Cyclopædia of Political Science, Political Economy, and the Political History of the United States

Edited by: Lalor, John J.
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New York: Maynard, Merrill, and Co.
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Includes articles by Frédéric Bastiat, Gustave de Molinari, Henry George, J. B. Say, Francis A. Walker, and more.
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LICENSE TAX. A license tax is a tax upon trade, and is paid for the privilege of pursuing an industrial or commercial occupation or a profession. The general idea of a license is that it confers a right that could not exist without the license, but this idea must, when license taxes are considered, be extended. For there are many trades and occupations which are not in themselves unlawful, and which could be followed without any interference by the state, yet which are made subject to a license tax. Thus, in the case of attorneys, notaries, peddlers and plate dealers, whose occupations do not imply any illegality, duties were for many years imposed on such as followed them. In general, license duties are mainly imposed in connection with the police power of the state, and for the purpose of regulating or prohibiting certain occupations which may be injurious to the interests of society in any form or when carried to excess. This idea was embodied in the constitution of the state of Arkansas of 1868, which provided that "the general assembly shall tax all privileges, pursuits and occupations that are of no real use to society; all others shall be exempt." (Art. 10, § 17.) And in carrying out this idea of regulation the tax may be made so pressing as to prohibit an occupation. Thus, a tax of $1,000 imposed on keepers of gaming implements, was clearly intended to be prohibitory, "and its payment would not give the owner the privilege of making use of it, which was illegal under another statute." (State vs. Doon, R. M. Charlt., 1.)


—Where regulation is the object of a license tax, revenue is a secondary consideration; and, in fact, in many instances the charge is only what is sufficient to defray the expense of regulation, and no revenue accrues to the taxing power. And where a grant is made by a state to a municipal corporation of power to issue licenses, it would appear that regulation was the object, unless there is something in the language of the grant, or in the circumstances under which it was made, indicating that revenue was contemplated; and the charge is not then known as a tax, but as a fee. "The license fee for retailing liquors is in no proper sense a tax. Its object is not to raise revenue. It has for many years been thought that this business was one dangerous to the public peace and public morals, and it has been the uniform practice of the country to subject it to regulation, require license from some public functionary before it is engaged in, and to punish as a crime the pursuit of it without a license. The license is part of the public regulations of the country, and the fee is intended rather to prevent the indiscriminate opening of such establishments than to raise the revenue by taxation." (Burch vs. Savannah, 42 Geo., 596, 598.) And a like reasoning will apply to charges like those for licenses for marriages, places of public amusement, auctions, draymen, hackmen, and for inspection. The sphere of such duties is limited, for, if generally applied, they become an obstruction to trade; but in the cases of a traffic or occupation which entails upon the government special inconvenience in its regulation, there are just grounds for imposing a special tax upon such occupation or trade; and objections such as that the charge is unequal and invidious, because the rest of the community is not subject to it, or that those taxed are not assessed on the amount of business done, will not hold. There can be little doubt that such taxes or charges, if properly imposed, do tend to diminish the evils against which they are directed; but experience has shown that when prohibition is intended, other and more direct means are to be found in legislative action which is expressly prohibitory than in the circuitous method of imposing a charge difficult or impossible to be borne: When imposed for revenue there is no limit to the taxing power.


