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great as the increase in the rate of the tax, a rare virtue in excise taxation, as the rise of the burden usually cuts down the consumption. (b) From the administrative standpoint they are very inexpensive to collect, give rise to comparatively little fraud or evasion, and the few industries which they affect have now become so habituated to public inspection and control that the latter occasion little complaint. (c) Finally, it is to be noted that although excise taxes are regressive, the burden of the tax is shared by producer and consumer not borne wholly by the latter and the share borne by the producer varies directly with the element of monopoly or differential advantage in production. "Viewed as a whole, the internal revenue system is the most satisfactory part of our entire financial structure, state or federal. Its returns are fairly steady and reliable in times of depression. Its growth is automatic. It is imposed on articles the demand for which is tolerably inelastic. Its burden is not perceptibly felt. It is honestly and economically collected; and finally, it is abundantly capable of yielding additional revenue, should an unforeseen emergency arise." 1

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Taxes on Transactions. In times of urgent need, as in the War of 1812, the Civil War, and the late war with Spain, the federal government has imposed taxes upon various sorts of transactions. Thus, the war revenue act of 1898 imposed stamp taxes on bank checks, telegrams, freight and express receipts, transfers of stocks and bonds, bills of exchange, etc. In 1899, the year after they were imposed, the stamp taxes yielded $43,837,819. The peculiar advantage of taxes on transactions is their quality of immediate productivity. As the figures just quoted show, they may be made to yield largely the very year they are imposed. Moreover, the government may make evasion almost impossible by lessening the legal protection and significance afforded by the documents not properly stamped. Another advantage is that they cost almost nothing to collect, as the taxpayer buys the stamp himself and places it upon the document. On the other hand, the general effect of such taxes is to impede business; and a check on business activity soon lessens the revenue from other sources.

1 Daniels, Public Finance, p. 148.

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Income Taxes. What shall be done to remedy the inelasticity and regressivity of federal taxation? The remedy most frequently advocated is that of a progressive income tax. Income taxes are not new in the United States. All through the colonial epoch earnings or produce taxes, i.e. taxes upon special forms of income, were common; between the Revolutionary War and 1870, particularly after 1840, many trials of a general income tax were made by the state governments; and in 1863, the federal government levied a general income tax, which was retained for about ten years. In 1894, the federal government again levied an income tax of two per cent upon incomes in excess of $4000, but the constitutionality of the act was promptly assailed, and the Supreme Court, by a majority of one, and after a change in the personnel of the court during the consideration of the case, reversed the earlier findings and held that the income tax could be levied only as a direct tax apportioned among the several states in accordance with their population. An apportioned income tax would be so obviously unjust that no one advocates its adoption. But President Roosevelt has recently recommended the income tax to the consideration of Congress and the American people, intimating rather broadly that a reasonable and judicially framed income tax might, if presented to the Supreme Court again, receive a more friendly interpretation.

The income tax as employed by the state governments has been a consistent and admitted failure, owing, it is stated by most authorities, to the inability of assessors to tax income at source and the consequent employment of self-assessment. John Smith, living in Massachusetts, receives his income from a mining company situated in Colorado; and as the Massachusetts assessors have no means of ascertaining Smith's ownership of the mining stock, they are forced to depend upon his answer in declaring the amount of his income. Yet it should be noted that the successful German income taxes are State taxes, resting largely upon declarations of the taxpayer and making comparatively little use of collection at the source. The success of these taxes in Germany is probably due to the fact that the rate is low, and the people law-abiding, even in matters of taxation.

A national income tax has many points of strength. (a) First of all it is to be noted that in England and Italy, in which the income tax has been given a trial, experience has justified this form of taxation, according to the majority opinion of those who have considered the matter.1 (b) Moreover, it is especially noteworthy that income taxation gains in economy and productiveness, and wins increasing approbation as the years go by. This is in sharp contrast with the experience of our states in their use of the general property tax, which has grown more unjust and less workable, the longer it has been tried. (c) In the third place, income is as good, and perhaps better, than any other single measure of ability; so that income taxation seems to be peculiarly consistent with the ethical ideal that taxation should be in accordance with ability. (d) Similarly, there is perhaps no general or universal tax which, if properly enforced, would give less trouble because of shifting. (e) Most important of all from the fiscal standpoint is its admirable elasticity. It acts, or may be made to act, as the regulator of the entire revenue system. In times of prosperity, when consumption taxes are productive, a simple reduction of the rate prevents the accumulation of a harmful surplus. In times of stress, the revenues may be increased with the minimum disturbance of industry and capital by a simple increase of the rate. There can be no doubt that our federal revenue system needs a direct tax of such a kind as to exercise a minimum disturbing force upon industry, in order to keep a wholesome balance between receipts and expenditures.

