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or reformatory end, possibly with some sectional bearing, but, at
any rate, not as the best result of either modern theory or modern

It is a great misfortune that the question of a fresh resort to
the income tax should have come up under such untoward circum-

1 Quarterly /ournal of Economics, October, 1 894.


stances, and that it should have received such a solution as this.
The question is of too great importance to be disposed of with so
little real study as it received from Congress, and the income tax
is too important a resource to be discredited in the public mind by
the working of an imperfect and crude system. The subject was
one for the best and most careful thought of the legislator, in the
light of the important body of practice to be found in other coun-
tries as well as our own. So far from the careful examination
which it required, the matter has had only a snap judgment, and the
probability of any thorough treatment of it by our government is
indefinitely removed. In the minds of a large part of our people
the income tax will be more thoroughly identified than ever with the
system in vogue during the Civil War ; and five years hence they
will seem to have had a fresh trial and bitter experience of the income
tax, when, after all, it is only an income tax — and that a badly
devised one — which they have seen apphed for the second time.

The language used above, no doubt, implies a certain accept-
ance of the general theory of taxing income. There is good
reason for the agreement between the theoretical views of so
many economists on this subject and the instinctive popular
belief, which is so often met. It is, after all, the aggregate
income of society which supplies the fund, and determines an
upper limit, for public expenditure ; and it is the income of
each individual member of the society which supplies the fund, and
determines the limits, for his contribution to that expenditure.
Every tax, says Adam Smith, must be paid from one or other
of the sorts of revenue which make up the private revenues of
individuals ; and his maxim which follows, to the effect that the
subjects of a state ought to contribute to its support as nearly
as possible in proportion to the revenue which they respectively
enjoy, although sometimes treated as a sounding truism, is, at any
rate, unavoidable. So far the economist and the simple poll-tax
payer may very well agree. The former makes his reservation as
to the difficulties, or even impossibility, of just administration, as
Mill did when he " feared that the fairness which belongs to the
principle of an income tax cannot be made to attach to it in prac-
tice, and that this tax, while apparently the most just of all modes
of raising a revenue, is, in effect, more unjust than many others
which are prima facie more objectionable." To the payer of the


poll-tax, however, it appears that the power of government is equal
to every task, and that strict laws and severe penalties will readily
accomplish the work of complete and just assessment. Without
accepting this Utopian view of the omnipotence of human law,
which is certainly no more true in the case of taxation than in any
other of the operations of government, we may at least urge that
it is sometimes worth while to inquire how close an approximation
to administrative perfection can be made. It is the judgment of
some important and enlightened countries, as, for example, of Eng-
land and Prussia, that, without attaining absolute success, they make
an approximation near enough to justice to make it worth their
while, under every change of administration, to maintain a tax
upon incomes as a branch of their regular revenue. The question
whether the United States cannot do the same thing appears to be
of some interest. If this government can make such an approxi-
mation, the direct resort to the actual source of all taxation has
much to recommend it in this country.

The most striking defect in the financial system of the United
States is the want of some easy adjustment of the receipts of the
government. As a result of those circumstances which have made
the customs duties our chief reliance, the Treasury may sometimes
have a plethora when a prosperous business swells our imports,
and sometimes a dearth when the course of trade changes ; but in
neither case have we any important elastic branch of taxation,
which can be relied upon to lower a surplus or fill up a deficit at
short notice. Neither customs nor excise duties can be used for
this purpose without serious disturbance and friction. England, as
is well known, meets the analogous difficulty — caused by fluctu-
ations, not in her receipts, but in her expenditures — by the
adjustment of the income tax. Continental writers and statesmen
have long pointed with envy to this unfailing resource of the
Chancellor of the Exchequer. With a tax for which the adminis-
trative machinery is permanent, but the rate is fixed for only one
year at a time, it is easy and usual, even after the fiscal year has
begun, to meet unexpected changes in affairs by a change in this
variable element of revenue, — a change which takes instant effect.
This use of the income tax, together with the power given to the
government to borrow on short time in anticipation of receipts, is,
in large part, the explanation of the singularly close calculation


and the small balances of cash with which the English Exchequer
is habitually managed. The circumstances of the United States,
and the unavoidable difference in our leading sources of taxation,
make it unlikely that this generation or the next will see any simi-
lar administrative success here ; but a much closer adjustment of
revenue to actual needs than we have at present could be attained
by the use of a well-arranged and quickly movable tax on incomes,
as a part of our ordinary revenue. Thus a proper income tax
appears to have uses which make it desirable to have its practica-
bihty more carefully studied.

