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Home -> Merlin Harold Hunter -> Outlines of public finance -> Chapter 13 continue

Outlines of public finance - Chapter 13 continue

1. Preface

2. Chapter 1

3. Chapter 1 continue

4. Chapter 2

5. Chapter 2 continue

6. Chapter 3

7. Chapter 3 continue

8. Chapter 3 continue

9. Chapter 4

10. Chapter 4 continue

11. Chapter 4 continue

12. Chapter 5

13. Chapter 5 continue

14. Chapter 5 continue

15. Chapter 6

16. Chapter 6 continue

17. Chapter 7

18. Chapter 7 continue

19. Chapter 7

20. Chapter 7 continue

21. Chapter 9

22. Chapter 9 continue

23. Chapter 10

24. Chapter 10 continue

25. Chapter 10 continue

26. Chapter 11

27. Chapter 11 continue

28. Chapter 11 continue

29. Chapter 12

30. Chapter 12 continue

31. Chapter 13

32. Chapter 13 continue

33. Chapter 13 continue

34. Chapter 14

35. Chapter 14 continue

36. Chapter 14 continue

37. Chapter 15

38. Chapter 15 continue

39. Chapter 15 continue

40. Chapter 16

41. Chapter 16 continue

42. Chapter 17

43. Chapter 17 continue

44. Chapter 17 continue

45. Chapter 18

46. Chapter 18 continue

47. Chapter 18 continue

48. Chapter 19

49. Chapter 19 continue

50. Chapter 19 continue

51. Chapter 19 continue

52. Chapter 20

53. Chapter 20 continue

54. Chapter 20 continue

55. Chapter 20 continue

Other Considerations. It is generally recognized that
mere size of the income is not the only factor to be con-
sidered in calculating ability to pay. Many schedules
have consequently been devised in some countries, with
different rates for each, in the attempt to more nearly
approximate justice. Such factors as the nature of the
industry and its age are given consideration. These varied
attempts to secure justice, with the consequent adminis-
trative problems, account for the variations which occur
in the income tax systems of different countries. A brief
consideration of the plans used by some of the more im-
portant countries will illustrate the attempts to make
income taxes satisfactory.

152. The Income Tax Has Been Successfully Used in
England. The income tax has held an important place in
the fiscal system of England for more than three quarters
of a century. Even before it became a permanent feature
it was used more or less systematically. As early as the
fourteenth century, incomes had a place in the base for
the levy of taxes in what were called poll taxes. The first
real income taxes, however, were introduced by William
Pitt, about the beginning of the nineteenth century.
These taxes resembled subsequent measures in that ex-
emptions and certain allowances were granted, and in-
comes were classified into schedules according to their
nature. These taxes soon went into disuse, and during
the succeeding years many tax experiments were tried.
Laws were repealed and new ones enacted without, how-
ever, introducing any radical changes. For a quarter of
a century the taxation of incomes was discarded, and it
was not till 1842 that this form of revenue was revived.

Sir Robert Peel, who was confronted with the task of
meeting a deficit in the treasury caused by tariff reduc-


tions, was responsible for reestablishing taxes on incomes.
The enactment was made for but three years, but at the
expiration of this time the law was again placed upon the
statute books. The process of reenacting the law, with
occasionally some slight modifications, has continued to
the present time. The act of 1842 is, therefore, the basis
of the present English income tax system, which is con-
sidered by many to be one of the most successful in

Modern Schedules. The classification of incomes into
schedules has been a fundamental part of all the English
income tax laws. The present law provides for five sched-
ules. Schedule A comprises the income from land and
buildings, in which is included the rental value of lands
and buildings occupied by the owner, as well as receipts
by a landlord. Schedule B is designed to cover the income
from farm land, whether received by tenant or owner.
Incomes from lands used in connection with industrial
establishments are included in neither of these schedules.
Schedule C includes "all profits arising from interest, an-
nuities, dividends, and shares of annuities payable to any
person, body politic, or corporate company or society,
whether corporate or not corporate, out of any public

The incomes which fall under Schedule D are more
than those of all the other schedules. These include,
first, all incomes which accrue to any person residing in
the United Kingdom from any kind of property, whether
located in the United Kingdom or not; and all gains
secured by any person residing in the United Kingdom
from any profession, trade, employment, or vocation,
whether this be carried on in the United Kingdom or else-
where. Second, under this schedule is placed the returns
arising to any person, whether a subject of Great Britain
or not, whether a resident of the United Kingdom or not,
from any profit in the United Kingdom, or any profession,
trade, employment, or vocation carried on within the


United Kingdom. A third part of this schedule reaches
forms of interest, annuities, and profits which are not
covered by the other schedules. Schedule E has been
relatively unimportant and applies to salaries of public
officials, government annuities, and pensions.

