or gross income " took the place of "all profit or increase." Exemption was also extended to mechanics so as to conform to the state system.1 In a few other states we find sporadic instances of survivals of the faculty tax. Thus, in Pennsylvania the law of 1782, which was discussed in the last chapter,2 survived for a time. In 1799 mechanics and manufacturers were again included in the tax, and in 1817 ministers and schoolmasters were also made taxable.4 The tax, however, was rarely enforced, and afforded virtually no revenue. Of its temporary resuscitation in the forties we shall speak on the next page. Except in the two states of Massachusetts and South Carolina, thus, the old custom of assessing profits as an adjunct to the property tax had totally disappeared by the middle of the century. Moreover, the assessment of real estate according to profits had almost everywhere been supplanted by assessment on selling value. The only exception was Delaware. In that state it is still provided that when houses or lands yield an annual rent, the owner shall be assessed for every twelve dollars of rent as for one hundred dollars capital; while in the case of ground rents eight dollars of rent are to be assessed as one hundred dollars of capital. In practice, however, this method is now confined to assessments for school purposes only, while for county and municipal purposes real estate is assessed, as elsewhere, on selling value. § 2. The Period of the Forties The second phase of income taxation in the American commonwealths began in the early forties. It is well known how the withdrawal of the federal government from the field of internal improvements and the distribution of the surplus 1 Quoted in State Amendment, Elfe, 3 Strobhart, p. 318. 2 Supra, p. 378. 8 Laws of the Commonwealth of Pennsylvania (Dallas), vol. vi, p. 397. Revised Statutes of Delaware, 1839, c. x, secs. 3 and 5, pp. 107-108. revenue in 1836 started the commonwealths on that wild career of extravagance which soon resulted in disaster. Many of the states found themselves involved in serious financial difficulties at the close of the thirties, and the matter of the assumption of the large state debts by Congress became a burning political question in the early forties. When this project came to naught, and the states found that they had to rely upon their own efforts in order to meet the interest charges on their swollen indebtedness, several of them. were confronted by the necessity of increasing their revenues, and a few turned to the project of some form of income taxation. The first state to resort to this expedient was Pennsylvania. We have seen in the last paragraph that the colonial faculty tax had lingered along, but that it had become virtually a dead letter. Now in 1840 it was partly resuscitated. The law of that year imposed a tax of one per cent upon all salaries, and of one mill upon each dollar received from every trade, occupation, or profession not already taxed by the commonwealth.1 The law of the following year increased the tax upon salaries to two per cent, and upon the profits from trade, occupation, or professions to one per cent, but also provided for an exemption of two hundred dollars on all incomes.2 In 1844 a slight change was made in the law, and in this form the tax lingered along for a few decades. In 1854 it was provided that the tax on trades, professions, and occupations, when levied for school purposes, should not be less than fifty cents, a figure increased in 1857 to one dollar.5 What the real proceeds of the tax were, it is impossible to state, as no separate accounts were kept. An indication is, however, afforded by a statement in the governor's message that in 1843, out of a total revenue from taxation of $910,000, the amount received from offices was $1386.6 So insignificant, 1 Laws of 1840, act no. 232, sec. 2. Laws of 1854, no. 610, sec. 30. 6 Governor's Message of January 1, 1844. 3 8 Laws of 1844, no. 318, sec. 24. 5 Laws of 1857, no. 667, sec. 2. in fact, had the tax become that it was allowed to disappear in 1871, when the law was repealed. What had been done in Pennsylvania was now attempted in some of the other states, especially in the South. In Maryland, where for many decades there had been no direct taxes at all upon property, a general assessment was imposed in 1841, in order to raise the required revenue. In the following year a law imposed a tax of two and one-half per cent upon salaries and emoluments, and all incomes and profits from professions, faculties, and employments.2 The law was like that of Pennsylvania in that it exempted salaries of judges and clergymen; but it differed in that it also exempted incomes derived from taxed property, as well as incomes under five hundred dollars. A progressive tax was imposed by another law on all ground rents, so arranged as to be equivalent to a tax of two and one-half per cent upon an annuity amounting to ten per cent. Later on, however, the rate of the tax on ground rents was made the same as that on other incomes, except that five hundred dollars was not exempt. An interesting feature of this law was the provision requiring taxes upon official and other