-- 1. #Inheritance tax laws.# There remain to be considered at least two important forms of taxation that are essentially _personal_ in their unit of assessment, in contrast with the foregoing which are (or should be, if consistent) essentially _impersonal_[1] These are the inheritance and the income taxes.
Until 1916 little use had been made of inheritance taxation for federal purposes. In that year, however. Congress passed a law which was expected to obtain about $20,000,000 a year from inheritances.
Forty-one states in America have inheritance tax laws (in 1915) which apply generally to property passing either by will or under the intestate laws of the state. The tax is for state purposes. These laws differ in many ways, but are nearly all alike in certain respects:
(1) In applying to the separate legacies rather than to the estate as a whole.[2]
(2) In taxing legacies to relatives in the direct line at a lower rate (or even exempting them entirely) than those to collateral relatives.[3]
(3) In exempting legacies below a certain amount.[4]
(4) In having rates progressing with the size of the legacy; (this feature is less general, but is prominent in most of the later laws).
-- 2. #Fiscal importance of inheritance taxes.# The fiscal importance of inheritance taxes has been comparatively not very great (except in New York State), but it has rapidly grown. In 1903 the receipts from this source (in 27 states) were over $7,000,000; in 1913 they were (in 35 states) $26,000,000. The spread of inheritance taxes and the higher and progressive rates applied are an expression in part of the need of additional revenues and in part of the growing popular concern regarding the concentration of wealth. Yet the actual legislation is something of a compromise between fiscal policy (to get revenues) and social policy (to reduce or to distribute the larger fortunes).[5] In New York legacies of over $1,000,000 are now taxable at 4 per cent to relatives in the direct line and to all others at 8 per cent. In Washington the tax to relatives in the direct line is but 1 per cent, but to others it may go as high as 12 per cent on legacies over $100,000. In Wisconsin, somewhat similarly, the tax may rise to 15 per cent on the excess above $500,000.
-- 3. #Income taxes; general nature.# All taxes, whether assessed upon the capital value of goods or not, come out of (reduce) the incomes now or later available for individuals. But there are various ways of attacking incomes, i.e., of apportioning the tax burden. Income taxation is that form in which the basis of the assessment and levy is the income of the taxpayer as it arises (not accumulated wealth, or capital, or business processes, or expenditures). Of the various conceptions of income[6] the one mainly employed in income taxation is monetary income arising in the course of business, supplemented occasionally (but not consistently) by some items of material income that are expected to come to the person. There is not in the long run such a contrast between wealth taxation and income taxation in their ultimate burden and effect as is usually supposed.
Indeed wealth (or capital) taxation as applied to accumulated wealth is more far-reaching than income taxation, for it falls upon the present worth alike of monetary and of psychic incomes (e.g., the value of a house whether it is let to a tenant or occupied by the owner). But, on the other hand, income taxation attacks directly the monetary incomes from labor, coming as wages, salaries, fees, and profits in business. This feature goes naturally with the fact that the income tax is essentially a personal tax, grouping the items of assessment about a person, whereas the "property" taxes are mainly (tho not consistently) impersonal, making the piece of wealth the primary object of assessment. This summation of each person's income makes income taxation peculiarly suitable for progressive taxation with the social-welfare motive of equalizing the distribution of wealth. It is doubtless this technical assessment feature, rather than any essential advantage as a mode of taxation, that has led to its recent growth in popular favor.
-- 4. #Income taxation by the states#. Income taxes have been used widely in European countries, but not so much in the United States.
Numerous attempts have been made by the states to tax incomes, but with small results. Personal incomes, when sought by local assessors, proved to be most elusive. There are (in 1913) but seven states with anything resembling a personal income tax.[7] These are Virginia, North Carolina, South Carolina, Mississippi, Oklahoma, Massachusetts, and Wisconsin. Of these states Wisconsin has the most recent law, and one the widest in its application and the most important fiscally. The law applies a progressive rate to all incomes (with exemption of $700 from wages and salaries) and contains elaborate provisions for corporate taxation. The proceeds are distributed 10 per cent to the state, 20 per cent to the county, and 70 per cent to the municipality in which the tax is collected. In the six other states the tax is on incomes only exceeding a certain amount (North Carolina, $1000, the other states from $2000 to $3500 exemption); some apply to incomes from any source but others do not apply to incomes from property otherwise taxed. The total receipts from these state income taxes in 1913 were but $314,000.
