legislative enactments to protect preëxisting property. A manuscript, a painting, or an invention is the joint product of physical and intellectual labor, which the copyright or patent right protects, the same as other forms of law protect other visible and tangible property from robbery and spoliation. The relation which these instrumentalities sustain to property is clearly indicated by asking the question whether there can be such a thing as a patent granted for what has never been reduced to a physical actuality; or a copyright given for the flight of fancy of a poet not embodied in the materiality of a manuscript or in the pages of a printed book? John Milton sold Paradise Lost to Samuel Simmons, bookseller, for five pounds ready money; but Gray’s “ mute, inglorious Miltons,” who only imagined and never wrote, could never have obtained a copyright or any money offer whatever, no, not even reputation, for their imaginings, though for all that the world knows they might have been infinitely superior to the Milton who became glorious because he was not mute, in all that relates to mental attainment. It is also exceedingly curious to note how Shakespeare, whose range and accuracy of knowledge were so wonderful, clearly perceived and as clearly expressed the whole essence of modern political economy and jurisprudence in respect to this immediate problem when in the following lines from Midsummer’sNight’s Dream he says : —
Doth glance from heaven to earth, from earth to heaven ;
And as imagination bodies forth
The forms of things unknown, the poet’s pen
Turns them to shapes, and gives to airy nothing
A local habitation and a name.”
In other words, according to Shakespeare, as well as according to political economy and common sense, however brilliant may be the imagination of the poet or inventor, he has no property in his ideas or imaginings until he has reduced them through labor to an actuality. And then the value of the actuality produced for the purpose of exchange or sale will, provided there is a copyright or a patent to prevent use without compensation, be just in proportion to the effectiveness or desirability of the labor exerted. The standard for measuring the value of the work of a Shakespeare, a James Watt, and a street sweeper is one and the same.
Again, an annuity, like a bank-stock, is a right to receive property, the result of previously accumulated labor, and its transfer by sale or bequest is simply a transfer of an equitable right; and a right of this character, in turn, is not property, but a title to preexisting property. So, also, in respect to franchises, which although often spoken of and regarded as property are clearly nothing but rights. Thus, for example, a franchise of a railroad is simply a right to operate a road in a particular manner; and a legislature cannot and does not create a railroad by creating or granting a franchise. At the same time, the value of a physical actuality may undoubtedly be increased by a franchise which gives a right to use such actuality in a particular way. A monopoly, also, like a franchise, is valuable, but its value consists in the fact that it gives to certain persons privileges that are taken from others, and the making of a monopoly no more creates property than does the making of a franchise.
Some persons, whose opinions are worthy of respect, have raised a point in discussing this question, that there is a distinction to be recognized between property and capital; and that both in law and political economy the latter does not necessarily conform to the definition that has been here given to the former. But can there be such a thing as capital which does not represent a physical actuality in the sense of embodied labor? Capital is the interest of a person in embodied labor over and above his debts, or his interest in legal or equitable rights to embodied labor, and can have no value, and is merely imaginary, except it has the right, title, or power to command embodied labor, or to exercise dominion over property the result of labor. All that we labor and toil for is embodied labor. We will not give our labor for the “baseless fabric of a vision,” or our accumulated labor for the dreamy creations of a Berkeley or the imaginary castles of poets, except so far as they make them manifest in material forms or writings.
By some, also, the forces of nature are regarded as property; but they are not so until dominated over and subjugated by man; and then only do they acquire value and become negotiable and subject to proprietorship. Gravity and electricity, as free forces, are incapable of sale and taxation; nor can they in any rational view be considered as property.
WHAT ARE TITLES TO PROPERTY ?
But while political economy recognizes nothing as property except physical actualities, the law, for the sake of convenience, has so long treated titles as conveying the same ideas as property that the profession and the public have very generally come to regard the two as equivalent or identical. Consideration is, therefore, next asked to this point.