—A license tax is usually a fixed charge for each occupation, and as such it is an unequal and unjust tax, because if a heavy charge, it weighs more heavily upon those who carry on business on a small scale, or whose services are in little demand. The tendency of such duties is thus to favor the concentration of the business taxed into the hands of the wealthier undertakers, and this tendency is increased in proportion as the duty is increased. Indeed, the first license tax imposed in England was believed to be a protective measure. A duty was imposed on all persons traveling through the country as hawkers and peddlers, and on every horse or other animal used by them. It is supposed that this measure was adopted in the interests of the shopkeepers; for as means of locomotion were very limited, in the remote districts the difficulty and inconvenience of reaching towns where shops existed were such as to cause trade to be carried on to a much greater extent then than now by peddlers, and by imposing a heavy tax on these traveling salesmen they were discouraged and trade brought back to the shops. The intention may be to create such a concentration and even a monopoly, as in the case of the very heavy license fees exacted from pawnbrokers in Dublin, which are said to owe their origin to a purpose of giving a monopoly of the business to a few favored retainers of the court. The concentration thus, directly or indirectly, brought about would assist the supervision of the licensed trade or occupation by the state; but it is an unjust interference with trade, and when the tendency to crush out the small trader is under natural conditions as strong as it is at the present day, legislation should seek rather to aid than to do injury to him.


—A license tax is an indirect tax, and is not finally paid by the person whom the state recognizes as the payer; for the latter reimburses himself from his customers. There are certain cases, as was pointed out by Mr. Cliffe Leslie, in which it may prove a direct tax. "A petty retailer, to give real examples, takes out licenses to sell spirits, beer and tobacco; he advances the customs and excise duties on tea, sugar, and the rest of his stock; he pays perhaps sixpence in the pound on his shop; and after all these duties have been advanced, his shop is burned to the ground, or he falls sick and loses his business, or he is defrauded and becomes bankrupt; or a large dealer, to whom the taxes are a 'flea-bite,' takes away his customers; or from one of twenty other causes the return to all his outgoings is ruin. * * There are thousands of poor men who every year embark their little savings or borrowed money in losing ventures of this sort on which they pay taxes; and not unfrequently one cause of their failure is the advantage which wealthier rivals find in those very taxes. Thus, excise and customs duties on commodities, trade licenses, licenses to keep horses and public carriages, etc.,—though treated not only by theorists but even by chancellors of the exchequer, as taxes on consumers alone—are often heavy direct taxes on a working class of producers, over and above the general diminution of wages which the whole system of so-called indirect taxation occasions." ("Fortnightly Review," February, 1874.)


—But regulation apart, there is little to recommend an extensive system of license duties, such as is at present in use in France under the name of patentes. They are unequal, and all attempts to make them equal have failed. In France and some other countries the charges for licenses to sell alcoholic liquors is graduated according to the population of a place, and the number of retail dealers in each place is limited. In such cases the charge may be regarded as a return for the privilege of selling under a partial monopoly. But when it is attempted to adjust license duties to the amount of business done, or the profits received, by the payer, all the difficulties that are arrayed against the income tax (see INCOME TAX) are met with, and the tax is no more equal than before. Mr. McCullough says that they are too contradictory of the plainest principles ever to become prominent sources of income; and Paul Leroy Beaulieu, the author of the best work on taxation in the French language, asserts, that the problem of making license duties equal is like that of squaring the circle.


—In the United States license duties have been mainly employed by the different states in connection with the police power, and they have been granted also to municipal corporations. The federal government in 1861-2 imposed an elaborate system of license taxes, the main object of which was revenue, and in fact regulation was hardly thought of except so far as was necessary to the collection of the taxes. Under such a system it occurred that many occupations were charged with license taxes under both national and state laws, and many interesting questions regarding the legality of the federal law were raised, and notably in regard to lotteries and liquor dealers, for the former had been declared illegal by the laws of the majority of the states, and the latter were proscribed by some. In 1866 special taxes were imposed in place of license taxes, but the change lay wholly in the name, and the character of the different taxes remained almost unaltered. In 1871 the greater part of the special taxes were abolished, and only those on distillers and dealers in liquors, and manufacturers and dealers in tobacco, were retained, and these last taxes are still in force. For the purpose of showing the number of occupations taxed during the latter years of this system of license taxes, and after many had been abolished, and to show the relative importance of each as a source of revenue, the following table is taken from the report of the commissioner of internal revenue for 1868:

Table.  Click to enlarge in new window.


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