When we pass from the case of ordinary revenue, and consider
the sources of supply for emergencies, a well-constituted income
tax has a still greater importance. Even writers who would rule it
out from the everyday practice of a government, by reason of the
manifest difficulty of justly administering it, will accept it as a proper
provision for sudden and severe stress. In the presence of a great
public exigency the inequalities of any tax cease to weigh with their
full weight in comparison with a quick and copious yield of rev-
enue. This was the case in the Civil War, when it was not so
much the ignorance and inexperience of Congress as the impera-
tive necessity of obtaining money by the quickest process, that was
the real cause of many harsh and unjust provisions in our financial
legislation ; and the same thing will happen again whenever some
heavy strain is felt by the federal Treasury. Unless our system is
improved by the addition of some important tax which is capable
of sudden expansion, without the inconvenience which attends any
change in a tax on commodities, we shall again see the govern-
ment driven, may indeed see it driven in any year, to lay some
bad tax or to borrow, in order to bridge over the gap caused by
the slow increase of ordinary taxation. As a provision for such
cases of extremity, the tax on incomes, if shaped for the purpose,
has no superior and no rival ; but it can best be shaped in a time
of quiet. Maintained at a low rate in ordinary times, and its
methods and machinery thus perfected and made familiar, it might
put in the hands of Congress a resource in case of need, such as
has been sorely missed in many turns of our affairs.

How the income tax of 1894 fails to meet the necessities either
of ordinary or of extraordinary occasions may best be shown after


a brief recapitulation of its leading provisions.^ For five years,
beginning with 1895, a tax of two per cent becomes due on the first
day of July in each year on gains, profits, and incomes, in excess
of $4000,^ enjoyed in the preceding calendar year by any citizen
of the United States or any person resident therein, whether de-
rived from property, rents, interest, dividends, or salaries, or from
any profession, trade, or employment. The taxable income is to
be subject to the usual deductions for taxes paid and losses incurred,
but is to include all personal property acquired by gift or inherit-
ance. As a basis for the assessment, every person of lawful age,
having a taxable income of more than ^3500 in his own right or
in any fiduciary capacity, is to make "a list or return" "of the
amount of his income, gains, and profits," under oath, with heavy
penalties in case of refusal, neglect, or false return. All corpora-
tions or associations doing business for profit in the United States,
not including partnerships, are required to pay a tax of two per cent
annually on their net profits for the preceding year; and, upon
such payment being made, dividends upon their stocks are not to
be included in computing the income of their stockholders. On
all salaries and payments for services due from the United States,
and in excess of $4000, the tax of two per cent is to be withheld by
the disbursing officer.

The first point which invites attention in the general scheme
of the new law is the singular provision for including in the an-
nual gains, profits, and income to be taxed the value of personal
property received by gift or inheritance. The difficulty of making
a sound distinction between income and growth of capital has al-
ways been recognized. Financial writers have dwelt on the impor-
tance of maintaining a line somewhere, and of so limiting taxation
as not to impede additions to the capital which is to be the source
of future income. The income tax of 1864 dealt with the subject
with a rough hand, and probably treated as taxable income much
that should have been spared ; but not even the war tax went to

1 The sections of the Tariff Act of 1894 providing for the income tax are §§ 27-36.

2 The English law, as modified by the legislation of 1894, exempts ;{^i6o from all
incomes under ;{^400, and ;i^ioo from all between ;i^400 and ;^500. The Prussian law
now exempts all income under 900 marks, and, starting from that point with a tax of
6 marks, advances by degrees until for incomes of 100,000 marks and upward the tax
is approximately fuur per cent.


the extent of classifying inherited property as income. It is obvi-
ous that, in this capital point of the definition of income, the pres-
ent tax gives up the idea of preserving any tenable line. The
treatment of this precise point by the Prussian income-tax law of
1 89 1 is instructive. After defining taxable income as the annual
receipts from invested capital, from real estate, from trade and
industry, and from other sources of periodical gain, it goes on,
apparently from abundant caution, to draw a line between the
income and that which yields the income : ^ —

Sect. 8. Extraordinary receipts from inheritances, gifts, life insurance, from
the sale of real property not undertaken as a business or for speculative purposes,
and similar gains, are not to be held as taxable income but as an increase of the
main capital [Stafnmver7ndgen~\ , and, like diminutions of the main capital, come into
consideration only so far as the yield of this is thereby increased or diminished.

The English income tax, from its peculiar structure, also avoids
the confusion which exists in our law. It will be recollected that
the English law does not undertake to tax the aggregate or total
income of the taxpayer, but only taxes certain specified descrip-
tions of income, — rents, farmers' profits, annuities, interest, and
dividends, gains from professions and trades, and salaries of public
officers, — and that the taxation of legacies and distributive shares
is left, as it should be, to stand as a part of the general system of
death duties, and to be dealt with according to the policy govern-
ing the whole subject, and is not made an incident in the applica-
tion of an entirely different branch of taxation. It may be urged
that the United States government no longer levies duties upon
inheritances and successions, and that both Prussia and England
do levy such duties, and that this provision in the new income tax
may thus fill a hiatus in our legislation, the presence of which is
now sometimes noted with regret. But it is to be remembered
that not a few of the states now levy such duties, that more of
them are likely to do so, and that in a comprehensive view of the
whole field of taxation, therefore, the transmission of property at
death did not require this attention from the federal legislator.
If it did require such attention, it may be added, then plainly the
succession to real property should have been taxed, as well as per-
sonal inheritances.