-- 5. #History of federal income taxation.# The income tax seems destined to play a more important part in the fiscal system of the federal government. Until 1913, however, its part had been small. It began to be used under the law of 1867 (when the law passed in 1861 was replaced before it went into effect). This was repeatedly amended and finally repealed in 1870, to continue in force until the year 1872. The rate was 3 per cent on the excess of incomes over $600, and 5 per cent on the excess over $10,000. This law was repeatedly upheld by the United States Supreme Court as not in conflict with the Constitution. Its fiscal results were not large, as it was never effectively administered.
The next income tax law was that of 1894, enacted in connection with the tariff revision of that year. It was declared unconstitutional before it had gone into effect. The main ground for the decision was that a tax on incomes from rent of land as well as on incomes from personal property is direct, and must therefore be apportioned among the states according to population.
In the active discussion of social legislation in the years following this decision public sentiment developed favoring a renewed attempt to get such legislation by amending the Constitution. This was shown by the remarkable fact that a bill for the sixteenth amendment to the Constitution was passed unanimously by the Senate, and almost unanimously by the House. It was ratified by three-fourths of the states and became a law in 1913.[8]
-- 6. #Events leading up to the law of 1913.# Meantime, in 1909 and excise tax law had been passed, applying to corporations in a manner not open to the objections found by the Supreme Court to the law of 1894. The Democratic party, which had passed the law of 1894, was pledged to the passage of an income tax law when it came into power again in 1913. The reduction of the tariff, as well as growing expenditures, moreover, made necessary the development of new sources of revenue for the national government. In other countries the income tax had been found to be a part of a system of taxation especially valuable as "a balance wheel" to equalize the revenues and expenditures. It was deemed by some to be an additional advantage of an income tax that it would make the richer citizens better realize the nature and burden of public expenditure. Most other federal revenues, being derived from the tariff and from taxes on merchandise, are borne mainly by the purchasers and consumers.
An income tax was opposed as sectional taxation by many in the Eastern states where the owners of most of the larger fortunes reside. But to this Senator Elihu Root replied that the states where there was the greatest ownership of wealth pay the largest taxation under any scheme, and ought to.
-- 7. #Main features of the law.# The law as enacted[9] imposes (a) a "normal" tax of 1 per cent on the entire net income of every corporation (engaged in business for profit);
(b) a "normal" tax of 1 per cent on the excess above $3000 of every unmarried individual's income (or $4000 for husband and wife, as indicated in the next section); (c) an "additional tax" (often called a super-tax) ranging from 1 to 6 per cent on individual incomes of larger amounts than $20,000. There are thus eight classes of persons, those entirely exempt, those paying only at the normal tax rate, and six different classes paying a super-tax.[10]
A person with an income of $1,000,000 thus pays $60,020, this being the amount indicated, $25,020 for the first half million plus 7 per cent on the second half million.
-- 8. #Exemptions and stoppage at source#. There are various exemptions, the first being that of $3000 on every individual income and of $4000 on the aggregate income of husband and wife living together.[11] Among other exceptions are sums paid for taxes (except assessments for local benefits), necessary business expenses, losses sustained, and (for the normal tax only) those parts of individual incomes derived from corporations which have paid the tax on them.
The difficulty of getting an honest and complete assessment of incomes is great. All taxation is deemed by the taxpayer to be "inquisitorial"
in some degree, and this is particularly true of an income tax. In England had been developed the plan called "stoppage at source." In our law the taxation of corporations at the rate of the normal tax, while requiring them to report the names of those receiving dividends and interest payments, affords an ingenious way of checking up the returns of individuals in respect to a class of investments which is steadily increasing in importance.
-- 9. #The graduation principle#. The most disputed feature of the income tax is the principle of graduation, or of progression. It is upheld in part because in this case it but offsets _regression_, that is relatively heavier taxation on the smaller incomes, in the case of the other kinds of taxes (tariff, property taxes, etc.). It is urged further that those of larger incomes, especially the largest, have marked advantages over others in making investments. Further it is urged that the higher the income the less does a certain rate cut into "the amount necessary for good living" (as was said in Congressional debate). This is in accord with the psychological principles of choice, of value, and of diminishing gratification. Finally, there is a widespread approval of the progressive rate just because it in so far acts as a leveling influence upon fortunes. The "additional" tax is already important fiscally, yielding over one-half of the total paid by individuals and one-fourth of the total from corporations and individuals.
The income tax returns for the first ten months of the law (March to December, 1913) showed 356,598 taxable individual incomes, equal to about 1 per cent of the taxable population (considering minors to be usually not taxable). Even this proportion, small as it is, is much larger than that of the European countries having a general income tax.