Graduation. Graduation is provided for by exemptions,
abatements, and supertaxes. Incomes of less than 160
are not taxed. The schedule of abatements is as follows:
incomes of more than 160 but not more than 400, an
abatement of 160; incomes of more than 400 but not
exceeding 500, an abatement of 150; incomes of more
than 500 but not exceeding 600, an abatement of 120;
incomes of more than 600 but not exceeding 700, an
abatement of 70. No abatement is allowed for incomes
exceeding 700, but the rate, which is fixed each year,
applies to the entire income.

The actual percentage rates, assuming the rate to be
one shilling to the pound, for various amounts, would be
as follows: 161, .0003 per cent; 400, 3 per cent; 401,
3.1 per cent; 500,3.5 per cent; 601, 4.4 per cent; 700,
4.5 per cent. All amounts above this pay the proportional
rate of 5 per cent.

Additional abatements are allowed for life insurance
premiums, charities, and other benevolences, while land
and building depreciation is also granted. One eighth of
the income from land is allowed to be deducted, and the
amount for building depreciation is one sixth. Under
certain conditions the deduction may be as much as twice
this amount. An abatement of 10 for each child under
sixteen years of age is allowed to individuals whose income
does not exceed 500.

Declarations. The necessity of making a declaration of
income in order to secure the benefit of exemptions and
abatements is responsible for the fact that a majority of
income tax payers declare the total amount of their in-
comes, even though the taxes are collected to a large ex-
tent at the source. The situation usually resolve? itself


into a refund of taxes which have been collected in excess
of the amount which would have been taken had the abate-
ment been deducted beforehand. The abatement claims
usually run into the thousands, and it becomes necessary
to refund thousands of pounds.

Modifications of Above Outline. In an attempt to tax
incomes more nearly in accordance with their ability to
bear burdens, differentiations have been made and super-
taxes have been placed upon the larger incomes. A dis-
tinction is also made between earned and unearned in-
comes. On incomes such as wages and salaries, the rate is
usually reduced something like 25 per cent, while it is
increased for incomes from investments. The supertax,
for example, under one law was to apply whenever the
total income exceeded 5,000, and was to be levied against
the amount in excess of 3,000. Individuals subject to
the supertax are required, under severe penalty, to make
declaration of the fact to the fiscal authorities.

The administration of the system is somewhat compli-
cated, yet apparently satisfactory. A large number of
officials are concerned with assessments and collections.
These appear to be remarkably free from political in-
fluences a fact which aids materially in securing satis-
factory results. As already indicated, an extensive use
is made of collecting the tax at the source, which lessens
the problem of securing income assessments, but which
enhances that of making proper allowance for the abate-

This broad outline of the English income tax may not
conform to the details of a particular year, for these
change somewhat with the adoption of the annual budget.
The Great War, of course, necessitated changes to meet
the emergency which will be noted in a succeeding chap-
ter. The above outline, therefore, is intended to give
some idea of the English plan as it had developed
under normal conditions. As a whole, opposition to
the income tax has broken down, and the tax now


functions as one of the most successful features of the
fiscal system.

Reasons for Success. Some of the reasons for the
marked success of the British income tax have been
summed up by Professor Seligman. 1 He points out that
the system of assessment is successful because the asses-
sors command the confidence of the recipients of incomes.
The supervision is by men of high caliber, who are render-
ing service, not for private gain, but because they are
animated by a spirit of public duty. The collection at
source, furthermore, has eliminated the distasteful and
disquieting inquisitorial procedure which arises from the
attempt to assess incomes. The policy of keeping the
rate low, of recognizing different classes of incomes, and
the introduction of graduation and supertaxes, have had
their influence in making the tax generally popular. The
success of present income taxes in England is a monument
to the thought and care which the fiscal experts exercised
in organizing and proposing this form of revenue.