1 Das preussische Einkommensteuergesetz vom 24 Jiini, 1891 (Krause's 8vo ed.),
p. 47.


The purpose of the provision for taxing personal inheritances,
however, is probably not so much to fill a gap in our legislation as
to strike a blow at large accumulations. The blow is not a heavy
one, although the income tax of two per cent is double the rate
which was levied during the war upon the transmission in the
direct line of property, real or personal. Except as a first step,
to be followed in the future by some more serious legislation, this
tax will probably have no appreciable effect upon the great for-
tunes. On the successors to small properties the moral effect,
however, may be considerable. The man of relatively small
means, who finds his " income " carried above the limit of 1^4000
by his inheritance of a small property, and a tax exacted from him
for the excess, is certain to feel his grievance keenly; and the
number of such men on the list of possible taxpayers is vastly
greater than the number of inheritors of large properties. To
such men, and to the public generally, the word "income" has a
certain definite meaning, not to be confused with capital by any
eccentricity of a statute ; and the violence done to this understand-
ing, when a so-called "income tax" takes away a share of the
source of income, is tolerably sure to leave behind a sense of
personal wrong, like that which can still be remembered as among
the fruits of the income tax of the Civil War.

Leaving this special case of inheritances, it may be remarked,
in passing, that it may be doubted whether the same danger of
doing violence to an instinctive sense of the difference between
income and capital is not met in any attempt to make an income
tax widely inclusive by sweeping phrases. " Gains, profits, or
income . . . derived from any kind of property, rents, interest,
dividends, or salaries, or from any profession, trade, employment,
or vocation, ... or from any other sources whatever" — is it
possible, under such a description of the object of taxation as this,
to keep to any such Hne as that which the Prussian law, cited
above, so clearly points out.? In this case the legislator of 1894,
like his predecessor of 1864, in his overweening anxiety lest some
taxable persons should escape, runs to the opposite extreme of
throwing his net over a greater number whom the law should
properly let alone. But this excess of zeal is not peculiar to
income-tax laws or to our national legislation.


Coming now to the method by which the amount of taxable
income, however described, is to be ascertained and brought to the
knowledge of the assessing officer, we find that the act of 1894
follows the line laid down by the acts passed during the Civil War,
by making the personal declaration of the taxpayer the basis on
which the collector is to proceed, with the aid of the best informa-
tion he can obtain. Nothing could be simpler, on paper, than this
method. The taxpayer is himself the one person who knows best
the amount of his income for the tax year, and knows best the
elements from which it may be computed if its amount is doubtful.
The law imposes upon him the duty of making the necessary dis-
closure for confidential use by the public officer ; and under a free
government it is presumed that the great mass of citizens can be
trusted to perform what is, after all, in a sense a self-imposed duty.
But what has been the experience of the several states in assessing
by the same method the general property taxes, which have been
so familiar a part of our local taxation throughout this century, and
in some states for a still longer period .-' We have had painful
evidence of the truth of Leroy-Beaulieu's extremely cautious obser-
vation that " nulle soci^te humaine n'est composee en totalite
d'hommes d'une inflexible probite." In an earlier generation and
in a simpler community, where every man's affairs were tolerably
well known to his neighbors, and probably differed little in kind
from those of his neighbors, and when the opportunities for invest-
ment were comparatively few, and chiefly of such kinds as to be
well open to observation, the process of self-assessment by declara-
tion in some form to assessing officers may have answered its pur-
pose ; although, even in this case, the chief safeguard was probably
the notoriety of essential facts rather than the individual sense of
duty among our predecessors, strong as that may have been. But
with the growth of wealth and the change in social conditions there
has been substituted for this primitive state of things, over a large
part of our country, an organization of astonishing complexity, in
which the affairs of the individual are known to others little beyond
the point which he may choose ; and his opportunities for the
unobserved investment of capital may almost be said to be infinite.
State legislation has often attempted to support the flagging con-
science of taxpayers by increased stringency, until in some cases
the laws prescribing the form of declaration, and seeking to probe


to its depths the knowledge of the declarant, are miracles of
ingenuity. And yet there is probably no state in which the
attempt to tax personal property, upon a list made out by the
taxpayer under the requirements of the law, any longer succeeds.
In the emphatic words of a board of commissioners in a state
which has been said to bear the palm for the minuteness and
scope of its inquisition, so far as the statute is concerned, " fully
one-half of the property of a modern state exists in intangible
forms : of this all but a mere bagatelle escapes taxation entirely,
when the attempt is made to reach it in the form of property." ^
The inabihty of the law to reach that which is known to the tax-
payer alone is everywhere notorious, and shows itself in such
absurd results as the apparent decline of personal property in
highly prosperous communities. After long and obstinate efforts
to enforce it, the taxation of intangible property has failed even in
states like Massachusetts, where the machinery for its enforce-
ment has been as carefully perfected as anywhere, and has found
constant support in the robust faith of legislators and administra-
tive officers.

