home | authors | books | about

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

An income tax provision was made a
part of the tariff law of 1894, and was expected to provide
the deficiency in the revenue which the reduced tariff
rates would occasion. The bill provided for a flat rate of
2 per cent on all incomes above $4,000.

Much opposition to the bill developed in Congress on
the ground that it was undemocratic, inquisitorial, and the
still more serious objection that it was a bid for the sup-
port of the poorer classes in a discrimination against the
more well-to-do. The high exemption was strongly
championed by the Populist party, while nearly the whole
of the support of the measure came from the Western
and Southern representatives.

Law Declared Unconstitutional. The question of the
constitutionality of the law soon came before the Supreme
Court. 1 This was considered under four separate heads:

(1) Was a tax on the income of real estate a direct tax
within the meaning of the Constitution, necessitating,
thereby, a levy apportioned according to population?

(2) Was a tax on the income from personal property a
direct tax? (3) Did the law violate the principle of uni-
formity? (4) Was a tax levied upon incomes from state
and municipal bonds constitutional?

The decision on the Civil War income tax was reversed
when the court decided that a tax on the incomes from
lands was direct, and therefore must be apportioned ac-
cording to population. The court in its first decision was
divided on the constitutionality of the other points, but
at the rehearing decided against the law in every respect.
Many considered that this decision settled once and for
all the agitation for an income tax, while others began to
seek a new method for securing its establishment.

The Present Federal Income Tax Was Made Pos-
sible Through a Constitutional Amendment. After the
adverse decision of 1895, sentiment in favor of the income
tax as a source of Federal revenue seemed to gain ground.

Many statesmen, among them President Roosevelt, de-
clared in favor of income tax legislation, and believed
that a law could be so formulated as to be sanctioned by
the court. Laws had been upheld already which imposed
taxes on the income of some corporations, and upon

In its platform of 1908 the Democratic party declared
in favor of a constitutional amendment, permitting the
Federal government to levy an income tax. President
Taft expressed the belief that an amendment was not
necessary, yet did not encourage the adoption of the in-
come tax during his term of office. The Republican
leaders seemed no more enthusiastic, and in order to
calm the agitation for income taxes arrangement was
made to submit an amendment to the states. As a result
the following Sixteenth Amendment was ratified by the
requisite three fourths of the states in 1913: " Congress
shall have power to lay and collect taxes on income from
whatever source derived, without apportionment among
the several states, and without regard to any census or

Tax Adopted in 1913. With this amendment in force,
on October 3, 1913, the President signed "An Act to re-
duce tariff duties and to provide revenue for the govern-
ment and for other purposes/' As in 1894, the income
tax law was a part of a tariff bill. This comprises the
second part of what is generally known as the Underwood-
Simmons Tariff Act. The law is not a detailed piece of
legislation, but rather a framework which was to be filled
in by rulings of the Treasury Department. No attempt
will be made to go into the details in this volume, as many
detailed and technical treatises are available.

Court Decision. In spite of the amendment, the con-
stitutionality of the law was contested in the courts. It
was contended that the progressive feature, which classi-
fied according to wealth, was unwarranted, unjust, and
unreasonable; that the collection at source involved the


taking of property without due process, as well as the
taking of private property for public use without just
compensation; and that the retroactive feature of the
law it taxed incomes received since the preceding March
was unconstitutional.

Chief Justice White rendered the decision of the court
and upheld the law in every respect. 1 He gave a lengthy
discussion of the nature of direct and indirect taxes under
the meaning of the Constitution, and of the place of the
income tax in this classification. In regard to the points
in question the court held that the retroactive feature did
not vitiate the law, neither did it violate the due process
of law provision of the Fifth Amendment. Tax uniformity
required by the Constitution was geographical, and equal
protection of the law was not denied by a classification of
things and persons.

The provisions for collecting the income tax at the
source did not deny due process of law by reason of duties
imposed upon corporations without compensation in con-
nection with the payment of the tax. Where differences
existed between citizens, Congress did not transcend the
limit of its taxing power by taxing them differently.
Other cases involving the law have come before the court,
and the decisions have generally served to strengthen the
income tax.

Incomes Taxed; Rates. The law is inclusive in the per-
sons who are taxable. Every citizen of the United States,
whether residing at home or abroad, is subject to the tax.
All persons residing in the United States, including minors,
are subject to its provisions, as also are all persons residing
without the United States who receive an income from
property owned, or business or profession carried on,
within the United States.

