The principle of collection at source has been applied only to incomes derived from corporations. As the corporation pays an income tax, the individual stockholder is not taxable on his dividend; and since corporations also include the interest on bonds, the individual bondholders are likewise exempt.

The constitutionality of the income tax law was attacked soon after its passage, but the Wisconsin court upheld the law in every detail.1 In the first year, 1912, the income assessed amounted to $100,845,863 and the total tax was $3,501,161, of which corporations paid $2,392,454. This remarkable result was due very largely to the non-partisan administrative methods introduced by the State Tax Commission.

The first year's operation of the law shows how much better results can be obtained by a system of centralized administration than by the ordinary local methods to which we have been accustomed in the United States. At the same time, while the Wisconsin income tax has been for this reason far more satisfactory than any of the other existing state income taxes, it is still open to doubt whether a state income tax works much better than a state property tax.

It is difficult to compare a property tax to an income tax, because of the lack of correlation. If we knew with accuracy how much property there was in a given community and if all the income in that community were derived from that property, a more or less exact computation could be made. But there are three difficulties in the comparison: First, not all income is derived from property, and especially in modern times there are large professional and even business incomes more or less independent of property; secondly, not all property incomes received within the state are derived from property within the state, and vice versa; thirdly, not all incomes derived from property are taxed, because of the exemptions which, especially in the United States, include a great majority of the citizens and which in part affect the incomes that are derived from property. It is for these reasons that 1 Income Tax Cases, 148 Wis. 456.

only a vague comparison can be made between the two forms of taxation. We accordingly relegate to a footnote what we conceive to be the best available proof of the actual inferiority of the income tax.1

While exact comparison is therefore impossible, it is largely for the last of the three reasons just stated that on general principles we should expect an income tax to be less lucrative

1 During the period from 1900–10, when virtually all property was nominally taxable in Wisconsin, the State Tax Commission made an annual computation of the true value of the property that was assessed by the local officers. During this decade the per cent of the local assessment to true values, as ascertained by the state, varied from about 52% to 78%; that is, the local assessors were able to find from one-half to four-fifths, or, roughly speaking, about two-thirds of actual property values.

What now is the situation in the case of income assessments? We are informed by the State Tax Commission that the true value of assessed property in Wisconsin for 1913 is $ 2,998,187,705, or, in round numbers, three billions. This does not include the property of the railroads and other public utilities which are, however, not subject to the income tax; nor does this figure include the personal property which was exempted when the income tax was introduced and which was estimated by the state board in 1911 at 234 millions (moneys and credits, 151 millions; farm machinery, etc., 74 millions; watches, bicycles, etc., 10 millions). In the two years that have elapsed the figures would naturally be greater. On the other hand, some allowance must be made for indebtedness. If we conservatively estimate the true value of exempt personal property as, say, 200 millions, we would have a total true value of net taxable property of a little less than three and a quarter billions. At 6% the income from this would be over 190 millions. Yet the assessed income as reported by the State Commission as being liable to the income tax was, as we have seen, only 100 millions. The conclusion would be that while the general property tax succeeded in reaching two-thirds of the actual property, the general income tax succeeds in reaching only slightly more than one-half of the actual income.

Of course there are two possible criticisms to be made in the above computation. In the first place, we have assumed the income from property to be 6%. If the real income is somewhat less than that, the figures would need corresponding revision; but 6% does not seem to be too high. Secondly, and more important, we have no means of ascertaining how much is the total amount of income which is exempted from taxation and a part of which, at all events, represents income from property. It must be remembered, however, that there are many incomes, such as all labor incomes above the low exempt minimum, as well as all professional incomes, that are included in the list of taxable income, although they do not represent property at all. It is, therefore, not wholly illicit to estimate that the deductions on one hand will be balanced, in part at least, by the additions on the other.

than a property tax. If property yields 6 %, a tax of one-half of one per cent would be equivalent to an income tax of about 8%. A property tax would probably yield far more than a corresponding income tax, if both were assessed according to the same administrative principles, chiefly for the reason that in a property tax there are in general no exemptions to speak of, while in an income tax there are ordinarily large exemptions, designed primarily to free the small incomes from personal exertion but affecting also the smaller incomes from property. In the one case all property is taxed; in the other case the income from only a part of the property is taxed.

