the preceding decade, applied to associations and corporations as well as to individuals; but unlike that of Saxony it provided for an avoidance of double taxation by making corporations liable only on their incomes over three per cent, that amount of income being presumed to be reached in the hands of the individual security holder. The tax was assessed on the individual except that the head of the family was liable for the entire family income whenever he had the right to dispose of it. Incomes under 500 marks were exempt. In order to retain the same nominal rate of taxation -2 per cent with an actual degressive tax (a lower rate on the small incomes), a complicated system, known as taxable valuations (Steueranschläge) was introduced, whereby various grades of income were taken up in the tax list at different figures; e.g., 500 marks at 125, 2000 marks at 750, and so on, until incomes were assessed at their full value when they reached the figure of 30,000 marks. The administrative machinery rested, as in Saxony, on the principle of declaration or self-valuation, combined with a careful supervisory official assessment.

The old taxes on product, like the land and building tax and the capital tax, were retained, but the earnings tax (Erwerbsteuer) of 1874 was now limited to profits derived from capital actually invested in business. The consequence was that although the income tax was nominally put side by side with the old produce taxes, in practice the system meant a general income tax, with a differentiation between funded and unfunded incomes. For incomes in general were now reached by the income tax, while additional taxes at various rates were imposed on incomes derived from property, whether consisting of land, of business capital, or of securities.

The adoption of the income tax in Saxony and Baden was followed by its introduction in a few of the smaller states, like Saxe-Weimar in 1883 and Anhalt in 1886. The general discussion which ensued did not fail to affect public sentiment in Prussia, which was now lagging far behind some of her 1 In 1892 corporations and associations were exempted from the tax.

sister commonwealths. The Prussian government finally took up the matter with great energy, and in the early nineties, under the ministry of Dr. Miquel, succeeded in enacting a series of laws which put Prussia as far in the lead as she had hitherto been in the rear.

§ 5. The Prussian Income Tax of 1891

The great Prussian reforms of the nineties consisted of four parts: the reconstruction of the business tax, the introduction of a general income tax, the enactment of a supplementary property tax, and the remodelling of local taxation.1

The income tax law of 1891 abolished the class tax but retained the dividing line of 3000 marks as the one beyond which the taxpayers were required to declare their income. Several other features of the class tax, primarily of an administrative nature, were likewise retained, as we shall see. The income tax was now made a general tax.2 The chief provisions may be discussed under four heads: first, to whom does the tax apply? second, what is taxable? third, what are the rates? and fourth, how is the tax assessed and collected? As the law of 1891 is, with a few modifications, still in force we shall speak of its provisions in the present

tense.

The law applies to certain specially designated associations, including ordinary corporations, as well as to individuals and it follows the Baden principle in that corporate

1 For a general account, especially of the last two phases of the reform, see Seligman, Essays in Taxation, chap. 10, part iv.

The law has been frequently re

2 Einkommensteuergesetz v. 24 Juni, 1891. printed with annotations. A good commentary is that of Kolisch, 1893. The best and fullest work is the Commentar zum Einkommensteuergesetz, by B. Fuisting, which forms the first volume of his Die Preussischen Direkten Steuern. The 7th edition (1907) is a volume of 993 pages and gives the text of the law of 1891 together with the amendments of 1906 followed in each section by explanations, judicial decisions, and comments. A pocket edition is also published every few years, the most recent being that of 1910. An English translation of the law will be found in the Blue Book Reports respecting Graduated Income Taxes in Foreign States. Misc., no. 2, 1905. Cd. 2587.

incomes are taxed only on the excess over three and one-half per cent.. All Prussians are subject to the tax except those who, without having any domicile at home, have lived abroad for more than two years, as well as those who are exempt according to the imperial law regulating the subject of double taxation, to which reference will be made later. The law also applies to other Germans residing in Prussia as well as to foreigners who reside in Prussia for business purposes or, if there for other reasons, who are resident for more than one year. Finally, the law applies to any one who derives an income from Prussian real estate, industry, or trade or from Prussian salaries or pensions. Members of the royal family and of the former royal families of Hanover, Kurhessen, and Nassau are exempt.