The tax is divided into two parts the normal tax and
the additional tax. The normal tax is a proportional tax
of 1 per cent upon the entire taxable income, while the

1 Brushaber vs. Union Pacific Railroad, 240 U. S. 1.


additional tax introduces the progressive feature. The
additional tax schedule is as follows:

1% on net income over $ 20,000 but not exceeding $ 50,000
2% " " ' " 50,000 " " " 75,000

3% " " " " 75,000 " " " 100,000

4% " " " " 100,000 " " " 250,000

5% " ' " " " 250,000 " " " 500,000

6% " " " 500,000

The law defined as taxable all profits and income de-
rived from salaries or compensation for personal services,
or from professions, business, or trade. Incomes from in-
terest, rents, dividends, securities, or the transaction of
any lawful business carried on for gain or profit, and in-
comes derived from any source are included.

Deductions and Exemptions. From gross income cer-
tain deductions are allowed. Among these are necessary
business expenses, but not family, living, or personal
expenses; interest on indebtedness payable within the
year, and all taxes except those levied for local benefits.
Actual losses sustained not covered by insurance, a rea-
sonable depreciation, and worthless debts which have
been charged off are also allowed. Deduction is also per-
mitted of income which has been taxed at the source, and
of the dividends of companies whose net earnings are

The exemptions allowed by the law are liberal. An
exemption of $3,000 is given to a single person, and
$4,000 is allowed to a man and wife living together. All
property acquired through gifts, bequests, or descents,
and all interest on obligations of the United States or its
possessions, are exempt from the tax, as is also the interest
on the obligations of the minor political divisions. The
compensations paid by all political units, except the
United States government itself, are also exempt from the
tax. Receipts from life insurance policies, moreover, are
not taxed.

Method of Collection. Use is made both of collection at

the source, and of declaration of income. Any person or
company which pays to another person or company an
amount in excess of the legal exemption, is required to
deduct the normal tax and pay it to the proper official.
When an income is subject to the normal tax alone, and
the entire amount is received from a person or company
which has paid the tax at the source, no return of such
income is required. Returns of all other taxable incomes
are required to be made by the recipient of the income.
Penalties are provided for failure to make returns, for
making fraudulent returns, and for failure to pay the tax.

158. The Income Tax Was Modified by the Revenue
Act of 1916. It was too much to hope that the new tax
law would meet with unmitigated success. A heavy bur-
den was placed upon the internal revenue department of
the treasury in interpreting ambiguous phraseology, and
in rendering opinions and decisions of various kinds.
The degree of success which the law attained really de-
pended upon these officials. While interpretation was all
that was necessary in some instances, some conditions
developed which demanded a change in the law. The
first of the nine titles in the Revenue Act of 1916 consists
of the remodeled income tax law.

Rates Under Act of 1916. The perceptible changes in
the 1916 law do not indicate the amount of consideration
which was given to this phase of the revenue. While
many changes were made in phraseology, the essential
features remain very much the same. The most conspicu-
ous change is in the normal rate and in the additional
Attempted Modifications. In the 1916 revision much
pressure was brought to have the exemption lowered to
$1,000. This was unsuccessful, however, because of the
administrative difficulties already involved and because
of the great increase in these burdens which would ensue
from the reduction. Pressure had been brought, too, to
abolish the collection at source feature, because of the
burden placed upon the companies who were compelled
to pay the tax. Some desired that this be changed to
information at the source, but this was not done. Other
changes which many desired, but which were not made,
were the elimination of much unjust double taxation be-
cause of the treatment of foreigners, and the recognition
of some differentiation in incomes.

Important additions were made to this law by the War
Revenue Acts of 1917 and 1919. These will be outlined in
the chapter on Emergency Financiering. 1 The law of 1916
represents our development of income taxes under nor-
mal conditions. Although a recent addition to the Fed-
eral revenue system, income taxes have more than proved
their worth. In the use of a source of revenue as new as
the income tax, a large amount of evasion has been
practiced, but this difficulty will decrease as the system
becomes better understood and the administrative ma-
chinery becomes more perfect. The amount of revenue
derived from this source has been considerable, and
income taxes are destined to continue to occupy an im-
portant place in our Federal fiscal system.

Defects Occur in Federal Income Taxation. It is
too much to expect that a system so new, and one which
has been expanded to such an extent within a short period

of time, would possess a perfection which leaves nothing
to be desired. While there has been no outstanding
objection to the plan, and while it has been responsible
for a substantial amount of the Federal resources, yet some
defects have appeared which it will be well for Congress
to heed when attempts are made to remodel the law.

