STATE AND NATIONAL INCOME TAXATION.
1. Income as a measure of ability.
2. The superiority and defects of this measure.
3. Objections by the small taxpayer.
4. Answer to the objection that it is a tax on thrift.
5. Its inquisitorial nature.
6. The real objection is because one's ability to pay can be more accurately ascertained.
7. Review of federal experience.
8. The same subject.
9. The tax should be levied on all income.
10. The South Carolina plan violates this principle.
11. A tax on income and property in effect may be the same.
12. Yet an income tax can be more efficiently assessed and collected than a property tax.
13. How objections to public knowledge of one's income may be overcome.
14. The state should begin with the income of corporations.
15. What they should be required to state concerning the income of their members.
16. Why corporations should not object to paying an income tax.
17. Different methods of paying the tax on corporate income.
18. Residential effect on income taxpayers.
19. Division of the income of railways among different states.
20. The state should assist in ascertaining the income of its citizens.
21. The aggregate income would form the proper basis of state and local taxation.
22. And result in the reduction of state expenditures.
23. And lessen the difficulties of ascertaining a proper tax fund.
24. The division of incomes between states.
25. The graduation of the tax.
26. Federal taxation of income.
28. The income tax law of 1894.
29. Is the question of the unconstitutionality of law definitively settled? 3o. How the national government could aid state governments in petfecting the system.
31. The combination of taxes on income and on property.
1. If ability to pay is the proper basis of taxation, a person's income is a much fairer measure of his ability than the property assessed for taxation by the present crude methods. It may indeed be shown that in apply ing the income measure to taxpayers they will not always. contribute in the most equitable manner, and that practi cal difficulties will attend the collection of the sums de manded. But the objections are not so numerous or weighty as those attending existing methods.
2. In many respects an income tax is the fairest that can be laid. It is a tax on ability ; those having most are required to pay most; and the best opinion is setting more and more strongly toward the adoption of such a system.' Yet a glance into it discloses many weak places. Sup pose, for example, a person has an income just sufficient by the practice of wise economy to pay his ordinary ex penses. The taxing even of a small portion of this to pay an income tax changes his condition, and he is crippled to live with the same degree of comfort as he did before. In words, his sacrifice, though the payment be small, is dis proportionate to the sacrifice of another person who pays a tax perhaps ten times greater, but on a proportion ately greater income. In the second case the taxpayer has more than enough income left to pay all his expendi tures ; in the other case a deduction means something taken from the taxpayer's table or from his back.
3. The small taxpayer may, however, make the same objection to the present system of taxation. His ability to pay is much less than that of his rich neighbor. An as sessment of ten dollars on his real estate may be a far more serious thing to him than an assessment of a hun dred dollars on the real estate of his neighbor worth ten times as much. The evident inability of every taxpayer to bear even a small proportionate burden is one of the strongest arguments for graduated taxation. And it ap plies just as strongly to taxes assessed on real estate and other property as to taxes assessed on income.
4. It is said that a tax on income is a tax on thrift. This is one of the most common objections, but may not the same thing be said of any tax? After paying it the person has just so much less ; and the inducement to earn more perhaps is thereby lessened. But not always. A tax on thrift does not always destroy a man's ambition. It depends rather on the amount that is extracted from him. History is full of examples in which so much was taken from the thrifty that they lost all heart to accumu late more. On the other hand, the effect of a tax, if not too heavy, may be to quicken the energy of the taxpayer in order to make up his loss. Whether a tax operates in one way or another depends in most cases on the amount taken from the taxpayer.
5. Again, it is said that an income tax system is too inquisitorial. In truth, it is not a whit more so than ex isting systems where they are thoroughly executed. These call for a full disclosure of one's property and its value.
6. This objection disguises the real one, that it would be more difficult in many cases to evade inquiry into a person's income than it is to conceal personal property and make wrong returns of its valuation. The present laws are indeed less inquisitorial, because they can be easily set at naught and property be covered up; but if they were rigidly and effectually enforced, opposition to taxing personal property would be just as fierce as oppo sition to an income tax. The new devices for escaping the payment of the collateral inheritance tax are fresh illustrations of the unwillingness of the owners of per sonal property to contribute anything to support the state.
7. Will the contention be questioned that income taxes could be more fairly and effectively ascertained and col lected than are the existing taxes? An objector appeals to the ten years of federal experience in collecting an in come tax between 1861 and '71. It is true that the oppo sition was strong, the methods of ascertaining personal income were crude, and evasions were frequent. But it must be remembered that the system was new ; the admin istrators of the law imperfectly understood their duties, the government regarded the tax as temporary and did not seriously undertake to perfect the details of its collec tion. Had the system been permanently established, greater efforts would have been made to improve it.
