money. Mortgages and deeds of trust commonly contain a covenant on the part of the mortgagor, or grantor, to pay all the taxes assessed upon the mortgaged premises during the life of the mortgage, with the provision that his default in so doing shall authorize the mortgagee to pay such taxes and add the amount thereof to the debt secured by the mortgage. This provision had to be taken care of since disputes were common on this phase of the subject and some agreement had to be reached by the courts, which would settle this matter for good. It is a good policy that the mortgagor is so held as in many other instances. The mortgagee had to face numerous hardships and trials when he understood or rather thought he understood the mortgage. The mortgage is indeed a hard thing to understand perfectly and in fact there are many laws that are aiding the mortgagee, but he needs still further protection.

CHAPTER XII

THE TAXATION OF MORTGAGE CREDIT

A tax upon credits is a double tax if the values upon which the credits are based are taxed. If the possessor of the values pays a tax, it must come out of the product. This decreases the net product equal to the amount of the tax, and the values of the taxable property equal to the tax capitalized at the current interest rate.

Suppose it is necessary for the possessor of a farm to mortgage it for $1,000, which is half of its value. The mortgagee should pay tax on his values just the same as the mortgagor.. But if the mortgagee pays $5 tax on the equity which he now has in the land by virtue of the mortgage, and the mortgagor $10 tax on the mortgaged property, it is double taxation of property. The capitalist certainly ought to bear his share of the taxes. If the capitalist invests in farm mortgages and mortgages are exempt, he will not pay any taxes because the total burden of taxes will be borne by the possessors of tangible property. If by virtue of the tax upon mortgages the capitalist could obtain a higher rate of interest through some other investment, he would choose the one yielding the higher rate; but if no higher yield could be obtained, the capitalist would invest in farm mortgages as readily as any other security of equal merit. Then the interest rate would be fixed by the supply of and demand for loanable funds despite the tax. It seems that the possessor of property should pay tax only on his equity. But such an arrangement would create all kinds of loopholes for the tax dodgers. The many ways of concealing equities and intangible assets make

it impossible to deal with these problems justly. If intangible assets are exempt from taxes, the capitalists escape their share of the tax burden.

Credits are taxed directly as personal property. The Federal government requires a record tax, or a stamp tax, to complete the legality of contracts but this brings in only a small amount of revenue and is only paid once. An annual tax upon credit assets might be worked out, but none of these methods of taxing credit are satisfactory, because of the many evasion schemes through gentlemen's agreements, and the like.

Effect of a Tax on Mortgage Credit When All Other Forms of Credit Are Taxed

If all credits were taxed equally and the values they represented exempted, there would be no inequality, except on the basis of the unequal values which the credits covered. If credits are taxed, it is certainly clear that the values covered by the credits should not be taxed. But, it would be easy to create fictitious credits and shift them from one state to another. By these tactics both the credit and the values could escape taxation. The evasion of the taxes on mortgage credits would not be difficult, because of the ease with which the securities can be transferred. The evasion of the tax on mercantile credit, book accounts, exchange transactions, foreign bonds, and similar intangibles, would be easy. However, it must be admitted that if any credit is taxed, all credits should be taxed alike. The problems of shifting the incidence and evasion are separate questions.

Effect of a Tax upon Farm Mortgage Credit When Many Other Forms of Credit Are Exempt

A tax upon farm mortgage credit forces up the interest rate on the farmers, when other securities are exempt.

Lenders seek the highest yields with safety. If municipal bonds can be obtained at 5 per cent exempt from taxes equal to 2 per cent, farm mortgage securities will have to pay 7 per cent to compete in attracting buyers. Until interest rates have adjusted themselves to bring equality of earnings on capital more capital would be offered for the tax exempt securities than would be needed. On the other hand, the farming industry would suffer from need of capital. Such a condition impoverishes agriculture. Moreover, it exempts the rich and increases the tax burden for the agricultural classes. In this fashion luxurious cities are built up in part at the expense of the impoverished country. The agriculture of the United States has suffered from these conditions ever since Chief Justice Marshall's famous decision which declared that "the power to tax is the power to destroy," and forbade the control of the constitutional measures of one government by another. Since this famous decision, the tax exempt bonds of states, districts and municipalities have increased to such a tremendous volume that the industries issuing taxable securities are frequently unable to find a market. The taxation of mortgage credit and the exemption of other credits is an injustice to agriculture. Therefore, the exemption of credits whereby investors escape taxes is only indirectly relieving the moneyed classes of their share of the tax burden.

Effect of the Exemption of Farm Mortgages When Other Credits Are Taxed

When farm mortgage securities are exempt and the interest yield is more than from other securities of equal merit, capital flows from other industries into agriculture, because capitalists want to secure the highest yielding securities. This impoverishes other industries and

encourages too rapid an expansion of agriculture. Such an unbalanced condition is detrimental to all industrial progress. Agriculture suffers as much as, or more than, any other business. The impoverished conditions of industry react upon agriculture because of the inability of the industrial classes to buy farm products. Such a condition at the time when agricultural produce is coming to the market in larger quantities than usual, depresses prices wholly out of proportion to the increased production. Then an agricultural crisis ensues, and other industries appear to recuperate while they are able to buy agricultural products at low prices. In the meantime the young farmers and "suckers" who began farming on cheap money are foreclosed; the price of land declines with the prices of farm products, and the farmers' purchasing power shrinks. This reacts upon industry, because the farmers are the big consumers who buy manufactured products. Perhaps no other cause is so provocative of crises as the juggling of taxes and tariffs.

Effect of a Partial Exemption of Farm Mortgages

The injustice of exempting some farm mortgage securities and taxing others is hardly in need of comment. We have a critical situation of this kind in the United States. The farm mortgage securities issued by the Federal and joint stock land banks and by mortgage banks under special laws are exempt from all taxes. But the farm mortgage securities of the several hundred private farm mortgage banks and companies are taxed. In addition, the Federal and state supervised banks enjoy the prestige and confidence of the government and are able to provide organizations of a national character and thus secure national advertising which is beyond the ability of private houses. It would seem