153. Prussia Has Used Income Taxes Successfully.
The Prussian income tax had its beginnings in the use of
poll and class taxes as far back as 1811. Gradual changes
in subsequent fiscal laws have resulted in a use of the
income tax as extensive as is found in any country. Be-
fore the outbreak of the Great War more than three
fourths of the entire revenue came from the income tax,
and the success may be attributed partly to the care
which has been exercised in formulating the laws, and
partly to the respect which the citizenship has had for
the mandates of the state. The war, of course, brought
some modifications, but the principle of the income tax
of pre-war days will likely be continued.

Tax Rate. The tax rate is kept comparatively low, and
an attempt is made at progression, although it is not
logically followed throughout the entire schedule of levies.
The lowest rate, six marks from incomes between 900 and

1 Seligman, The Income Tax, p. 214.


1,500 marks, is a little over one half of 1 per cent, while
the highest rate, placed upon incomes over 100,000 marks,
is about 4 per cent. The exaction of a fixed number of
marks from each grade of income makes the tax regres-
sive within the grade that is, the tax is heavier for in-
comes just over the lower limit than for incomes just under
the upper limit.

Exemptions and Abatements. As in the English income
tax, exemptions and abatements are granted. All incomes
of less than 900 marks (about $214) are not taxed. It is
considered that the property taxes and excise taxes, which
are used to supplant the income tax, place a sufficient
burden upon the poorer class of citizens. Whenever the
income of an individual is less than 3,000 marks, a re-
duction of 50 marks is allowed for each dependent. The
reduction is somewhat different when the income is
between 3,000 and 6,500 marks.

If the income does not exceed 9,500 marks, any circum-
stances which have affected unfavorably the source of
income may be taken into consideration by the assessing
officials, and deductions be made accordingly. Deduc-
tions from income may be made for public, charitable,
and religious contributions, interest payments, municipal
and local taxes, and payments of various kinds of insur-
ance premiums.

The Prussian law does not attempt to reach as many
classes of incomes as does the English system. Incomes
derived from undertakings in other German states are not
taxed, nor is the pay of many of the military officers.
Insurance payments and sinking funds are also exempt.
The income tax as described is supplemented by a tax
upon wealth, and at times, when the treasury is in need
of extra funds, by a supertax upon incomes. The com-
bination of wealth and income taxes is designed to give a
system which will impose taxes as nearly as possible
according to ability to pay.

Collection of Tax. No attempt is made to collect the


tax at the source, but the amount of income to be taxed
is ascertained by a system of declaration and assessment.
Information as to the recipients of incomes, and the
amounts, is secured by the officials from various sources.
On the basis of this information the local officials estimate
the amount of incomes of the individuals who will prob-
ably be subject to the tax. Every person whose income
is more than 3,000 marks is required to make a declaration
on special forms which are provided by the officials.

Corporations and other companies are required to make
a declaration, and must submit, with the report of income,
annual reports, balance sheets, and other data, to be kept
on file by the fiscal authorities. Failure to make the
declaration by a specified time is punished by the imposi-
tion of a fine of 5 per cent of the tax, and if the failure
extends to a second specified time, the fine is 25 per cent
of the tax. There is, of course, some evasion, but it has
not been extensive enough to destroy the importance and
approximate justice of the system.

154. Many Other Foreign Countries Use the Income
Tax. One would not be justified in a book of this nature
in even briefly outlining the use of the income tax as it is
found in more than fifty countries outside the United
States. In some of the countries it forms an important
part of the revenue system, while in others its role is
comparatively insignificant. The significant feature is
that the tax is one of the newest systems of securing
revenue, and that its place in the different countries
where it is being used is becoming more extended and
secure. A brief mention of some of the countries where
the tax is playing an important part will reveal the fact
that it is found in new as well as in firmly established
governments, and in radical as well as conservative

An outline has been given of the Prussian income tax
system because it represents one of the best organized
forms of income taxation, yet income taxes have been in


use in the minor German provinces much longer than
they have been found in Prussia. In these, as in most of
the continental taxes, low exemptions and minute classi-
fications are found.

The English colonies have followed the lead of the
Mother country, and have made extensive use of the
income tax. The different states of Australia have well-
developed and important income taxes. The Federal
government of Canada has not made such an extensive
use of this form of revenue as some other countries,
although income taxes hold an important place in some
of the provinces. These taxes resemble the British plan
of comparatively high exemptions, with no definite scale
of progression. India has a systematic plan which some-
what resembles the British.