Coming next to a consideration of what is taxable, income is declared to consist of the annual net receipts from the four categories of capital, real estate, trade and industry, and lucrative occupations. Extraordinary receipts from inheri tance, gifts, life-insurance policies, the sale of real estate (if not carried on as a business or for purposes of speculation), and similar receipts (ähnliche Erwerbungen) are not regarded as income, but are treated as accessions to capital. Detailed provisions are laid down as to what deductions are to be made from gross receipts in order to arrive at the net receipts or taxable income. Revenues and expenses are divided into fixed and uncertain (feststehende und unbestimmte); in the former case the income for the year is taken, in the latter the average for the last three years. The taxable income is still the family income, i.e., it includes the income of the wife (except when she lives apart from her husband), and of the children, unless they have an independent income which is not at the disposal of the father.

In the third place, considerable changes were made in the classification and rates. Incomes below 900 marks are, as before, exempt, but they are then arranged in different stages, with a fixed tax in each. Incomes from 900 to 1050 marks pay 6 marks (0.66 to 0.57 %), and the scale rises in twenty

six classes until incomes from 9500 to 10,500 marks pay 300 marks (3.15% to 2.85%, or 3% of the mean income). Then the grades rise by 1000 marks to 30,500 marks, by 1500 marks to 32,000 marks, and by 2000 marks to 100,000 marks, at which figure the normal rate of four per cent is applied. Altogether there are now seventy-five grades, whereas in the old classified income tax there were only twenty-seven. Moreover, the normal rate of the higher incomes is now four per cent as against the old three per cent.1 The rates for limited-liability companies were made slightly higher in the lower grades.

The system of abatements was now also extended. The general provisions of the old laws of 1851 and 1873 were retained, permitting abatements for children and for special reasons which diminish the taxpayer's ability to pay, like illness, accident, indebtedness, and extraordinary outlays for the education or living expenses of the family. But in the case of children the abatements from the taxable income in all cases where the income did not exceed 3000 marks was now definitely fixed at fifty marks for every child under fourteen. In case this should not result in an actually lower tax, it is provided that if there are three or more children the taxpayer should be moved down one grade. Finally, in the case of the special reasons mentioned above, diminishing the ability of the taxpayer, the permissible abatement now consists of a reduction of three grades provided the income does not exceed 9500 marks. This was a substantial enlargement of the system.

Most important, however, are the new administrative provisions regulating the assessment and collection of the tax. In the first place the local officials are required to make a careful annual list of all persons presumably subject to the law. In the next place is to be noted the introduction of the principle of compulsory declaration of income

1 For a complete table of these income-tax rates, see Seligman, Progressive Taxation, 2d ed., 1908, p. 48; and Kennan, Income Taxation, Milwaukee, 1910, p. 94.

by the taxpayer. The old free and easy system which, as we know, had by express legislation and administrative provision sedulously avoided any minute inquiry into the conditions of the individual's position, had made the tax, especially in the upper grades, very much of a farce. As a high Prussian official himself tells us: "The laws in the German states were in the highest degree defective. Where, as in Prussia, the assessment was made under the legal prohibition of any more searching' or 'intrusive inquiry' into the income or property conditions, the ascertainment of the real income was entirely out of the question. The complete break-up of the income tax was the necessary result. The tax was in the highest degree arbitrary and unequal."1 Practically no one was correctly assessed except the recipi ents of fixed wages or salaries, and in particular the owners of intangible property were scarcely reached at all. Another author, who wrote just before the reform of the early nineties, went so far as to pronounce the income tax a "lie and cheat system," 2 and to confirm the prediction of Kühne in 1851 on the floor of the house, that the tax would become a very caricature of an income tax.3

It was but natural, therefore, that the question of compulsory declaration should be in the forefront of the discussion. It was, in fact, the point around which most of the objections to the bill crystallized. The way, however, had been prepared by scientific writers who, like Neumann, had stated that "in such matters nothing can be accomplished by kid gloves," and by special works devoted to this single topic, one of which, by Henrich, appeared at the close of the eighties, and ran through several editions. The controlling

1 Die Einkommensbesteuerung der Zukunft in Anknüpfung an das Preussische Einkommensteuer-Gesetz. Von B. Fuisting. Berlin, 1903, p. 1.

2"Ein Lug- und Trug-system" - Die Reform der Directen Steuern, insbesondere die Einführung der Selbsteinschätzung in Preussen. Ein Mahnwort an die Preussischen Landtagswähler. Von L. Henrich, 2d ed., Berlin, 1889, p. 58.

3 Ibid., p. 49.

* Neumann, Die Progressive Einkommensteuer. 1874, p. 191.

5 See op. cit., above.