8. The throwing open of the returns of income re ceivers, "in order," as the Commissioner of Internal Reve nue said, "that the amplest opportunity may be given for the detection of any fraudulent returns that may have been made," was the origin of a new series of frauds, as curious as they were unexpected. Some persons paid taxes on larger incomes than they received, expecting through their publication, to strengthen their credit, others, who had perhaps met with heavy losses and feared the consequences to their credit if they gave cor rect returns, made false statements to cover up their real condition. But they might have pursued the same course before, had they desired, and paid taxes on imaginary personal property.
9. An income tax should be levied on every income above a very small figure. Taxation which begins with persons who have an income above a considerable amount is class taxation and is highly objectionable. All should return their income, and then a similar deduction should be made in all cases for living. Thus equality would be preserved ; but no class should be com-' pelted to bear the burdens of all. The tendency of a government imposing a class-tax is bad, as the non-pay ing class favor the increasing of expenditure, for the obvious reason that, as others must pay the bills, those who do not pay will lose nothing and may be gainers. The people in many parts of the country are quite famil iar with this kind of experience. In New England, for example, highways are authorized at meetings of town freeholders. Again and again have the majority, who were not obliged to pay the bills, authorized the building of highways to furnish work for themselves and their friends. Had they been required to pay for them, their action would have been otherwise.
1o. The income tax system proposed in South Caro lina is very faulty, because no tax is to be imposed on in comes below twelve hundred dollars. If all were re quired to pay something. they would hive more respect for the government. The tax might be graduated, especially on smaller incomes, but none should escape whose incomes exceed a small figure.
From one point of view a tax on income and a tax on property from which a person's income is derived is the same thing. A tax on income is regarded as a direct tax ; yet a tax on property is paid, after all, from profits, from rents or interest, which is income. Is not the tax therefore in both cases drawn from the same source? And this is true with respect to the larger portion of all property that is taxed. Is the question, then, unimport ant whether the tax is levied on income itself or on prop erty from which income is derived? Suppose a person has an income of $5000 on which a ten per cent. tax is laid ; the tax will be $500. Suppose another man is taxed one-half of one per cent. on a piece of real estate worth $roo,000, from which he derives a rent of $5000. What is the difference to them, whether these taxes are laid on their income or on their property? The amount taken from their profit or income is just the same. Both are required to make the same sacrifice.
12. The question, though, is exceedingly important from another point of view. As we have seen, varying rates are assessed on different kinds of property ; the val uation of visible property is unequally assessed ; double taxation is often imposed ; the incidence is grossly un equal ; enormous quantities wholly escape taxation. The first three difficulties would be unknown under an income tax system. The failure of the state to ascertain one's income would correspond with its failure to find out all of a taxpayer's property, but it would not be so great.
13. Another objection to the income tax system is the dislike of many to have the public know the amount of their income, and the fear that such knowledge could not be kept concealed so easily as by the present system. It will be admitted that through the failure of those who are required to execute the laws, the public does not de rive much certain information from the tax records of one's wealth, but if the laws were enforced the records would show quite as much under the one system as the other. A person who was a member of a corporation, partnership or other association (and most persons are who have much property) might divide his income and return the amount to the taxing authority in different forms. By so doing, one of the grave objections to the system might be lessened. He should be permitted to return the whole amount from every source, or to direct the associa tions of which he was a member to include his income in theirs.
14. In taxing income the state should begin with cor porations. There would be less objection to taxing their income, because they are public bodies, and their accounts, earnings, etc., are of a public nature. The dividends they make and the amounts carried to surplus disclose fully their earnings. To them, therefore, the inquisitorial fea ture would have no terrors. Very likely they might ob ject to the amount of taxes imposed, but that is another matter. Partnerships, also, both limited and private, and all other kinds of associations should be required to make a return of their income.
Is. All corporations and associations ought to be re quired to furnish to the taxing authorities proper data concerning their membership and the amount of stock held by each member. By this means the authorities could easily verify the exceptions made by individuals in their returns of income held in such companies. Corpor ations should at least be required to answer any inquiries of this nature that might be made.