The first ten months' yield (March 1, 1913, to December 31, 1913) was over $60,000,000. A remarkable fact is that 21 per cent of all taxable incomes (not persons) were in the single Borough of Manhattan (the main part of New York City). The receipts from the income tax in 1913 were nearly 10 per cent of the ordinary receipts of the federal government, and about 2 per cent of total revenue receipts of all branches of government, the income taxes paid by individuals being about 1 per cent of the same total, and the super-tax about 1/2 per cent of the same.
The receipts from the income tax during the fiscal year ending June 30, 1915, were $80,000,000, of which $39,000,000 was paid by corporations and $41,000,000 by individuals. Of the latter sum, over $24,000,000 was from the super-tax.
-- 10. #A system of taxation.# The task of reforming and developing the various kinds of taxes and of uniting them into a just and consistent plan for each of the divisions of government in the United States is a vast and difficult one. There are many conflicting interests among states, between states and nation, among the various minor political divisions, and among individuals and classes. There are also conflicting opinions regarding many features of the possible practical plans. Because of these it is safe to predict that progress will not be made quickly, steadily, nor always directed toward a clear ideal.
If progress is to be rapid, the public must, however, have consistent principles by which its steps may be guided. In the foregoing kinds of taxation are the various elements which may be united into a system of taxation. It is useful to consider how this might be done.
At the basis of the whole tax structure is taxation, by value, of concrete wealth at the place where it is situated (_in situ_). This should be regardless of the distribution of ownership or of the residence of the owner. The present misnamed "general property tax"
already presents the main outlines of this form of taxation and the general changes necessary in law and method of assessment have been indicated above.[12] Corporation taxation may be adjusted to this either by separate treatment and assignment to state purposes only, or more simply for most states, by assimilating it with the general taxation of wealth and allotting due shares of the proceeds to the various taxing divisions.[13] The national government can, because of its exclusive power of levying tariff duties and also because of its exclusive control over interstate commerce, reach the tax-paying ability of the nation effectively by a combination of tariff and internal revenue taxes. These become a part of business costs, and are diffused over the whole population in general prices.[14]
This system of impersonal wealth taxation may then be supplemented by personal taxation, applied through inheritance and income taxes. These forms of taxation extend over and reach many of the same persons and incomes as do ultimately the impersonal taxes. But the summation of personal incomes gives the necessary condition for applying the principle of progression so far as this is, by public opinion, deemed desirable either for fiscal or for social reasons.
[Footnote 1: See above, ch.17, sec. 3, note, and sec. 5, on this distinction. The poll tax also is personal: see ch. 16, sec. 9.]
[Footnote 2: In Utah the tax is 5 per cent on all estates over $10,000.]
[Footnote 3. Exception, Utah.]
[Footnote 4: Exceptions are Missouri, New Hampshire, Vermont, Virginia.]
[Footnote 5: It would be more consistent with the purpose of equalizing fortunes to vary the rate not according to the size of the legacy but according to the size of the fortune which the legatee has, or would have, after receiving the legacy.]
[Footnote 6: See Vol. I, p. 26.]
[Footnote 7: In addition, certain items of receipts of companies or incomes of individuals are arbitrarily defined as property for purposes of taxation in a few cases in about fifteen other states. See Wealth, Debt, and Taxation, Report of the Bureau of the Census, 1907, p. 622.]
[Footnote 8: Article XVI. The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census enumeration.]
[Footnote 9: It constitutes sec. 2 of the tariff act of 1913 entitled "An act to reduce tariff duties and to provide revenue for the government and for other purposes."]
[Footnote 10: This may be seen in the following table: Normal Rate on excess Total tax on in next class tax on lower Nor- Addi- upper Total rate limit mal tional limit per cent Under $3,000 0 0 0 0 0.00 to 0.00 $3,000-$20,000 0 1 0 170 0.00 to 0.85 $20,000-$50,000 170 1 1 770 0.85 to 1.54 $50,000-$75,000 770 1 2 1,520 1.54 to 2.02 $75,000-$100,000 1,520 1 3 2,520 2.02 to 2.52 $100,000-$250,000 2,520 1 4 10,020 2.52 to 4.00 $250,000-$500,000 10,020 1 5 25,020 4.00 to 5.00 In excess of $500,00 25,020 1 6 upwards 5.00 to 7.00
By legislation in the summer of 1916, after the foregoing was in type, the "normal" rate was doubled and the additional rates were raised.]
[Footnote 11: The exemption is $3000 for each if they are not living together. Thus the law offers a reward of $20 to make marriage a failure.]
[Footnote 12: See above, ch. 17, sec. 5.]
[Footnote 13: See above, ch. 17, secs. 15, 16.]
[Footnote 14: See above, ch. 15, sec. 14, first paragraph.]
PART V
PROBLEMS OF THE WAGE SYSTEM