mon, sense, applied to a wieldy subject, beset with inexact antecedents of authorities, could achieve, has here received its latest and best expression. With it the beginner may assume the airs of an old connoisseur in any and every department that it has cost his contemporaries a life-time to know. With such a catalogue and the treasures it represents, more Irvings, Prescotts, Ticknors, Longfellows and Motleys may be confi dently looked for in our country, and if the future does not realize the vaticination, it will not be for the lack of materials or inspiration.

ARTICLE X.-THE TAXATION OF MORTGAGES.

IN the recent discussion concerning the taxation of mortgages that took place in the Atlantic Monthly, the argument of Mr. Brooks Adams was certainly a sufficient reply to all the common objections to a reform. These objections are based entirely upon the delusion that both mortgages and estates mortgaged are at the same time property. Nothing better in the way of political education can be accomplished than the clearing people's heads of this delusion, and any words may be deprecated that shall seem to hinder this good work.

But in the course of his argument Mr. Adams makes some statements that can hardly be accepted without question. His end is to change existing laws regulating taxation, and it is of the utmost importance that such changes be made understandingly. Before a line of policy is reversed we must know what the result of the present course is, and what will be the result of the change. We propose to show that Mr. Adams has not fully explained the operation of existing laws, nor given satisfactory reasons for changing them.

Mr. Adams asserts: . . . . "The difficulty with all this taxing of debts is not only that it is absurd in theory but that it is iniquitous in practice. The borrower always has to pay. If four per cent. is the market rate for money, and taxes amount to two per cent., we have seen that the mortgagor can borrow only at seven per cent. The capitalist will collect the tax for the government, but he pays himself at the expense of the borrower for his risk and trouble in so doing. No statute can change this law of trade. The only effect of taxing loans is to raise the rate of interest."

This, the orthodox doctrine, is established generally by reasoning somewhat as follows. In the employment of capital, according to economic theory, an approximately equal rate of profit will be obtained, no matter what the department of business. The apparently higher rates of profit secured in some cases are explained as the reward of increased risk, greater

uncertainty and other considerations. If it is discovered that any branch of trade is securing to itself greater profits than others, capital will seek that employment until the returns are reduced by competition and the equilibrium is restored.

If then a man proposes to invest a certain capital in building houses, it is plain that he will expect to receive a certain rate of profit. He will not expect one rate of profit when he sells for cash and a different and lower rate when he sells upon credit. He would rather expect, however, to receive a higher rate in the second case than in the first. To put our reasoning in the concrete form, a builder expends, let us say, $1600 upon his house, expecting to get for it $2,000. If he sells for cash at this price he realizes his expectation. If the whole transaction has required a year, we may allow $100 for interest and call the profit $300.

What, now, must be the return if credit is to enter into the transaction? Can it be any less than where payment is made in cash? Let us suppose that the terms of sale are $1000 down, and a mortgage. If capital is loaned at six per cent. and there is no tax upon mortgages, this mortgage will be sold for $1000 at six per cent. The builder can sell it and make his profit of $300 as well as if he had sold his house for cash. But if there is a tax of two per cent. upon mortgages, a mortgage for $1000 would not sell for that sum. Money otherwise loaned brings six per cent. and loaned upon such a mortgage it would bring but four per cent. If the builder is to make his profit the mortgage must be at eight per cent, or else for a larger sum at six per cent. For an obvious reason, where there are no usury laws, the former course will be adopted. Nothing can be clearer therefore than that the buyer of the house must pay the mortgage tax.

There are two lines of criticism upon this argument that it is practicable to take up. The first and most thorough-going is extremely intricate and difficult to comprehend without some acquaintance with and indeed some mastery of economic principles. The second is altogether more obvious and less profound; but it will serve to introduce the other, for it suggests questions that unavoidably excite our curiosity. The first course requires an investigation of the causes that deter

mine the ordinary rate of profit; the second involves a reference to the fluctuations of price. As we have recently passed through a period remarkable for the "shrinkage of values," and as this phenomenon has received a vast amount of explana tion, it will be more practicable to begin with our second criticism.

Let us shift our point of view while clinging to the doctrine of a general rate of profit. Suppose that a man possessing some capital seeks to invest it in real estate. He will of course expect the usual return for his investment. He examines the house that we have supposed to have been built at a cost of $1700 and finds that he can have it for cash, at $2000, or, on credit, by paying seven and four-tenths per cent. interest on the amount of the mortgage. Having but $1,000 he is unable to buy for cash, while he is unwilling to pay the exorbitant interest that is demanded. He will say to the plea that the tax upon mortgages causes the increased interest that it is doubtless true, but that as the tax was intended to rest elsewhere he will not, if he can avoid it, assume it himself. The question therefore is whether there will be a deadlock-whether no bargain at all can be made.

It seems reasonable to suppose that bargains often do take place by compromise, so that a part of the tax upon mortgages is paid by the seller of the property, either because he sells at a less price or accepts a lower rate of interest than he at first demanded. For suppose that our intending purchaser refuses to buy; what is the position of the builder? He has a house that he cannot sell at the price he has fixed, and he must either rent it or let it lie idle. The latter course is much more to his disadvantage than paying the mortgage tax. The former course will give him no ready money with which to continue his business, so that he will be compelled to mortgage the property himself, and thus, according to the reasoning that we are criticising be compelled to pay the tax on the mortgage. Whether he would be able to exact the tax from the tenant in the shape of increased rent is another question. If it is maintained that the tenant pays the tax, then the case of those who have bought houses on mortgage may present no peculiar hardship.

In short the relative intensity of the demand of the two parties must be reckoned as one of the conditions of the problem. If the owner of the property anticipates a fall of prices he will be eager to dispose of his property. If the buyer has the same expectation he will be disposed to hold back. Or if the market for houses is overstocked the seller will not forego an opportunity of selling because the tax on mortgages will be levied upon him. The fluctuations in the price of real estate are notorious, and when the price is going up the buyer probably has to pay all charges; when the price is falling or has fallen the seller may be obliged to assume some of them. The case is somewhat similar to that of two countries, one of which imposes duties upon the products of the other; the "reciprocal demand" will decide whether one country or the other shall pay the whole or a greater or less part of the duty. We might almost say that there is a modern "zeisachtheia" under our system of credit, every ten or a dozen years, prices being shaken down without much regard to cost of production or rate of profit. If it be true that in times of dull business the holders of real estate often dispose of it at a loss, or at a reduced profit as in the case above supposed, then we may regard the tax upon mortgages as paid once for all, in a permanent depreciation of the value of real estate. For if we sup

pose the buyer in our example to wish to dispose of his purchase, he can do so without loss at the same rate at which he bought. He can assume the mortgage tax now because he escaped it before. In this way the incidence of the tax would vary as one was buyer or seller, so that it would be evenly distributed.

Even if we suppose that the buyer always pays the tax, as is commonly done, we must bear in mind that his position is changed when once he has paid off the mortgage. He now occupies the position of the builder and may be supposed to desire the ordinary profit upon his investment. He therefore adds to the price of the house the amount that he has paid in extra interest and demands this sum for the property. He cannot do this when business is dull for the competition of the builders would not allow it, but he may very often do it when prices are rising. From this again we should conclude that