16. Perhaps some corporations would object to an in come tax, fearing a higher rate than that now imposed. They certainly would not object, in many cases at least, on the ground of disclosing their earnings more fully, for these are now well known, and must be known to retain public confidence. It is true that they have often escaped paying their full share, but as expenditures increase, taxes are likely to fall more and more on corporations. Noth
ing is more common in state legislation, whenever public expenditures are increased, than to raise the tax on cor porations, as they are largely contributing to state sup port. There is another reason which, at the present time, is weighty with many. They think that corporations have not done their full share. In the coming years therefore corporations may look forward with great certainty to the oncoming socialistic juggernaut. This huge machine, while professing to love justice, is administering it in such a rude fashion that the corporations will not long escape an increase of their tax burden. Since this is so, they ought to prepare for what is coming, partly by acqui escing in the sytem for themselves, and partly by insisting on its application to individuals.
17. Experience, however, might show that the taxing power should deal with corporations in a very different manner. The plan might prove to be the wiser not to tax corporations at all except on the undivided portion of their net income, and to require them to report the names of the persons among whom the remainder of their in come was divided, or they might be required to pay taxes on this portion of their income for them. Besides these methods of taxing corporate income there may be others, and which might prove to be best can be determined only by trial.
18. Unquestionably, one of the first consequences of introducing an income tax would be to start an extensive migration among the larger income taxpayers. But then, a similar movement would happen if the laws relating to the taxation of personal property were effectively en forced. Whether the tax on corporate income should be paid by corporations themselves, or by the receivers of it, or by corporations for the latter, might turn largely on the question, What would be the residential effect of the different methods of paying it ? The answer to this ques tion would be of the first magnitude to many munici palities.
19. A somewhat difficult question arises in taxing the income of railway companies doing business in several states. Should it not be divided among them in propor tion to the amount earned in each state? This might be difficult, but would not be impossible. Does not justice demand that such a division be made ? 20. The state should assist in ascertaining the income of every citizen. The local boards employed in assessing and collecting taxes ought to have such supervision as would insure an intelligent and fair enforcement of the laws. Furthermore, doubtless many questions would arise concerning what should be included and excluded as in come ; and state authority as far as possible should decide them. Such officials, further removed from those directly engaged in ascertaining the incomes of individuals, would act with more independence and probably possess greater experience, and render more satisfactory decisions.
21. When the incomes of all individuals and corpora tions were ascertained, the aggregate amount would form a proper basis for taxation. Then the state would take a share for paying its expenditures from the income of every member, and the municipalities would take another share for local needs from the income members living within their respective limits.
22. One of the great advantages arising from this sys tem would be the immediate reversal of the policy of mu nicipalities in extending the functions of the state. They would seek to lessen them, to reduce state expenditures, that more income might be left for taxation and expendi ture for local purposes.
23. Another advantage would be the diminished diffi culties in ascertaining what should be included as income compared with the difficulties in ascertaining the value of real estate. In determining the value of this even the best informed judgment to some extent is a guess. In deter mining what should be regarded as income all guesses would disappear. There would be indeed many difficul ties in making out returns, in determining what should be considered as income, deductions for losses and the like, but these questions would not receive mere guesses for answers, nor expose those who decided them to the influ ences of interest or sentiment as in valuing real estate.
24. Two questions may be left open for future consid eration. One of these relates to the division of incomes accruing from property outside the state. We have indi cated how the income of a railroad company ought to be divided ; and one may ask, if this principle is applied to them, ought it not to be extended to other property, whether owned by other associations or individuals ? If, for example, a manufacturing company is doing business in New York, Pennsylvania and Ohio, and getting an in come partly in all of these states, ought it not to be di vided among them all? Much may be said in favor of apportioning it among the states in which it was earned. If all the states adopted an income tax system and each state undertook to return to other states the amount of in come of citizens and corporations acquired by them within its limits, then indeed justice would require that all should do the same. But there are some practical difficulties in the way. It may be too much to expect all the states to do this, and if such action were not reciprocal, and each tried to get as much as possible and give nothing, this sys tem would work rank injustice.
25. Finally, should incomes be graduated ? This is an old question, and a reference to some of the literature on the subject will suffice. Unquestionably the smaller in comes ought not to be taxed at the same rate as the larger ones.' 26. In 1861 the national government imposed a tax of three per cent. on all incomes exceeding $800. Three years later the law was changed and the rate established was 5 per cent. on incomes $600 and not exceeding $5000 ; 7/ per cent. on incomes between $5000 and $10, 000, and to per cent. on all incomes above $io,000. Some changes were made afterward, but the system was tem porary, continuing only ten years.