It is for this reason that the Wisconsin income tax, although imposed on incomes from all sources, was designed as a substitute for the tax on certain classes of personalty only. In fact the Wisconsin income tax, far from raising as much revenue as did the general property tax at a corresponding rate, has not been able, even with its admirable administration, to raise in many counties as much as the former discredited personal property tax. In not a few of the country districts the falling off is marked; while it is only in the larger towns where the tax on intangible personalty has been more or less farcical that the income tax yields as much. It is this consideration which has led the State Tax Commission to stand sponsor for a scheme of modified home rule in taxation, whereby it will be left to the localities themselves to elect between the income tax or the personal property tax.

This discloses also the unsatisfactory nature, even in theory and apart from administrative considerations, of an attempt by a state to levy a general income tax as a substitute for a personal property tax. We do not wish to deny - we have even emphasized the fact that income is often to be preferred to property as a basis of taxation. In so far as corporations in general are concerned we were perhaps the first to call attention to the advantages of net receipts over property as a basis of taxation.2 Nor do we wish to deny that in dealing with a particular class or classes of enterprise, like mines,

1 Cf. supra, p. 15. 2 Seligman, Essays in Taxation, 8 ed., 1913, p. 245.

forests, and certain businesses exposed to sudden mutations of business life, a state tax on yield or produce is preferable to a state tax on property. What may be fairly criticized in the Wisconsin scheme is the idea that a general income tax to include personal as well as corporate income is to be preferred either to a general property tax or to a tax on particular classes of property. In Wisconsin, for instance, if A has invested $100,000 in land, he has to pay both a property tax and an income tax, while if B has invested a like sum in certain classes of personalty, he pays only the income tax.

While a general income tax is, for the reasons mentioned above, not apt to work better than a general property tax, there are additional reasons which militate against the success of a state income tax. These reasons are connected with the impossibility of localizing income and the difficulty of ascertaining business income derived from interstate commerce or business. It may be contended that the difficulties are not greater than in the property tax; but in this there is small comfort, for it is in no small measure due to precisely this reason that the property tax is in general such a failure. It must, moreover, be remembered that Wisconsin has greatly simplified the matter. In the first place, the law excludes from the income tax all railroads and other public utilities, where the difficulties of interstate taxation are apt to be the greatest. In the second place the law abandons the attempt to tax the income of any business except that which is actually transacted within the state or derived from property located within the state. Is it not clear that in the more industrial and commercial states, the homes of large business ventures doing a great business outside of the state, such a method would be sadly lacking? So that even at the very best a state income tax would not be apt to succeed unless it was controlled and regulated by the federal government, either in the formulation of the principles to be adopted or in the choice of the administrative methods to be employed; for in no other way can the incomes derived from interstate business be reached.

If there is any lesson to be drawn from the short experience of Wisconsin with the income tax it is, that while much can be accomplished by improved and centralized administrative methods, some form of federal regulation is necessary to secure the best results.

§ 6. Conclusion

In the face of the contentions reproduced in the previous sections, the prospects for a state income tax in general seem rather doubtful. In only one state of the union--- Wisconsin - has the uniformly disheartening experience of the American commonwealths with an income tax been interrupted, and as to Wisconsin it must be remembered not only that the conditions are exceptional but that the results are only in part successful. The conditions in Wisconsin are exceptional, first, because the prevalence of "the Wisconsin idea" made it comparatively easy to bring about a thoroughly centralized and expert administration; secondly, because Wisconsin is not a predominantly industrial state; and thirdly, because the law excludes those corporations where the greatest difficulty would ordinarily be encountered in administering a state income tax. The results, again, are even then only partly successful, in that a general income tax in Wisconsin has thus far proven itself unable to take the place, not of a general property tax, but, in not a few counties, even of a tax on special classes of personal property.

The history of Great Britain has shown us the fatuity of a local income tax; the experience of Switzerland has shown us1 the difficulties connected with a state income tax and has disclosed the fact that in certain respects at least a personal income tax is more difficult of administration than a personal property tax. Furthermore, to quote the example of the German state income taxes in support of an American state income tax is, as we have pointed out above,2 beside the mark, for in Germany there exists an imperial law governing the whole subject of interstate double taxation which it is not very likely 1 Cf. supra, p. 362. Supra, p. 270.

2