make returns of their earnings, but were assessed by the listers at fixed amounts. As we have seen more specifically in the cases of Connecticut and South Carolina, and the same was true in the other colonies, the faculty tax was nothing but a classified product tax, in which different employments and different classes within each employment were rated at fixed amounts. It was precisely for this reason that the faculty tax, which at the outset gave satisfaction, soon became antiquated and unjust. Instead of being a tax on actual profits or gains as a part of a general tax on incomes, in which attention might be paid to the individual situation of the taxpayer, it was nothing but an arbitrarily levied class tax on certain assumed earnings. It bore very little relation to the actual income; it became grievous and unequal; and it was therefore allowed to fall into disuse. It never was an income tax in the modern sense.

On the other hand, as we shall see in the next chapter, most of the state income taxes of the nineteenth century, with the exception chiefly of that of Massachusetts, which is simply a survival of the old faculty tax, have been true income taxes. They have not been confined to the assumed gross profits of certain particular classes, but have been levied on the actual total income of the taxpayer. The difference between the colonial taxes on profits and the state income taxes is very much like that between the European taxes on product and the income taxes. In Germany, in France, and in many other countries, after the general property tax had been abandoned, and after it had been recognized that net product was in some respects a better index of taxable capacity than property, the whole tax system was changed into one on product: that is, first we had the land tax, which was levied on net produce; then came the buildings tax, levied on the rental value of buildings; then came the tax on capital, according to the yield of capital; then came the tax on business, in which the assumed profits were calculated according to the outward signs. All these were taxes on things on the land, on the house, on the business, on the capital; and finally, to round

out the system, there was sometimes imposed a tax on the remaining source of profit, that is, the professions and employments which yield a produce in the shape of a salary or compensation. These taxes are still to-day known as real taxes (impôts réels), or produce taxes (Ertragssteuern). It is only within a comparatively recent period that product has come to be recognized as a less satisfactory theoretical basis of taxation than income. Product looks at the thing that produces; income looks at the person that receives. In the first case, no allowance is made for debts or other qualifying circumstances; in the second, such allowance is possible. As a consequence, modern income taxes have been imposed partly in place of, and partly in addition to, these produce taxes.1 The system of real taxes is being supplanted by that of personal taxes. Or, if we persist in using the term "income," the first class of taxes may be called indirect or partial income taxes, because the income of the individual is only indirectly reached and only partially assessed; while the new and more general taxes are income taxes in the proper sense of the term, and have the characteristics of a personal tax.

In a subsequent chapter we shall endeavor to ascertain what was meant by the term "direct tax" in the constitution of the United States, and whether it included this faculty taxthe only form of profits taxation then known in America. If there is any value in the above exposition, however, it is plain that the profits taxes of the American colonies were not direct income taxes, and that in so far as they are called income taxes at all, they must be classed as indirect income taxes. It is remarkable that in all the legal briefs and arguments presented to the Supreme Court in connection with the first income tax case in 1895 no reference was made to the statement of Oliver Wolcott, the Secretary of the Treasury, who in 1796 drew up the celebrated report on direct taxes in the states. Wolcott was thoroughly familiar with all the details of the laws, and in his enumeration of the various taxes imposed he described the faculty tax in the following words :

1 Cf. the discussion, supra, pages 12 et seq.

"4th. Taxes on the profits resulting from certain employments. This head will comprise a variety of taxes collected in certain of the states upon lawyers, physicians and other professions, upon merchants, traders and mechanics, and upon mills, furnaces and other manufactories. In some states these taxes are attempted to be proportioned to the gains and profits of individuals, in which cases they are both arbitrary and unequal; in other states the taxes are uniform, in which cases they are only unequal.

"It is presumed that taxes of this nature cannot be considered as of that description which the Constitution requires to be apportioned among the states. . . . It is impossible to render them exactly equal; that they are easy of collection, that their operation is indirect, and that they are capable of being rendered perfectly certain, are recommendations in their favor." 1

Oliver Wolcott clearly saw, as he expressed it, that the operation of these taxes was indirect, and, with a full knowledge of everything that had been said on the subject in every state, he came to the conclusion that they were not direct taxes in the contemplation of the constitution. The points which it is desired to emphasize here are that these faculty taxes were not income taxes at all; that they were simply an addendum to the early land taxes, originally levied on product; and that with the change of the taxes on product into taxes on property, these faculty taxes gradually fell into disuse. To call them income taxes is a misnomer.2 Income taxes in the mod. ern sense were levied for the first time in England in 1799, and it was at a considerably later period that they spread to other countries. To claim, then, that our colonial taxes on faculty were income taxes, betrays a confusion of thought and

1 American State Papers, Finance, i, p. 439.

2 Wolcott, in referring to the somewhat peculiar system in Delaware, described above, said, "taxes have been hitherto collected on the estimated annual income of the inhabitants." This naturally led the counsel in the income taxes of 1895 to speak of the Delaware system as the "income tax." But the same system is virtually in vogue to-day, and no one thinks of calling it an income tax.

an ignorance of economic distinctions. The faculty tax had its origin in the same motives that have led to the introduction of modern income taxes, but it was not an income tax; just as the French land and business taxes of to-day, levied on the produce of land and of industry respectively, are not income taxes. In fact, the entire modern movement on the continent can be understood, as we have learned in earlier chapters, only if interpreted as an attempt to levy income taxes in place of the produce taxes, among which are to be found imposts precisely analogous to the American colonial "faculty tax." The European movement is one to replace the "faculty taxes" by income taxes. If the faculty tax were an income tax, this movement would be unmeaning.

The distinction between taxes on product, on the one hand, and taxes on income, on the other, is one of fundamental importance in the science of finance. To disregard it can only produce confusion. To observe it will enable us to explain what is otherwise inexplicable in American economic history.

CHAPTER II

STATE INCOME TAXES

THE history of the taxation of incomes by the separate commonwealths of the American Union 1 may be divided into four periods: first, the survival and development of the old faculty tax of colonial times; second, the partial resort to income taxes as a result of the fiscal difficulties of the early forties; third, the utilization of the income tax especially by the southern commonwealths during the period of the Civil War; and fourth, the newer movement of the last two decades.

Let us study first the survival of the colonial faculty tax.

§ 1. The Survival of the Colonial Faculty Tax During the early decades of the nineteenth century not only did the faculty tax gradually fall into disuse, but with the increasing mobility of landed property, assessment according to selling instead of annual value or product, became universal. In Vermont the old custom continued for several decades. In the consolidated act of 1825 certain classes liable to the faculty tax were to be assessed according to their gains, but with both a minimum and a maximum limit. For instance, attorneys, physicians, and surgeons were listed at not less than ten dollars nor more than three hundred dollars,

1 The greater part of this chapter was printed as an article in the Political Science Quarterly, vol. x (1895), pp. 235 et seq. Eight years later a more detailed study was made by Delos O. Kinsman, The Income Tax in the Commonwealths of the United States, in the Publications of the American Economic Association, 3 series, vol. iv, no. 4, New York, 1903. Five years later the study was brought up to date, so far as graduated income taxes were concerned, in Seligman, Progressive Taxation, part i, sec. 15; and in the following year Kinsman completed his study in an article, "The Present Period of Income Tax Activity in the American States," in Quarterly Journal of Economics, vol. xxiii (1909), pp. 296 et seq.