27. In the administration of the system compliints were frequent, but it may be truthfully said that, as a whole, the system was fairly successful. Doubtless many escaped paying their full share ; there were errors in the methods of calculating income, but when we look back on those times, now twenty-five years past, the system worked quite as well as could have been expected.' 28. As the Supreme Court of the United States has decided that a federal income tax is unconstitutional, per haps it is not worth while to consider the subject further. It may be remarked, however, concerning the expediency of imposing such a tax, that the most thoughtful writers disagree. Such a tax commends itself strongly to the people generally because they think it is another way to make the rich pay the public bills. One of the most vicious things about the last attempt in 1894 to impose such a tax was the exemption of all incomes below $4000. By this exemption the tax was to be levied simply on a class, and a small one, compared with the entire number of people. The law ought to have been defeated on that ground, if on no other.
29. A federal income tax can not be imposed until the constitution is amended or the Supreme Court entertains a different view concerning its constitutionality. As the court was so equally divided, it can hardly be said that the question concerning its constitutionality is clearly settled. That tribunal has changed its opinion on several import ant questions, and the members are so equally divided that there is no reason especially for regarding their decision as beyond change.
3o. However that may be, if a federal income tax were ever imposed, one of the enormous gains would be in the laying of a solid foundation for similar taxation by the states. Indeed, the national and state governments could co-operate most effectively to the same end. As re marked at the outset of this chapter, one of the most se rious difficulties attending any system of state taxation is the varying systems in other states. Each state seems to be bent on levying all the taxes it can on the property within its reach, and on property beyond, when the owner uappens to reside within its jurisdiction. These unhappy conflicts would speedily cease were the federal and state governments to co-operate in establishing and maintain ing an income system of taxation. The advantages that would accrue from such national and state co-operation are too obvious to require explanation.
31. Difficulties, numerous and grave, surround the taxation of income, the escape of persons owning un improved property and the like, but if we keep in mind ability as the proper basis of taxation, these difficulties shrink into smaller size than those which surround other systems of taxation. It is sometimes urged that an in come tax is desirable as supplementary to a tax on real estate ; but we think the reasons are far stronger, if both systems ought to be used, for making the taxation of in come the principal one and the taxation of real estate sup plementary. Possibly an income tax supplemented by an other taxing the unearned increment of property would yield a sufficient revenue to sustain the public servic.
'The tendency of writers is toward income taxation. See Prof. Arthur Hadley's Economics, Ch. 14, on Government Rev enue; Seligman's Essays on Taxation; also his article on Colo nial and State Income Taxes, 10 Polit. Science, Q. 221; J. R. Elliott, American Farms, Their Condition and Future, 164. G. Gunton favors surplus income taxation, Primer of Social Econ omies, 362: F. S. Hoffman, The Sphere of the State, Ch. 7, The State and Taxation, 112; J. Bascom, Social Theory, P. 436. Among those who oppose income taxation of any kind are T. G. Shear man, Natural Taxation, 30-32, 41-45; D. A. Wells, Who Pays Your Taxes, 48. Bolton Hall, Id., ch. 8. p. 7.
For other articles, see Prof. Dunbar's article, J. of Economics, 1894, p. 26. A. C. Miller's National Finance and the Income Tax, 8 Jour, of Polit. Econ. 255.
'See Ann. Rep. of N. Y. Controller, 1896, xviii.
'F. C. Howe, in his work on Taxation in the United States, under the Internal Revenue System, says: "Unquestiona bly, the tax was exposed to widespread evasion, especially in the large cities. Such complete confidence was reposed in the Individual that evasion was an easy matter; and the instruc tions of the commissioner, early in 1863, that the returns should be open for inspection only to officers of the revenues, simply facilitated it. For writers who favor federal income taxation, see E. R. A. Seligman, Is the Income Tax Constitutional and Just, 19 Forum 48; F. C. Howe, Federal Revenues and Income Tax, 4 Annals of Am. Acad. 557; U. S. Hall, Reasons in its Favor, 17 Forum 1; E. B. Whitney, Political Dangers of the Income Tax Decisions by the U. S. Sup. Ct. 19 Forum 621; E. R. A. Seligman, The Income Tax, 9 Polit. Science Q. 610.
For writers who oppose federal income taxation, see D. A. Wells, An Income Tax—Is It Desirable? 17 Forum 1; G. F. Ed munds, Salutary Results of the Income Tax Decision, 19 Forum 613; The Proposed Income Tax, 57 Nation 404; The Graver Evils of the Income Tax, 68 Nation 24; Beauties of the Income Tax Laws, 58 Nation, 133. See Dunbar's Art. 9 Quar. Jour, of Beo norcdcr, 26.