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to be taxed, independently of their openness to inspection, are not
actuated by the same motives as the individual who is called upon
to return the amount of his income. It is with a wise perception
of the motives at work that the English income-tax law provides
for the taxation, not of total income, but of five distinct classes of
income, described under the schedules A, B, C, D, and E. The
schedules are broad, and cover the ground fairly well, no doubt ;
but, if they do not, the law does not concern itself with a failure on
a small scale. The great object is to narrow the field within which
individual declarations must be relied on ; and this is accomplished
by providing that under schedule A (rent), C (public funds), and
E (public offices), the tax shall be collected at the source of the
income, and not from the person who enjoys it ; that, under sched-
ule B (farmers' profits), the tax shall be assessed on an estimated


profit equal to one-half of the rent paid ; and that a declaration
shall be required only under schedule D for income from trades
and professions. In short, the source of the income is aimed at by
the English law, wherever the nature of the case permits ; and the
resort to declarations, recognized as hazardous, is restricted to less
than one-half of the total actual assessment. This system is
entirely at variance with the current notion of an income tax ; for
under it the income, as a whole, is not brought into view, and the
tax is laid, not on the income as such, but on several probable chief
constituents of the income. But, after all, the practical question
must be whether the tax is more thoroughly collected under one
system or the other. On this point the remarkable regularity of
receipts from the English tax^ and the close correspondence
between estimated and actual receipts is strong evidence of suc-
cessful administration, and raises a presumption in favor of the
adoption of a similar method even under the different conditions
presented in this country.

It is true that, by the Prussian law of 1891, the declaration is
now made the basis of assessment of the income tax in that country.
The people of Prussia have had a long course of education under
the various forms assumed by the class and income tax since 1820.^
At long intervals the law has been strengthened until, from a rough
classification of the taxpayers by merely external signs, it has ad-
vanced to its present demand that the taxpayer shall show that
his income falls between certain rather close limits. But the Prus-
sian declaration, made under affirmation, and " to the best of his
knowledge and belief," is a simple document compared with that

1 For the last ten years the receipts from income tax, as estimated by the Chancellor
of the Exchequer at the beginning of each fiscal year and as reported at the close, have
been as follows, stated in millions and hundredths of millions : —





1884-1885 .



I889-I89O .

• 12.55


I885-I886 .




. 13.20


I 886- I 887 .



I 891-1892

• 13-75


1887-1888 .



1892-1893 .

• 13-40


1888-1889 .

T7 :_ i.1.-


_ .00. .00

1893-1894 .

• 15-15

. ii

Even in the exceptional year 1884-1885 the actual receipts varied less than 7 per
cent from the estimates.

2 See Qtiarterly Journal of Economics, January, 1892, p. 207, for an article on this
subject by Dr. J. A. Hill.


which formerly confronted the American taxpayer, or that which
is contemplated by the recent act ; and it is likely to have a much
less important place in the business of assessment. It calls only
for general statements of the distribution of the taxpayer's income
under the four heads referred to on page 121, and leaves to the
chairman of every board of assessment a wide discretion as to the
extent to which he shall carry further inquiry.^ The Prussian dec-
laration, in short, appears to be a rather cautious tentative advance
from a system of extreme laxity, — an experiment of which the
success has not yet been tested by sufficient practice to make it
significant for the United States.

It may appear at first sight that the act of 1894 makes some
concession to the method of taxation at the source, by the pro-
vision that all corporations doing business for a profit, including
banks, insurance, railway, and telegraph companies, shall pay a
tax of two per cent on their annual net profits ; and that dividends
thus taxed at the source shall not be included in the taxable in-
come of the stockholder. Whether this provision was adopted for
any other reason than the increased facility of collection, especially
from non-residents, and the occasion which it supplies for requir-
ing from all corporations a statement of accounts, may well be
doubted. At all events, the provision acts, for the most part, not
as a substitute for the declaration, but as an auxiliary ; for the tax-
payer, except in cases where his income from other sources than
dividends is not more than $3500, must still make his declaration
in due form. It is clear, then, that the act does not tax this species
of income at its source as the means of exempting any consider-
able number of persons from the duty of making the usual decla-
ration. Apparently, in the mind of the legislator, the collection
of a tax at its source and the declaration by the taxpayer are
things altogether dissociated.