The disadvantages of a general income tax, however, are great. (a) Its inquisitorial features are a fertile source of weakness. In our opinion, people should not resent taxation simply because it is inquisitorial; but if they do vigorously resent it, the fact constitutes an element of weakness in the tax which we must take into account, whether we sympathize with the feeling or not. (b) The chief objections to the income tax, however, have to do with its practicability. The federal income tax of 1894, for example, contained the following provisions, each of which, the

1 In France, also, there has for some years been an active agitation for a progressive income tax.

reader will note, raises problems that either cause injustice or make room for evasion and escape, whichever way they are solved. In estimating the incomes of persons, assessors were directed to include: profits realized within the year from the sales of real estate purchased within the two years preceding, interest received or accrued upon all notes, bonds,1 mortgages, or other forms of indebtedness; the amount of all premiums on bonds, notes, or coupons; money, and the value of all personal property acquired by gift or inheritance. On the other hand, assessors were instructed to allow taxpayers to deduct necessary expenses actually incurred in carrying on any business, occupation, or profession; interest due or paid out; taxes actually paid; losses actually sustained from fires, storms, or shipwreck and not compensated for by insurance or otherwise; and debts ascertained to be worthless. What check had the assessor upon the interest received on notes, bonds, and other forms of indebtedness? How could he ascertain the profits realized upon sales of real estate? Similar openings for an indefinite amount of fraud were given in the permission to deduct "necessary expenses," "interest due," "losses sustained," and "debts ascertained to be worthless." On the other hand, corporations were denied the right to deduct amounts carried to the account of depreciation or sinking funds, and they were compelled to deduct the tax of two per cent from all dividends which they paid to their stockholders, whether their stockholders had incomes of $4000 or less.

Many of these defects are not peculiar to the tax of 1894, but are inherent in the income tax principle. In estimating net income a vast number of deductions must be made from gross income, most of which are vague, and many of which are practically indeterminate. Money rent of land, for instance, is frequently less than true net income, because the property is appreciating in value and because in many countries, particularly in England, land ownership yields a very valuable but very intangible income in the shape of increased respect from one's neighbor. Income

1 It is important to note that taxes on the interest payments upon corporate bonds could not in the United States, owing to decisions of the federal court, be collected at the source, or from the corporation.

from mines, on the other hand, usually represents in large degree a return of capital invested, since the mine is being gradually exhausted; while income from personal exertions frequently represents a similar return of capital expended in costly education and long apprenticeship. From the administrative standpoint the income tax has almost as many weaknesses as the general property tax, the number of cases in which it is easier to estimate income than capital value being offset by an equal number of instances in which it is easier to estimate capital value than income.

Progressive taxation is clearly needed somewhere in our fiscal system, state or federal; and the latter system unquestionably is sadly inelastic. But when all the obstacles are considered court decisions, administrative weakness, the average American's hostility to inquisitorial taxation, the high cost of collection, the expense involved in combining progressive taxation with collection at the source, and the theoretical defects which the income tax shares with all other general taxes - it is doubtful whether the income tax should be depended upon to accomplish the necessary reforms. The true path of reform lies not in seeking any general tax either upon property, income, or any other simple basis; it consists in combining all principles in a harmonious system, using income as the basis when that is more practicable, capital value as the basis when it is easier to measure wealth than earnings, and resorting to consumption at perhaps a lower rate when both wealth and income are particularly difficult to determine.

Inheritance Taxes. The recrudescence of the income tax project in recent years has undoubtedly been due to a desire to improve the distribution of wealth and reduce "swollen fortunes," but to allow swollen fortunes to accumulate wrongly and then to attempt to correct our mistake by taxing them 4 or 5 per cent is to palter with justice and to play at reform. There are many other remedies, more direct, more logical, more efficient. Among them may properly be included the regulation and taxation of inheritances.

When the first edition of this work was written in 1893, inherit

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