The difficulties in the way of assessing an income tax upon
declarations made by the taxpayers appear to the writer to be
completely analogous to those which defeat the taxation of per-
sonal property. The sources of a large part of the current income
of individuals are the very classes of intangible property which
constantly elude assessment. The dependence for the disclosure
of income in general is on the same average degree of honest
compliance with law, which has hitherto proved insufficient for
the success of state taxation in pari materia. What reason is
there for expecting any better result under the act of 1894 than
has been secured under a multitude of state laws .-•

It is probable that reliance is placed on the power of the
United States government to enforce its will where a single state
fails ; and, in dealing with some classes of evils, the superiority of
the central power and its freedom from the influences which some-
times hamper local authority is undeniable. It is sometimes of
unspeakable importance that a power not affected by the passion
or ruling interests of a narrow community should come in, with its
irresistible strength, to enforce the laws made for the benefit of

1 Report of the Tax Commission of Ohio, 1893, p. 42.


the whole, and to protect the general interests of the nation. But
the present case is not analogous to the suppression of a riot
which has become too strong for a state government to deal with,
or to a case of threatened interruption of the mails or of interstate
commerce. This is a case of widely prevailing inability to meet a
certain strain upon the conscience, and is not to be met by march-
ing in troops, and is not at all affected by the circumstance that
certain public officers receive their orders from Washington, and not
from a state capital. The federal power, after all, can act in this
matter only by making its rules stringent and its penalties severe.
It must proceed, that is to say, in the same direction in which the
state governments have been moving; and, if it is expected to
advance farther than they, this can be only because it is supposed
that its measures will be more severe or more strictly enforced.
But what power, federal or other, can by sheer severity carry
through successfully a system which demands from the individual
conscience more than is required by the general moral sense of the
community .'' Increased severity in such a case must inevitably be
met by increased ingenuity, and this all the more certainly if the
severity is practised under an authority which is felt to be in
any degree external and remote. Not much can be argued in the
present case from the measure of success attained in the enforce-
ment of the income tax of the Civil War and for a few years after.
The United States government was then supported by a vast
current of popular feeling, which for a time was ready to treat
any attempt to evade public dues in the hour of calamity as a
species of treason ; and yet it would still be easy to collect the
evidence of the increasing difficulty which was experienced in
finding the incomes to be taxed, after the danger had passed and
the enthusiasm of the time had begun to cool. With no great
tide of sentiment now existing in support of unusual federal taxa-
tion,i there appears to be no ground for believing that the act of
1894 will be able to secure the full disclosure at which it aims.
Doubtless large sums will be collected under it, for the field to
be reaped is wide and rich. But it is altogether improbable that
the assessment will approach completeness or uniformity, or that
the administration of the tax by the United States will escape the

^ See Dr. J. A. Hill's estimates, Qiiartei-ly Journal of Economics, July, 1894,
PP- 445-448.


progressive demoralization which takes place when conscientious
taxpayers find that others are shirking the burden which was
intended for all.

No doubt the acknowledgment that the taxpayer's declaration
is an unsafe basis for the assessment, even when corrected by the
best information at the command of the assessor, would make the
framing of an income tax for this country far more difficult. It
would be necessary, in all probability, to abandon the fiction on
which our law proceeds, — that every person having taxable income
pays to the government a fixed proportion of it, to be mathemati-
cally ascertained by a uniform rule. In place of this theoretical
perfection of system, we should have to substitute provisions for
collecting the tax in all possible cases from the source of the in-
come instead of its recipient, and this with a frank recognition of
the fact that such a method could only give us an approximation
to equality. It would, however, give us in all probability as close
an approximation as the present condition of our part of the world
will allow, which is, in fact, all that can be secured in practice
under any system, however rigid and precise we may make the
letter of the law.

The obvious advantage to be gained by taxing income at its
source, beyond the mere convenience of collecting the tax in rela-
tively large amounts, is that the assessment is made in the quarter
where there is the least temptation to concealment. The com-
panies or persons paying the rent, interest, or dividends which are

Online LibraryCharles Franklin DunbarEconomic essays → online text (page 14 of 40)