In some other particulars, also, the treatment of the question
of payment by corporations in the new act is hard of explanation.
It would seem, for example, that there would be the same reasons

1 The administrative instructions, published by the Minister of Finance, require, in
article 55, that the chairman shall see that the assessment is not negligently made upon
incorrect declaration, and then add the caution, — " Andrerscits sind kleinliche Erorter-
ungen ut)er geringfugige I'unkte und jede nicht zur Erreichung des Zweckes gebotene
Belastigung der Steucrpflichtigen zu vermeiden." See Das preussische Einkomrnen-
steuergesetz, p. 204 of Krause's 8vo edition.


of convenience and security for collecting from corporations the
tax on their payments of interest, as for collecting from them the
tax on dividends. The former income-tax law, which cared little
about the question of method, but cared much for speedy, certain,
and large collections, provided that the income tax upon interest
or coupons should be detained by all corporations, as well as the
tax on dividends or other profits, and should be paid over in like
manner to the United States.^ This was a most judicious and use-
ful provision, and would seem to be strongly suggestive under
present circumstances. It is obvious that an enormous mass of
incomes from investments would now be covered by a similar pro-
vision, and also that the income from coupon bonds, as to the
ownership of which no record exists, is the most slippery income
of all, and the most easily concealed by the reluctant taxpayer.
Still, the income from bonds and other interest on debts — so
easily taxed at its source — is left by the new act to stand upon
the taxpayer's declaration alone. Another point somewhat diffi-
cult of explanation is the fact that, while the act of 1894 professes
to establish an exemption of $4000, nevertheless persons whose
incomes are within that line are to be subject to an income tax on
so much income as they may derive from dividends. The corpo-
ration paying the tax levied on its net income evidently pays, and
is intended by the act to pay, an income tax for every stockholder
whose dividend is thereby diminished, whether he is a millionnaire
or a poor man. It is clear that the stockholder in such a case re-
mains subject to the tax, unless some provision is made for refund-
ing to him the amount paid on his account. Under the English
law, where dividends or interest have thus been taxed at the
source, any stockholder or creditor entitled to exemption from in-
come tax can obtain repayment of the tax thus unduly exacted
from him, by making application in the proper place and form.
But no provision of this sort is made in the new act of Congress ;
and a person supposed to be exempt from taxation under the law
may, in fact, be subject to taxation on his whole income if, as
sometimes happens, he receives it all from dividends. No doubt
the machinery for making a rebate to small incomes in such cases
would have to be elaborate, and would be difficult to manage —
more difficult, perhaps, in this country than in one so compact and

1 Internal Revenue Act of 1864, § 122.


homogeneous as England. This, however, is a part of the prob-
lem of taxation of income at the source that has to be faced
squarely in even a partial treatment of the subject ; and it is not
creditable to our legislation that it should have been satisfied with
the absurd result just pointed out.

It is hardly possible that the renewed resort to taxation upon
declaration, under a law of the United States, should not have
some effec: on the current of opinion which has been so long
gathering in opposition to the analogous practice of state taxation
of personal property. The wide recognition of the failure of the
local practice has already been referred to. There has been for
some years past an increasing disposition in many States to find
some substitute for this ineffective and obsolete system. What
will be the effect of the adoption by the United States of the same
practice of grasping at the intangible .'' Will it encourage or dis-
hearten the movement for local reform, or will the movement pause
until the issue of the new experiment is seen ? We shall be fortu-
nate if it proves that the United States have not interposed some
serious delay in the progress of a change, not likely to be too rapid
at the best.