Property being embodied and accumulated labor, it becomes endowed in all places where the rights of labor are recognized with the attributes anil incidents of titles or evidence of just ownership or possession—inchoate, legal or equitable — which inhere in the property, follow it, and form a component part of it wherever found. The fact that the ownership, interest, or title of a non-resident, as, for example, Mr. Kirtland’s bond and mortgage title to his debtor’s property in Illinois, can be extinguished in the real and personal property of the debtor by attachment or other process of law in the State where the debtor resides, and where his visible, tangible property has a situs, also leads up to and establishes as a principle of law that titles or incumbrances are connected with the owner, but inhere in the property, where the property is actually situated, as incidents, form a part and are inseparable from it, and include the equitable title or right of the creditor in the debtor’s unsold and unincumbered properly, but are not themselves property. Some economists befog themselves on this subject by first defining property as anything that can be bought and sold, and then, since a title — as, for example, a deed — can be bought and sold, accept the inference that a title is necessarily property. But let us analyze this definition and assumption. We can, without doubt, sell and deliver a deed to a farm; but what is sold in such instances is the farm, including a right, — a right to dominion over it. But it may be rejoined that a right of dominion is property. Let us, therefore, carry the analysis a little further. If a farm in Illinois is property in the State where it is and where it is taxed, any right or title to the same farm, held in Connecticut, be it in the nature of a deed, a mortgage, a partnership interest, or any other form of title, cannot be the property; for the same thing certainly cannot be property in two separate States and jurisdictions, and in two distinct forms and manifestations, at the same time. On the other hand, if it be assumed that the title to the farm, whatever it may be, is the property, and as such can rightfully be taxed where it is, then it stands to reason that the subject of the title — the farm in Illinois — ought not to be also regarded as property and taxed in Illinois. In other words, if the title to the farm is property, then the farm is not really in Illinois at all, unless the owner of the title resides there, but, “ wonderful to relate,” goes out of that State in the pocket of the individual who walks off with the title to it. We have all heard of such concentration of meat that all that is valuable in an ox for food can be put into a quart can; but such a concentration of property as is here supposed is something far more remarkable, and admits of a man having a drove of oxen in his hand, ten acres of woodland in the crown of his hat, a church with a long steeple in one coat pocket, and a four - story brick block, with possibly a mill privilege, in the other. It is also important to note that while a deed to realty, properly executed and recorded, is regarded as the highest form of title, we have the decision of our highest court (Fletcher v. Peck, 6 Cranch, 87) that a deed is but an “executed contract” on the part of the grantor not to resume his right in the thing granted; and therefore if Connecticut can tax extra-territorial contracts, she may tax her citizens on deeds of land in other States.
Call titles property if we like, experience, when we come to deal with them as matters of business, will nevertheless soon satisfy that the making of no form of title creates or produces any new property, but simply indicates the rights and interests of parties in preëxisting property. Enact such laws, also, in respect to taxing titles as we may, experience will also prove that taxes cannot be practically levied on imaginary things or legal fictions, because it is some physical actuality in the sense of embodied labor that must after all, and in the end, pay all taxes. If legislatures have the power of creating fiat property, — that is, imaginary or fictitious property, — it is beyond their power to make it pay taxes, for nothing less than omnipotence can make something out of nothing. These views, it should be understood, are, however, heresies to some of the best thinkers and writers on political economy and law in this country. One of them, in answer to the assertion that “rights and titles are not property, for if they were we might make property by making rights and titles,” rejoins, “But we do make property that way every day! We cannot make it so indefinitely because we cannot sell the titles indefinitely. The whole question is a question of the limits of credit, that is all.” But will Mr. Oldschool stop and think why we cannot sell titles and credits indefinitely? We can, till the millennium comes, when everybody is to have everything he wants without toil, sell property in the sense of embodied labor indefinitely. Why not titles and credits? The answer is simply that when we buy a title or credit we pay for and in a legal and economic effect buy the physical actuality or right of dominion over it which the credit or title represents, and nothing more. The moment one undertakes to sell titles or credits in excess of or separate from the embodied labor they are supposed to represent, we call the act bankruptcy or swindling, and the actor, a Jeremy Diddler. Fancy Mr. Oldschool appearing in court to defend such a person for selling a title, separate from an actuality, on the ground that such a title was property because he was able to sell it, and that somebody, not keen, was persuaded to buy it. Would the plea caveat emptor avail in such a transaction? In other words, when the title does not inhere in the physical actuality, we give it a bad name, and the most imaginative do not call it property. A title which is really a title is never suspended or in abeyance. If a thing is embodied labor, some one, or a number of persons, has some form of title or dominion over it, and the title is inseparably allied to the thing; and therefore the sale of the title is the sale of the thing, because they are one and inseparable. Embodied labor, therefore, embodies all forms of title to the embodied labor. The thing (embodied labor) embodies the incidents (titles), for the reason that the whole contains the parts. The moment we accept the proposition, established most clearly by Adam Smith and other economists, that labor exercised on material elements can alone produce property, that moment it would seem to be apparent that giving a definition to a small piece of paper (credit or title) which has not cost five minutes of labor, will not invest it with the character of property which has cost years, perchance, of the most skillful labor to produce. If some other name be given to embodied labor than property, it will not diminish its power to satisfy human wants; and if, on the other hand, we will call credits and titles property, they cannot be eaten, or made of themselves in any form to satisfy wants, but they can represent things which will satisfy wants. Credits and titles of themselves, per se, have no value, and separated from the things they represent, they cannot honestly be sold at all. Who will buy them? We know the character of the men who will sell them. Their representatives permanently reside at Weathersfield, Charlestown, Sing Sing, and Auburn.
As further elucidating this subject, attention is next asked to the consideration of what constitutes a debt, and more especially of
THE RELATION OF DEBTS TO PROPERTY.