salaries to be paid by the employer or by the state respectively. It is not worth while, however, to go into the administrative features of the law, because the whole system worked most unsatisfactorily. The governor, in his message of 1844, stated that there was a deplorable remissness in the execution of the tax laws; "some of the counties have utterly, and others partially, disregarded them." He stated that the revenues could "not be materially increased by the income tax heretofore partially collected." A few years later, according to the state treasurer's report of 1849, no income tax at all seems to have been collected, and in 1850 the law was virtually repealed by an act which provided that "the collectors should not be held liable for the recovery of the tax if they proved it not to have 4 1 Report of the Maryland Tax Commission to the General Assembly. Balti more, 1888, pp. cxxxviii, cxliii. 2 Laws of 1841-1842, c. 325. 8 Laws of 1841-1842, c. 329. 4 Quoted in Kinsman, op. cit., p. 34. been collected."1 We are told in the proceedings of the state constitutional convention that the law was repealed “because of its inquisitorial character, its impertinent scrutiny into the affairs of private life, and of other difficulties which it had to encounter, and the frauds and impositions it caused, and above all, its utter failure to produce a sufficient sum."2 While the resuscitation of the income tax in Pennsylvania and its introduction in Maryland in the early forties were due primarily to fiscal needs, there was a group of southern states where we find at this time a development of some form of income taxation, partly indeed as a result of fiscal exigencies, but partly also as a concession to the demand for more equal taxation. As is well known, the southern states, not only in colonial times, but in the early part of the nineteenth century, had a system of taxation which differed materially from that found in the rest of the country.3 At first, it will be remembered, poll taxes and customs played a much larger rôle than in the middle or northern colonies. Then, when a system of land taxes developed, they were of a rather primitive kind; and although we occasionally find faculty taxes in some of the southern states, there was as a rule no development of the general property tax as in the remainder of the country. When, now, in the early forties, the cotton factors, the merchants, and the professional classes began to assume a distinct importance side by side with the large plantation owners, the movement set in to draw them into the meshes of the taxgatherer. In some places this assumed the form of a system of license taxes, which has continued in most of the southern states down to the present day. In a few cases it took the form of the attempt to introduce an income tax. This was the case in Virginia, in North Carolina, and in Alabama. In Virginia the taxation of incomes began in 1843. In 1 Laws of 1849, c. 294. 2 Debates and Proceedings of the Maryland Reform Convention, to revise the State Constitution, vol. iii, p. 227. 3 Seligman, Essays in Taxation, chapter 1. 4 Supra, p. 379. that year a law was enacted imposing what were technically known as a tax on incomes," a "tax on fees," and a "tax on interest." The tax on incomes was a tax of one per cent on all incomes over four hundred dollars "in consideration of the discharge of any office or employment in the service of the state, or of any corporation, company, firm or person." The income of ministers of the gospel and incomes from labor in mechanic arts, trades, handicrafts or manufactures were exempt. The "tax on fees," at the same rate, was imposed on attorneys, physicians, dentists, and "all other persons in respect to their fees above four hundred dollars, derived from any office, calling or profession." The "tax on interest" was at the rate of two and one-half per cent on all "interest or profit, whether arising from money loaned, or from bonds, notes or other securities for money or from bonds or certificates of debt of states or public corporations." 1 In other words, this was a tax on salaries and professional income, and a partial tax on funded income, with separate rates for temporary and for permanent income. In 1846 the "tax on interest" was reduced and made applicable only to profits over six hundred dollars. In 1853 that part of the tax which applied to income from public securities was raised to three and onehalf per cent. But by this law the tax on "incomes" and "fees" was graduated. Incomes below two hundred dollars were exempt; on incomes from two hundred dollars to two hundred and fifty dollars the rate was one-quarter of one per cent; and it rose by regular increments to one per cent on incomes of over one thousand dollars. In 1856 and 1859 some minor changes were made in the law, but it was not until the Civil War period that it was converted into a general income tax. That period will be treated in the next section. In North Carolina the income tax dates from 1849. In that year a law was passed with the following preamble: "Whereas there are many wealthy citizens of this state who 1 Law of March 27, 1843; Acts 1842-1843, pp. 6-8. |