The only remaining feature of the act of 1894 which we have
to consider is the provision by which the tax is, for the most part,
to be levied annually on the income, not of the current year, but of
the year preceding. This is a natural, although not a necessary,
apphcation of the system of levying upon declared income. In
theory the accounts of the taxpayer for a year are made up and
closed. He knows to a penny what his income was ; and it is
the simplest of financial operations to calculate two per cent of the
amount, and in due time to pay down this tax. So long, indeed,
as the law proceeds on the theory of an exact determination of the
income to be taxed, it is hard to see how anything but the income
of a finished year can be dealt with. And yet it is probably more
convenient for the taxpayer that his tax should come as a deduc-
tion made at the time, from the income on which it is actually
assessed, and not as a payment to be made from the income of
another year, which is perhaps less prosperous.

The English income tax, being levied at the source whenever
possible, is almost necessarily a tax on current income. The rate


fixed by the important Finance Act of July 31, 1894, for example,
is to be levied on incomes of the year beginning April 6, 1894,
except in the cases where, for convenience of approximation, the
average income of two or three years is taken as the basis. Even
the Prussian law of 1891, which follows in moderation the plan of
levying upon declaration, calls upon the taxpayer to declare what
his income is for the current tax year in which the payment is to
be made.i The provisions made, however, by the law of the United
States on this point are whimsical in the extreme. The tax on
income derived from dividends and other profits, as well as the
neglected case of coupons, naturally suggests the collection of
income tax at the moment when the income accrues and passes to
the stockholder or creditor ; but the law throws away this oppor-
tunity by postponing the levy upon the corporation until the first
half of the next year, when the accounts of the calendar year for
which the tax is laid shall have been completely made up. But
for all persons in the service of the United States the income tax
on the excess of salaries above ^4000 is to be withheld from the
salary when paid, so that for this class of persons and to this
extent the tax is laid upon the income of the current year, and not
of that preceding.2

The method of taxing income in the year in which it accrues,
especially if accompanied by the practice of stopping the tax at
the source of the income wherever possible, brings into view some
possible conveniences in administration which are lost by the
method so familiar in this country. Taxes on accruing dividends
and interest, paid by the debtor, must of necessity be pretty well
distributed over the fiscal year, offering some advantages to the
Treasury not to be secured from a tax of which the greatest part

^ This is easily done of course with all fixed incomes from investments. Variable
and business incomes are to be returned at the average of the last three years. See § 10
of the law of 1 891.

2 It was the intention at one stage of the bill to extend the provision for the deduc-
tion of the tax from salaries, so as to require some employers besides the United States
to withhold the tax on any excess of salaries over ^^4000, and to pay it to the proper
collecting officer ; and § 28 contains two references to " that portion of any salary upon
which the employer is required bylaw to withhold, and does withhold, the tax." In the
final draft of the act, however, as printed at Washington for public use, the provision for
the payment of the tax by other employers than the United States does not appear, so
that these two references are without meaning, except as evidence of the haste and con-
fusion in which this important measure was carried through.


falls due at a single epoch. Collected at the natural dividend
periods such taxes come in by instalments, to the considerable
relief of the company or person making the payment. It is then
a natural and easy step to provisions, found both in the English
and the Prussian systems, for the payment by instalments in some
other cases, when circumstances make this method convenient.
Probably for a large part of the community the option of paying
such a tax by quarterly payments, which is the general rule under
the Prussian law, instead of the lump sum to which we are accus-
tomed here, would make the collection a far less formidable pro-
ceeding than it must now appear as the day of reckoning draws on.
But beyond this there is another point at which the whole rela-
tion of the taxpayer to the tax is altered, when the income is taxed
by instalments in the year in which it accrues. The law of the
United States allows the deduction from income of "losses actually
sustained during the year" ; but there can be no deduction for mis-
fortune incurred in the year when the tax falls due. There is a
complete separation between the conditions under which the liability
for the tax accrues and those under which the payment must be
made. But, where the tax is levied upon current income, it is
brought into close correspondence with the actual ability of the
taxpayer. It then becomes possible to provide, in some cases, for
an increase of the tax where new sources of income are opened to
the taxpayer within the year, and in some to lighten the tax where
misfortune has diminished his income since the assessment for the
year was made.^ The tax then loses some of its harshness, and
something of its present aspect of an arbitrary levy, and takes its
place as a natural and speedy result of the good or bad fortune of
the year in which it is due.