A debt is an evidence of a transfer of property or of services, and an equitable right to property itself or to other equitable rights to property; hut the value of a debt as a right rests entirely on the circumstance that it is a power to appropriate the results of embodied labor or physical actualities. A debt payable in merely imaginary things would be an imaginary debt. As between debtor and creditor, debts are inchoate or equitable titles, superior and paramount to the debtor’s titles; for they will finally absorb by legal process the entire estate and interest of the debtor in the subject of the title, to the extent of the money due. The debtor usually holds the legal title to the property with a power to sell, but he nevertheless always holds it as a trustee for his creditor; that is, subject to the equitable right or title of the creditor to the same property.
Debts, again, are the titles or the representatives of property or of money due. A warehouse receipt given for wheat is a title to the wheat, but it is not the wheat itself; nor is the debt the property it represents. There is no value in the debt except in the property which it represents or to which it is an equitable title. If the debt is non-negotiable, — as were Mr. Kirtland’s bonds and mortgage,— it can be stolen, lost, or destroyed, leaving the property itself intact, and for the reason that the debt is a title or a right, and not property. The evidence of a debt when lost, stolen, or destroyed may, however, necessitate the production of secondary evidence to establish the rights of a creditor. Admiralty courts allow no salvage for saving bills of exchange or other identified evidences of indebtedness, or titles to property, from wrecks; and for the reason that none of these things are property and their destruction is not a loss; nor can a debt be treated as an import following the owner when he comes from another country to make his permanent abode in this country; and if it were property under such circumstances, it would be free from state taxation as an import.
Debts in any estimates of property are also negative quantities, to be eliminated from nominal values in accurate appraisements of aggregate property. Every one can see, without studying political economy, that we cannot by creating debts create embodied labor, which alone is property; but it almost requires a surgical operation to get the idea into some men’s brains that the act of paying a debt is not an annihilation or extinguishment of some preëxisting property. If all national, state, and individual indebtedness were to be extinguished by payment, does any one suppose that the people would be worth less than before, or that any property would be destroyed? Or does any one suppose that any increase of national or state indebtedness would increase the wealth of the country? If so, a national debt would not only be a national blessing, but an individual debt would be an individual blessing. Yet there are some persons so wedded to the theory that debts are property that they logically feel alarmed at the liquidation of debts as a great destruction of property. They feel that debt, national and private, is wealth, and payment poverty; and these ideas have been and are yet in harmony with our national currency system and our generally accepted systems of state taxation.
These reasonings on the nature and origin of property, and the relation it sustains to titles and debts, would, therefore, seem to invest the following conclusion of Judge Foster, which alone would have compelled him to dissent from his associates, with the force of a politico-economic and legal axiom, namely, “ that property and a debt [considered as a representative of the property pledged for its payment] constitute together but one subject for the purpose of taxation. The tax being paid on the property without diminution on account of the debt, nothing remains to be taxed. The debt indeed, aside from the property behind it, and of which it is the representative, is simply worthless.”
WHAT THE CONNECTICUT COURT DECIDED.
The first question involved in the Kirtland ease which came before the Connecticut court for decision was therefore a joint politico-economic and legal question, and may be thus comprehensively stated: Are titles, having regard to the principles of natural right and justice, and to the provisions and restrictions of the federal compact and constitution, capable of being severed from the property or physical actuality from whence they are derived, and made subject, separately and independently and under another sovereignty, to taxation ? The Connecticut court conceded that in the case of real and tangible property the title is not capable of being severed from the property and taxed separately in different jurisdictions. The Massachusetts law-makers and law-interpreters have not, however, got so far ahead in liberality as this; for in that State taxes, under penalty of imprisonment for default of payment, are still wrung from citizens for property in the nature of visible, tangible movables, as cattle and stocks of goods and the like, admitted to be in other States and jurisdictions. But the Connecticut court, in respect to titles in the nature of notes, bonds and mortgages, and debts, decided that there was some other principle involved, and refused to concede to such titles what they conceded in respect to titles to realty, and to visible, tangible personal property. But in conceding that titles cannot be separated from realty, they conceded the whole point at issue; for certainly no one can dispute that Mr. Kirtland’s mortgage was anything other than an equitable or inchoate title to visible, tangible property in Illinois. Consider also the inconsistencies and absurdities of adopting any other conclusion. If Mr. Kirtland had sent his money to Chicago and had invested it by purchase in a cattleyard, the title to the actuality, in the form of a deed, would not have been considered property in Connecticut and would not have been there taxable. But if he had united with others, two, three, or more, and forming a corporation had bought the same property, then note how, according to the principle adopted by the Connecticut court, this same property would have increased and multiplied, and become ubiquitous, by merely varying its method of purchase and incident of title. Thus there would be, first, the physical actuality, in the form of the cattle-yard, as before, no more and no less, which Illinois would tax as real estate; then, there would be the legal title to the property held by the directors of the corporation; next, the equitable interest vested in the stockholders, one of whom, in the person of Mr. Kirtland, lives in Connecticut; and if, perchance, the actuality should be subsequently mortgaged, say for its full value, to Mr. Kirtland’s brother in Connecticut, there would be still another and paramount title, at least to the extent of the debt, to the other two. The judgment of the Connecticut court was to the effect, practically, that in such a case there were two properties, the actuality in Illinois, the existence of which could not well be denied, and the mortgage title in Connecticut. The courts of Massachusetts (in which State the offset of debts is not allowed in enumerations for assessment), following precedent and practice, would have decided that there were three: the actuality, the equitable title of the share-holders, in the form of stock certificates, and the mortgage title. But if there are two properties and one actuality in Connecticut, and three properties and no increase in actuality in Massachusetts, and if popular judgment is correct that it is desirable to comprehend as many subjects for assessment in a tax system as possible, why not include the legal title, and make four properties? and if the cattle-yard happened to be leased, the lease-hold title, and make, it five properties ?