Italian and Austrian fiscal machinery very early made
a place for income taxes, while they have for a number of
years played an important part in the revenue systems of
Norway, Switzerland, Hungary, Russia, Japan, and the
Philippines. France adopted the tax in 1914, but the
outbreak of the war interfered with putting it into effect.

Many other examples might be given of the use of in-
come taxes, but enough have been cited to warrant the
conclusion that their use is very general. More than half
of the people of the world are now living under the domain
of income taxes. These taxes are not used as extensively
by Federal governments as by the smaller political divi-
sions, although central governments have shown a tend-
ency to favor the tax. The comparative newness of the
tax is another general characteristic a large majority of
present systems having been introduced since the begin-
ning of the present century. After this survey of the tax
abroad the situation in the United States will be of in-
terest to American students.

155. Federal Income Taxes in the United States Have
Had No Systematic Development. No emergency of
sufficient moment arose for more than half a century after


the establishment of our national government to force
fiscal authorities to utilize every possible source of rev-
enue. No attempt was made, consequently, by Federal
fiscal authorities, to introduce income taxes until the un-
precedented demands of the Civil War presented them-
selves. The income tax legislation of the years of this
war, and those following, appears to have been on the
spur of the moment, and shows evidence of no very
mature deliberations of those who were responsible for it.
Provisions enacted at one time would often be amended
before the date for their becoming effective.

Civil War Income Tax. The first bill which provided
for a Federal income tax was passed in July, 1861. It
was simple, and called for a 3 per cent tax on all incomes
in excess of $800. The tax was not to go into effect for
a year, and in the meantime a modification had been made.
The exemption was reduced to $600 and a system of mild
progression added.

Under this law incomes from $600 to $10,000, less the
$600 exemption, were to pay the rate of 3 per cent, while
incomes in excess of that amount were to pay 5 per cent.
This act was in effect but a little while before the Revenue
Act of 1864 became a law. This provided for a 5 per cent
tax upon incomes between $600 and $5,000; 7K per cent
on the amount of income between $5,000 and $10,000,
and 10 per cent on all incomes over $10,000. Before this
law became active, however, a modification was made by
which all amounts over $5,000 were to pay 10 per cent.

By 1867 the pressure for revenue was somewhat re-
duced, and the law passed then, to remain in force for
three years, raised the- exemption to $1,000, and reduced
the rate to 5 per cent. At the expiration of this law in
1870, it was only with the greatest difficulty that a re-
enactment was secured. This was for a period of two
years, after which the income tax fell into disuse.

Constitutionality. The use of the Civil War income tax
was, in a measure, successful. As might be expected, it


was attacked upon the grounds of constitutionality, the
contention being that it was a direct tax, and therefore
repugnant to the constitutional provision in regard to the
levy of direct taxes. The Supreme Court held, however,
that the income tax was not a direct tax within the mean-
ing of the Constitution, and was therefore constitutional. 1

Administration. At first the unorganized administra-
tive machinery was a handicap, but as this became per-
fected, and while the motive of patriotism was active, the
fiscal returns were large. The largest amount collected
in any one year was in 1866, when $72,982,000 came into
the treasury. In the following years evasion became more
common, and the amount collected in 1872 had fallen to
$14,436,000. The total amount collected from the income
tax was more than $275,000,000.

Most dependence for the determination of incomes was
placed in declarations of recipients, although some use
was made of the source, and the assessors were given the
power to estimate incomes where satisfactory declarations
could not be obtained. Penalties were provided for fail-
ure to make returns, and for fraudulent returns, but in
the latter years of the tax these seem to have instilled
little fear into the recipients of incomes. It became a tax
upon the honest individual, and consequently unjust. A
systematic as well as successful income tax was used by
the Confederate government as one of its sources of

156. Federal Income Taxes Were Attempted in 1894.
After the abandonment of the income tax in 1872 revenues
were so large from other sources that practically no con-
sideration was given to this form of taxation. It was not
until 1894 that an occasion seemed to demand more
revenue than would come from existing sources. This
resulted from a reduction of tariff duties and an enlarge-
ment of the free list under the administration of Presi-
dent Cleveland.

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