It is not worth while, however, to go farther in urging this or
that point in which the method of levying an income tax in this
country is defective. The law of 1894 marks no advance in this
difficult branch of taxation. The whole subject is one in regard
to which our legislators, national and local, are bound in a singular
degree by habit and precedent. A practice once adopted becomes
fixed, an old method is good and a new one is visionary, and the
appeal to the experience of other countries is pronounced un-

1 See the cases provided for in §§ 57, 58, of the Prussian law.



American. The framers of the new law have made no excep-
tional mistake in resolutely shutting their eyes to what may be
learned elsewhere on this subject. They have taken the course
which might easily have been predicted, in going to the legislation
of the Civil War^ for the model to be followed at the present time ;
but they have followed that model without thought or discrimina-
tion, and without the defence of overwhelming necessity which
could be made for their predecessors thirty years ago.

Postscript ^

The collapse of the income tax of 1894, under the decision^ of
the Supreme Court of the United States, has probably caused
more surprise than grief. Nothing could disguise the fact that,
considered as a financial measure, the tax was hastily and clumsily
arranged, and that its provisions defied the teachings both of
equity and of experience. It offended, as a piece of class legis-
lation on the one hand, and by its weakness failed to satisfy those
who demanded such legislation on the other hand. Such strength
as it had with the public was in a considerable degree sectional,
and deepened the distrust of many who might have been wilHng
to see incomes taxed under more favorable conditions.

But that the tax should disappear by reason of a construction
of the Constitution, which practically forbids the levy of a national
income tax, is an event likely to cause regret, which will strengthen
with time and reflection. A most valuable financial resource is thus
lost, for which there is no available substitute — a resource specially
adapted for use in emergencies and at times when, as in the Civil
War, indirect taxation is strained as far as it will bear. The decision
of the court that "direct taxes," in the language of the Constitu-
tion, is a phrase of wider meaning than had been held in previous
adjudications, must be accepted. But it follows that, in one impor-
tant respect, the government established by the Constitution is
not so strong as it had been supposed to be, and probably not so
strong as the majority of our people would desire to have it.

1 For a careful study of the income-tax legislation of the Civil War and the opera-
tions under it, see Dr. J. A. Hill's article, "The Civil War Income Tax," Quarterly
Journal of Economics, 1894, p. 416.

2 Quarterly Journal of Ecoftomics, July, 1895.

3 Pollock V. Farmers Loan and Trust Company, 137 United States, 429, and
158 idem, 601.


It must be added that the fact that the decision of the court
in this case was the decision of a bare majority is not the least
disagreeable circumstance of the case. The possibihty that the
adjudication which thus reversed a previous line of decisions may
itself be reversed hereafter upon some slight change in the com-
position of the court is the subject of general comment, and must
certainly cause much uneasy reflection in the minds of those who
value the stability and dignity of our judicial institutions.

From every point of view, then, the attempt to revive the
income tax by the act of 1894 promises to stand hereafter as a
conspicuous example of the danger of playing with edge-tools.