Now all this confusion and misunderstanding in law, all these conflicting decisions of courts, and much of the pres-
ent injustice wrought in state taxation will disappear by abandoning, as contrary to all logical reasoning and the principles of common sense, the popular and to some extent legal idea that debts equitable titles, and rights to property are in the nature of entities or material tihings, and as such are capable of having and being assigned a definite situs. On tins matter the reasoning of Judge Foster is so clear and cogent that it is difficult to see how even an attempt can be made to refute it. “A debt,” he says, “ has no situs,” and obviously so, for a debt is simply an obligation resulting from a conclusion of law, and “is neither visible, tangible, nor ponderable.” “ Only a material thing can have a corpus, and only a corpus can have a situs, for it is the location of the corpus that constitutes a situs.” It is a misnomer, therefore, to call a debt property. It is only “ an equitable title in the property of the debtor, and it inheres as a title in the property it represents. It does not follow the person of the owner in his domicile, though he may transfer it there.” The United States Supreme Court has not as yet passed directly upon this involved question, but so far as it has considered it indirectly, it has decided Judge Foster’s common sense to be, as it ought to be, good and supreme law. Thus, in the case of Brown v. Kennedy (15 Wallace) this court rejected the theory that a credit has a situs and follows the owner, when it held that a bond and mortgage form of “credit ” was subject to confiscation by the United States in the State where the mortgage debtor resided, and on whom notice was served, “ though in point of fact the bond and mortgage were never in the judicial district of the United States where the proceedings in forfeiture took place, but were with the owner, within the rebel lines in the State of Virginia, during the entire war, and where the confiscation proceedings occurred, and where the federal courts, for the time being, had no power or jurisdiction over either persons or property.” Can it now be claimed, in face of this decision, that a mortgage Credit made and made payable in one State has a situs, and follows the person of the owner into another State, the State of his domicile? Again, the same court, in the case of Miller v. United States (11 Wallace), held that stock or shares in the Michigan Southern Railroad could be confiscated in Michigan by notice upon the railroad company, although both the owner and the certificate of the stock were beyond the jurisdiction of the court. The court said: “ A corporation holds its stock as a quasi-trustee for its stockholders. The service of an attachment, though it is but a notice, finds the debt or the stock in the hands of the garnishee from the time of the service, and thenceforth it is potentially in gremio legis. ” These and other decisions enforcing garnishment of debtors can only be understood and reconciled with recognized principles of law by considering (as the United States Supreme Court in the cases quoted undoubtedly did consider) debts and all choses in action as equitable rights in the debtor’s property, inherent in the property where located, and not as property having a situs with the owner in another jurisdiction.
It cannot, also, it would seem, fail to be recognized that the decision of the Connecticut court in this Kirtland case in effect affirms the rightfulness and of course the desirableness (for whatever is rightful is desirable) of contemporaneous multiple taxation of one and the same property. For if the physical actuality called the property is taxed as a whole, in the place where it is located, all the joint and separate titles and interests— equitable or legal, creditors’ or debtors’ interests, individual or partnership interests — will of necessity be taxed also; for it is impossible to tax the whole of any given thing without taxing all its parts.
CAN CONNECTICUT TAX THE INCIDENTS OF BUSINESS TRANSACTED IN ILLINOIS?
But apart from these curious and novel politico-economic and legal features, this Kirtland case involves constitutional questions of the highest interest and importance, as much so, perhaps, as any case ever brought to judicial arbitrament since the formation of the federal constitution. To this point, therefore, let us next give attention.
A State can, undoubtedly, — if the tax is not discriminating but uniform, — impose a multiplicity of taxes on one and the same property within its territory by taxing the property as an actuality, and at the same time the various titles or rights to it. Yet, constitutionally considered, the Kirtland case does not involve a question of amount or of multiplication of taxation, but a question whether Connecticut can tax at all property or business not within her dominion. It is a pure question of jurisdiction, whether property and the titles to it can be taxed separately and in different States at the same time, and whether business and its incidents can be taxed separately at the same time by two of our States of the federal union.