One of the first defects to be noticed is the assessment
procedure. Practically absolute reliance is placed upon
the recipient of the income to turn in the proper amount
to the internal revenue collector of his district. After
examination the collector may increase the return but
cannot lower it. The return is certified by the district
collector to the Commissioner of Internal Revenue, who
is given a maximum of five years in which to make an
official assessment. This assessment occurs when the
commissioner has reason to disagree with the assessment
the taxpayer has imposed against himself. In the mean-
time the recipient of an income continues to pay the tax
which he has assessed against himself, with little evidence
of official procedure. Closer official scrutiny and pro-
cedure than that just indicated would much more nearly
accord with American ideas of tax procedure.

The strict secrecy with which all returns of incomes are
held is another feature of the Federal income tax proce-
dure for which there can be little justification. There is
nothing about an income which connects it so inseparably
with the individual that it should be hidden from the
knowledge of every other person. Access to the various
returns by officials would give material aid in helping to
solve the numerous problems which arise. Many other
valuable uses of such information will readily occur to
the reader, especially if he be interested in the economic
condition of individuals of various groups and occupations.

Some of the conditions of the law necessarily inflict
undesirable burdens. One of these is the failure to make
provision for the recognition of any other tax year than
the one provided by the law. This places an unnecessary


hardship on business units whose accounting year does
not correspond with the tax year, in that it necessitates
additional and difficult calculations. The taxation of the
earnings of corporations, moreover, works an injustice
upon some recipients of dividends. One individual whose
total income may be below the exemption limit may
secure a part of it in the form of dividends which have
borne the tax, while another individual with the same
income from other sources would not be burdened. Some
plan of effective and accessible refunds would aid in
establishing justice between different individual taxpayers.

1 60. Income Taxes Have Been Used by Several States.
The use of income taxes as a part of the fiscal system of
states is looked upon by many as an innovation. There
has never been a time, however, when one or more of the
states has not had the income tax in some form as a part
of its fiscal machinery. Even in a number of the Colonies
income was used as a partial measure for determining the
proper base for assessment. Some of these Colonial taxes
were continued long after the state governments were
formed. Some states have used the tax rather consistently,
while others have made only sporadic and half-hearted
attempts to put it into force. The tax at present is used
with a greater or less degree of success in twelve or more

Tax in Wisconsin. The two states which have used
the income tax most successfully in recent years are Wis-
consin and Massachusetts. Wisconsin has used this form
of revenue since 1911, while Massachusetts introduced it
in 1916. The Wisconsin tax is assessed against individ-
uals and corporations. The law explicitly states who
shall be taxed, what deductions and exemptions shall be
allowed, the rates that shall be imposed, and the method
of administration. An exemption of $800 is allowed to
an individual, $1,200 to husband and wife, and $200 for
each dependent. The grades range by steps of $1,000 up
to $12,000, and the rate is progressive from 1 per cent to

6 per cent. For corporations the grades range by steps
of $1,000 to $7,000 and the rate is progressive from
2 to 6 per cent. Central administrative machinery is
provided, which accounts in a measure for the success
of the system.

The larger part of the Wisconsin income tax has been
secured from corporations. The total amount collected
the first year was about one and a half million dollars,
while the collection in 1918 was nearly seven million dol-
lars. The state tax commission characterized the system
as follows: l

Results have been satisfactory. The increase in the tax ... is gen-
eral throughout the state. The gradual and steady increase is doubtless
due, first to the fact that . . . there is a steady growth in business from
year to year, and second, because of the increased efficiency of admin-
istration. The conclusion from the foregoing is that a constant increase
in revenue from income taxation may be confidently expected.

Tax in Massachusetts. The Massachusetts law does
not attempt to go as far as the Wisconsin plan, yet has
been remarkably successful as a revenue producer, and as
providing an elastic feature to the tax system. Corporate
incomes are not included, and progression is not used.
Large classes of incomes are exempt, so that little more
than personal incomes are included under the provisions
of the law. Incomes are classified, and are taxed at dif-
ferent rates. The amount collected in 1918 was over
fourteen million dollars, more than one third of the
amount collected by the Federal government from in-
comes in the state. This record outdistanced that of any
other state.

Tax in Other States. It is significant that four states
adopted the income tax in 1919, and that others are con-
sidering it. One of the four was New York, and interest
centers here since it is the state of many and large incomes.
More than one third of the personal income taxes collected

by the Federal government come from this state. The use
of a moderate progression is being attempted. 1

The attempts to use the income tax in the states are so
different, are being tried under such a variety of circum-
stances, and with such varying degrees of administrative
efficiency, that generalizations cannot be made as to its
success. The results in such states as Wisconsin and
Massachusetts, however, indicate the possibilities of state
income taxes when care is exercised in formulating and
administering the law. As demands for more revenue
present themselves, and as the old system of property
taxes becomes more distasteful, a wider use of income
taxes as a source of state revenue may be expected.

© Art Branch Inc. | English Dictionary