The establishment of the Bank of England in 1694, and the
abortive Land Bank of 1696, were the results of a discussion
which had left its traces in projects and pamphlets scattered over
a century. The following notes of a series of banking schemes
will show how the EngUsh mind was long attracted on the one
hand by the successful operation of deposit banking in Venice and
Amsterdam, and on the other by the hope of devising some means
for using landed security as the basis of banking credit

In Price's " Handbook of London Bankers " (p. 142) is given
in full the petition of Christopher Hagenbuck and his partners in
November, 1581,^ representing that he has found a way to institute
an office into which much money shall enter every year without
expense, so that her Majesty can have the use of any needful
sum, the country be kept in abundance, and usury stopped. The
petitioner proposes to explain his plan on condition that he shall
have for twenty years six per cent on the gross sum received by
the office. The queen agreed to allow four per cent by a grant
under the Great Seal, but nothing further appears to have been

Hagenbuck's petition is in Italian, and he is himself spoken of
as " an Italian " (p. 147). The petition is dated just three years
prior to the decree of the Venetian Senate establishing the " Banco
della Piazza de Rialto," at a time when private banking had shown
its advantages and its dangers, and when the debate as to the
substitution of a public bank had probably begun in Venice. It
is not unlikely, then, that Hagenbuck proposed to import into
England an idea which had become familiar to him from Venetian

^ Quarterly Journal of Economics, July, i888.

2 This is entered by title in Calendar of State Papers, Domestic, 1581-1590,



Price also gives (" Handbook," p. 145) a series of papers under
date of May, 1622,^ in which it is proposed that a bank should be
established, under the charge of a commission of merchants, where
the king should receive and make his payments, and merchants be
invited to leave their money, and where " all payments of 20/. and
above shall be made, and only an entry made ther of the payment."

They which receave ther mony at the Bank shal be at ther owne libertye,
eath'' to carry it away, or to leave it ther for the owne use at ther need : If they
leave it ther they shall by way of assignation pay it over, only by entring it in the
Bank, which shall goe as an actuall payment, & soe a 100/ may be assigned fro
man to man to serve for payment of tenn severall loodred or more. . . .

The examples of oth'' states might teach us the use of this Bank, especially of
the Venetians & other places in Italye.

Other references are made in these papers to the example of
Venice. No action appears to have been taken on the scheme
of 1622.

Under the commonwealth, W. Potter published : —

" The Key to Wealth." Folio. 84 pp.
"The Tradesman's Jewell." .Small 4to, 16 pp.

" Essay upon a Bank of Lands to be erected throughout the commonwealth."
Small 4to, 6 pp.

"Humble Proposals." Small 4to, 16 pp. 165 1.^

The " Key to Wealth " is a prolix discussion, of which the effect
is seen in the proposition (p. 14) "that an encrease of money can-
not possibly occasion an encrease in the price of commodities (or
any other Inconveniences) but by increasing the sale of Com-
modities." Anything else, the author argues (p. 38), which would
give as good security for obtaining commodities at pleasure, would
be as good as money; and so (p. 45) bills might be issued by a
company of tradesmen by consent, who should bind themselves
each to the other to receive and make the bills good. The
" Tradesman's Jewell " suggests that the bills should be paid within

^ These papers, numbered 29, 30, 31, and 32, are described in Calendar of State
Papers, Domestic, 1619-1623, p. 386, where Nos. 29, 30, and 32 are said to be by Sir
Rcbe-t Heath, then Solicitor-General.

" My note of the full titles of Potter's pamphlets is mislaid. For the "Tradesman's
Jewell," see McCuUoch's "Literature of Political Economy," p. 159. The "Key to
Wealth" and "Tradesman's Jewell" are both referred to in the " Ilumljle Proposals,"
and are therefore as early as 1651.


six months after demand, and points out that estates would rise
from quick trading with bills, and become greater security, —

Whereby to borrow more Bills to the doubling of such increase, and so
ad infinitum.

Now this perpetual doubling the Increase of their stock is of so great con-
cernment, as though men's Trading should be but ordinary ; yet it will make an
Estate of 1000/. to amount in 40 years to 500 millions . . . and, by consequence,
it would make the people of this Nation to be worth in 40 years (the World
affording but Commodity enough for Money) five hundred thousand times more
than now they are ; that is, he who is now worth but twenty shillings to be

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