The legal fiction that personal property follows the person could not and never was intended to have any extraterritorial effect. It has been adopted by comity, and may be revoked by legislation at any time; and was adopted for the single purpose of facilitating the transfer of property. If real estate were made subject to the same rule or fiction of law, it would not withdraw it from the dominion of the State where it was located, and it would be still subject to taxation at the place of location. A share-holder’s interest in the real estate and other property of a corporation is now made subject, in most of the States, to this fiction, but nevertheless the property— real and personal — can be and usually is taxed at the place where located. Most, if not all, of the States of the Union now tax — and with the approval of all courts — the real and personal property of non-residents, where found, and their business where transacted, within their dominion. Whatever rule may have existed at a former time, it is now settled law, by decisions of the United States Supreme Court, that personal property and business do not follow the owner for the purpose of taxation, if the business transacted or the situs of the property is not in the State where the owner resides. But this, it will be observed, is simply affirming that the title to a property is not capable of being severed from the property itself.1
If we now examine the facts in this case, it will be found that Mr. Kirtland produced no new value and did no business in Connecticut; and, so far as relates to this litigation, neither introduced, owned, nor came into possession of any property within the State. When Connecticut, therefore, taxed him, she did so with reference either to business done in Illinois (where he loaned his money), or with reference to a title or a debt, the representative of property already taxed or liable to be taxed in Illinois at the time the debt was contracted, by stamp-tax or otherwise. And it is here a matter worthy of consideration, as one of the important collateral issues in this case, whether any debt can be taxed after it is made, either in the State where it is made or in the State where the person resides who owes the debt, without impairing the obligations of contracts. The question has never been settled, but at no distant day will undoubtedly come before the United States Supreme Court for a decision.2
It did not appear, furthermore, from the record that even the evidence of any debt due Mr. Kirtland — the bond and the mortgage deed — was ever belli in Connecticut. Under such circumstances, it is curious to note, as Judge Foster points out, to what a singular and absurd hypothesis and procedure the
Connecticut authorities, as if conscious that they had abandoned reason and were dealing with sentiment, had recourse in order to get a basis and a warrant for their action. They first assumed that there was an imaginary property, separate and distinct from the material property; and then gave to such imaginary property an imaginary situs, thus “ going far into the domain of the sentimental and spiritual for the purpose of taxation.” Bishop Berkeley, it will be remembered, held to the opinion that matter does not exist, and that we only imagine that it exists; but it is not at all probable that he ever hoped, when alive, that his views would be so practically indorsed, and at so early a day, in the State of his literary adoption. He would have made, moreover, a desirable tax assessor and tax collector under the present Connecticut tax laws; for being logical, even if he was sentimental, he would doubtless have been willing to take the taxes in the pure product of the imagination. His successors, however, are not only sentimental but illogical; for, not content with assuming that the imaginary is the real, they try to do what the good bishop never would have sanctioned, namely, take something out of nothing. But, seriously, such a procedure as was had in Kirtland’s case had in it no element of taxation. It assessed and taxed him in respect to business or interests beyond the territory and jurisdiction of Connecticut, and which the laws of the State could in no way reach or protect; and in so doing it ignored the fundamental principle that protection to that portion of property not taken or absorbed by the tax is the consideration or compensation for all legitimate taxation. In short, the procedure was nothing but an arbitrary exaction, without due process of law, and, as such, a plain violation of the Fourteenth Amendment to the constitution of the United States. Furthermore, if this fiction made operative for the purpose of taxation in Mr. Kirtland’s case in Connecticut be constitutional and applicable to extra-territorial property and business in any degree, it is difficult to see why it may not be extended to real estate and to all conceivable business, titles, and transactions of the citizens of Connecticut in other States and countries, or how there can be any limit assigned to the arbitrary taxation of the extra-territorial property and business of the citizens of Connecticut, except in the want or exhaustion of the imaginative powers of the members of its legislature. But the assumption of such a power is the assumption of universal dominion: and what, under such assumption and procedure, becomes of the question of independent state sovereignty ?
Undoubtedly Illinois can tax to any extent contracts made within her limits at the time when made. Virginia imposes a registry tax on mortgages in proportion to the amount of the mortgage. All the States also possess the power to impose stamp duties on all evidences of debt; and Illinois imposes a tax on resident agents and attorneys loaning money for non-residents on a valuation of the sum loaned. Every State can regulate the loaning of money, or the transfer of other property or rights to property within her borders, at the time when the loaning or the transfer may be made ; and whoever loans money or transfers property impliedly submits to the laws existing in the State, which enter into and form a part of every contract.
If each State has dominion over the property and business transacted within its territory for the purpose of taxation, that dominion must from its very nature be absolute and exclude the dominion of any other State over the same property and business. Again, the sovereignty of co-equal States involves a full recognition of the dominion and sovereignty of all sister States; and hence section one, Article IV., of the federal constitution requires that “full faith and credit shall be given to the public acts, records, and judicial proceedings of other States.” Each State, then, in entering the federal union, entered into a contract of non-interference with the dominion and prerogatives of other States; and it will not be disputed that the power of taxation is an incident of sovereignty or dominion. The dominion, therefore, of one State for the purpose of taxation over persons, property, business, or the incidents of business, must exclude the dominion of other States over the same persons, property, business, and incidents of business, at the same time. Neither in constitutional law in this country, nor in mathematics, can the same property, persons, business, or incidents of business, occupy two places and two sovereignties at the same time. Hence, the taxation by Connecticut of credits, choses in action, bonds, notes, book-accounts, verbal and other contracts, the incidents of actual business transacted in Illinois, must be in legal effect extraterritorial taxation of such business, and so an infringement and violation of the sovereignty of Illinois; or else it must be assumed that business does not include its incidents, or the whole its parts.
To most minds that examine this case, and apparently also to the court, the taxation of Kirtland for the money loaned by him in Illinois would seem to have been in respect to property, namely, the debt due him and represented by bonds and mortgage. As the bonds and mortgage were, however, but the necessary incidents and evidence of money-lending performed by Kirtland, or through his agent in Illinois, the taxation in question was rather in respect to business than to property, even conceding, for the sake of argument, that the debt and the paper evidences of it were property. It is worth while, therefore, to consider a little more fully, before concluding this review, what is embraced in the assumption by Connecticut of the right to tax the business and contracts of its citizens transacted or made extra-territorially. Was the business performed by Kirtland in any sense business in Connecticut? And in answer, it may be first remarked that the making of contracts is of itself a business, in the strictest sense, nor can any business exist without the power to make contracts, written or verbal. Money cannot be loaned unless there is a business of lending money, and, for the time being, the vocation of a money-lender. The amount or duration of a business in a State can have no influence on the question of the jurisdiction of the State over the business or transaction. A State can tax all sales at auction, including the sale of goods in unbroken packages owned by non-residents, and just brought into the State and sold by non-residents or resident agents (Woodruff v. Perham, 8 Wallace). In New York mere wandering peddlers are taxable on money invested in business in every town in which they peddle. If actually assessed in more than one town the same year, the remedy is to apply to the assessors (Hill v. Crosby, 26 Howard, 413). It would seem, therefore, that business — occasional, transient, or permanent — transacted in a State by aresident or a non-resident may by the force of state sovereignty be made subject to a uniform rule of taxation. “ Every obligation,” says Savigny, “ arises out of visible facts; every obligation is fulfilled by visible facts. Both of these must happen at some place or another.” Again, it is the joint effect of the law existing at the time in the State, and the visible facts which we call business, which makes a legal contract, and binds the parties to the performance of their agreement. The law and the visible facts in this case of Kirtland are acknowledged to have been Illinois laws and facts, or acts performed in Illinois. And if this be so, was not, then, the taxation of Mr. Kirtland in Connecticut extra - territorial taxation, or taxation of business done by Mr. Kirtland and those who elected to deal with him in Illinois?
CAN EASTERN STATES CONSTITUTIONALLY TAX THE BORROWING POWER OF CITIZENS OF WESTERN STATES ?
United States stocks and bonds have been held by the United States Supreme
Court to be exempt from state taxation by reason of an entire want of jurisdiction, on the part of the State, over the credit, contracts, business, or borrowing power of the federal government; and for the further reason that such stock and bonds are not property, in the sense of land or other visible, tangible things once owned and sold by the federal government, but mere incidents of the business or borrowing power of the government.1 The United States Supreme Court, in the case of Weston v. City of Charleston (2 Peters, 449), said, “ The tax on government stock is thought by the court to be a tax on the power to borrow money on the credit of the United States;” and the court further added: “ The right to tax the contract to any extent when made must operate on the power to borrow before it is exercised, and have a sensible influence on the contract.” This decision, therefore, settles, as a principle of law, that if a borrower or borrowing power is not within the jurisdiction of a State, the incidents or instrumentalities by which alone the business or borrowing power can be exercised are likewise not within the jurisdiction of a State, and cannot be subject to its taxation. Was now the borrowing power of the individuals who borrowed money of Mr. Kirtland in Illinois within the jurisdiction of Connecticut? It is a law of human nature, affirmed in the case just cited in the United States Supreme Court, that such a borrower must pay the tax, and that it is on him that the burden must fall, at the time when the contract is made, in the form of an additional rate of interest; which increase obviously operates as a restraint upon his borrowing power in Illinois, for, as the court declared it, “ the right to tax the contract to any extent when made must operate on the power to borrow before it is exercised.” It is evident, then, that the borrowers of Mr. Kirtland in Illinois will pay a higher rate of interest, or they will be unable to obtain the money, if Mr. Kirtland may be constitutionally subject to a tax in Connecticut, the place of his residence, on his transactions of loaning money in Illinois. There cannot be different rules determining the incidents of taxation on the borrowing power of government and the borrowing power of individuals in Illinois. If the tax is a burden on the borrowing power in one instance, it is equally so in the other. Does it not also follow that if the borrowing power of the United States, its credit, is exempt from state taxation, from want of jurisdiction, that the borrowing power, the credit of citizens of Illinois (as to transactions in Illinois) is likewise free from taxation in Connecticut, from the want of jurisdiction of Connecticut over transactions in Illinois? It cannot be seriously assumed that citizens of Illinois, or their business transactions in Illinois, are in any sense within the jurisdiction of Connecticut, any more than the borrowing power of the United States is within the jurisdiction of Connecticut. The United States Supreme Court, in the " State Freight ” case (15 Wallace), further helps to a conclusion in this matter by saying, “ It has repeatedly been held that the constitutionality or unconstitutionality of a state tax is to be determined, not by the form or agency through which it is to be collected, but by the subject upon which the burden falls.” And the same court has determined, as before shown, that the burden in case of a contract of loan falls on the borrower. Apart from this, however, it needs no argument to prove that the lender will, under all ordinary circumstances, add the tax to the rate of interest; for he must and will have the average remuneration of other investments. Therefore, every Western borrower is directly interested in the condemnation and rejection of the Eastern judicial and arbitrary exactions imposed on extra-territorial contracts, over which the usurping States have no dominion or control, or power to protect. The reversal of the Connecticut decision by the United States Supreme Court will undoubtedly lower the rate of interest immediately in the Western States to the extent of more than one per cent., and give a new life there to trade, business, and transactions now obstructed by a feudal and arbitrary edict.
It is also a notable circumstance that, soon after the breaking out of the war, in 1861, when the subject of the proposed issue of United States bonds came up for consideration before a meeting of a bar association of one of the Northern States, there was, when the point was first raised, but one dissenting opinion to the proposition that such bonds, if issued, would be taxable by state and municipal authorities-
Furthermore, if Connecticut has the power of taxing extra - territorial contracts for the loan of money, she has the power to fix any rate and to discriminate as to the States upon whose citizens the burden shall fall; or she may adopt a rate that shall be prohibitory on contracts made by her citizens with citizens of designated States, or citizens of all the Stares, as her caprice may dictate.
Before concluding this review, it will be interesting to call attention to another element of confusion and inconsistency certain to arise from the assumption that titles and rights are property, and can properly be regarded and treated as such in law and legislation. The Connecticut court held that titles owned in Connecticut to real estate situated in other jurisdictions were not property in Connecticut for the purpose of taxation, but that titles and rights, in the nature of evidence of indebtedness, — notes, bonds, mortgages, choses in action,—created and owed by citizens of other States but owned and in possession of citizens of Connecticut, were property in Connecticut legitimately subject to taxation. But the Connecticut court would have found itself sorely puzzled if it had attempted to lay down any clear line of demarkation and distinction between a title to realty and a title in the nature of a chose in action; for the reason that there is none, and because the distinction between real and personal property is founded on artificial rather than on natural laws, and the artificial laws are constantly liable to change. Thus, in Scotland, there is a class of bonds, called “ heritable bonds,” secured on real estate, and almost identical in character with the bonds and mortgage which Mr. Kirtland held, which descend to the heir as real estate, and by Scotch law and legislation are so regarded. In France, shares in the national debt and stock in the Bank of France, which the Connecticut court would undoubtedly regard as personal property in its most typical form, and having a situs at the domicile of the owner, can by the laws of France be made real estate at the option of the holder, and as such be actually mortgaged and administered upon. Again, before emancipation, slaves in the United States — which by the federal constitution were recognized as persons — were in some of the States declared to be real estate. In 1871, also, the Supreme Court of Kentucky decided that railroad stock was real estate and subject to distribution according to the laws of real estate (7 Bush, 349); while today, in Wisconsin, the one species of property which is especially typical of mobility, and is of no value apart from its capability of motion, namely, the rolling stock of railroads, is by law made realty. Now, can forms of credit and of titles, made real estate by the law of their creation, be made personal property by some other country or State; and through such fiction of law can they be reached for distribution as personal property, having a situs in the country or State of their owner? or can they be taxed in a State other than where and when the credit or title has been created by operation of law?
From these considerations, reasonings, and precedents, the conclusion of Judge Foster, although he stood but one against four in his court, would seem to be incontrovertible; namely, that “ the plaintiff,” Kirtland, “ was not liable to taxation ” in Connecticut “ for debts owing to him in Illinois; ” and inferentially, that, although possibly warranted by the letter of the statute, the act was an attempt on the part of Connecticut to exercise extra-territorial dominion over persons, contracts, or business, and was, therefore, unconstitutional and void. It would also seem to be clear that if property in action (choses in action) can be made by fiction of law an entity, having a situs in one State separate from the property which it represents in another State, the grossest inconsistencies will be perpetrated, and that the most inharmonious, arbitrary, and capricious tax laws and other laws will be enforced by conflicting legislation of States, required by constitutional obligations to “ give full faith and credit to the public acts of other States.”
The function of the legislative branch of every government is to enact the law, and of the judiciary to interpret it; and in general the judge cannot be too careful in refraining from trenching upon the function of the legislator. But there are occasions when, if the law is to continue to be what Lord Coke said it was, “ the perfection of reason,” it is necessary for courts in making their decisions to inquire into the relation of things covered by the statute; and if, through the progress of ideas or events, the original relation has changed, then to make the interpretation of the law conform to such change, rather than by interpreting too closely to the letter, make the law, in place of being the perfection of reasoning, the perfection of absurdity, and so an obstacle to all free and progressive society. The Connecticut Court of Errors in this Kirtland case had an opportunity presented them to add one more to the memorable instances in which, through the law of judicial decision, government has been elevated, the science of jurisprudence enlarged, a system of wrong made a system of right, and society benefited morally and materially. But in place of rising to the occasion, they held before their faces the absurdities of precedents founded on want of knowledge, and walked backwards. The Supreme Court of California acted differently in 1873, when, with a similar question before them, — the taxation of mortgages, — they swept away the whole system of taxing debts in that State by deciding, in consonance with the spirit and larger knowledge of the age, that debts were not included in the clause of the constitution of California which subjects all property to uniform taxation, inasmuch as a debt, “ a cause in action, cannot pay the tax, because it has and can have no value independent of the tangible wealth out of which it may be satisfied ; ” and further, that it was not possible at the same time to attempt to tax a debt and the property it represented without imposing a double tax on the property, and so unequally burdening property that was incumbered as compared with property free from incumbrance.
The United States is a country fitted by nature to be a country of abundance. A given amount of labor under existing circumstances will here produce more, on the average, of the essentials for a comfortable livelihood than any similar area on the earth’s surface. All the world ought, therefore, to come to the United States to buy, or what is the same thing to exchange; and all the world would come if they were not hindered. But all the world does not come, and the cry is everywhere that in the midst of abundance there is no demand for our abundance; and because there is no demand, production is suspended. The obstacles which interfere and prevent this demand are various in their nature and multiple in their number; and among them, important, if not foremost, in their restrictive influence, are laws like that to which the Connecticut Court of Errors has recently given renewed sanction in the Kirtland case; which make costly the work of production by making difficult the transaction of business and the movements of capital. Such laws do not exist in other countries, our compeers in wealth and civilization. Such a case as this Kirtland case could not have come up before any of the courts of England, France, Belgium, Germany, Switzerland, Italy, or Lower Canada; for in none of these countries are debts regarded in the light of property, subject to taxation. And until, as a nation, we cease to overburden ourselves in the race for commercial and industrial supremacy, we cannot legitimately expect to win the first place or the great prizes, or hope that our labor and capital will be used to yield to us the greatest abundance.
David A. Wells.
- In the case of Green v. Van Buskirk (7 Wallace) Mr. Justice Davis, in discussing this fiction of law, that the domicile of the owner draws to it his personal estate, quotes approvingly from Judge Story the opinion that “ this fiction always yields when it is necessary for the purpose of justice that the actual situs of the thing should be examined.”↩
- When the celebrated foreign-held bond case was before the Supreme Court of Pennsylvania, the late state Chief-Justice Woodward expressed himself in reference to this interesting question as follows : “ How far modern tax laws shall be permitted to impair and alter private contracts is a great question which must be decided ultimately by the Supreme Court of the United States. I have my own private views, which would probably be found to differ from a majority of this court.”↩
- As curiously illustrative of the limited acquaintance of our best jurists with the law and principles of taxation, it may be here mentioned that the majority of the Connecticut Court of Errors, in giving their opinion in this case of Kirtland, said that had it not been for the act of Congress of March, 1863, the bonds of the United States could have been taxed under state or municipal authority ; all of which is equivalent to saying that, in the absence of specific restraining law, States and municipalities could, if they would, destroy the federal government. The following politico-economic as well as legal axiom, enunciated by Chief-Justice Marshall in 1828, when there was no law of Congress prohibiting the taxation of United States bonds, however, effectually and forever settles this question. “ The power to tax,”he said, involves the power to destroy : " and he might have added as a corollary, if it did not at once suggest itself, that the power to destroy the federal government was something that could not be delegated by Congress or exercised by States or municipalities.↩