very much to favor the idea of a tax upon incomes for the reason that, taking both measures together, I believe the burdens will be more equalized on all classes of the community, more especially on those who are able to bear them." On July 29 Simmons reverted to the matter. Referring to the rule of the British Parliament, formed under some "mysterious" and "inexplicable" influence to lay "first imposts, then excises, then land taxes, and then income taxes," he declared: "I am perfectly satisfied, that there is no propriety in our putting a land tax on. The very reasons that induced England to put a land tax on should induce us to put on an income tax." The committee accordingly suggested a five-per-cent tax on all incomes over one thousand dollars, with a lower rate upon incomes from government securities and a higher rate on the income of citizens residing abroad.

2

Senator Clark referred to the ambiguity in the amendment because of the failure to explain whether income meant gross or net income; and when objection was taken to certain other defects, Simmons stated that the desire of the committee was simply to give the government the power to levy the tax, but that all the details should be worked out by the Secretary of the Treasury. The Senate accordingly adopted the committee's amendment, and after the appointment of a committee of conference, the law was enacted. The direct-tax section was included as it had been passed by the House, and the income tax sections provided for a tax of three per cent on the excess over eight hundred dollars of the "annual income of every person residing in the United States, whether such income is derived from any kind of property or from any profession, trade, employment or vocation carried on in the United States or elsewhere, or from any source whatever." In the case of citizens residing abroad the rate was five per cent, and in the case of income from securities one and one-half per cent.4

From the above survey two conclusions stand out clearly.

1 Op. cit., p. 255.

2 Op. cit., p. 314.

3 Op. cit., p. 321.

4 Act of August 5, 1861, c. xlv, sec. 49.

In the first place, the income tax was due to the dissatisfaction expressed with the scheme for a tax on real estate only; and in the second place, every one agreed that a direct tax in the constitutional sense denoted only a tax on real estate and slaves and a poll tax, and that the income tax was to be put in the category of indirect taxes. It was for this reason that both houses refused to insert in the direct-tax law any provision taxing personalty; and that a separate paragraph was introduced in order to include the income tax among the duties and excises levied by the internal revenue law. In fact, it now became the custom to call the tax "the income duty." It was so characterized by Morrill in the House, in 1862,1 and the successive laws from 1862 on specifically describe the tax as an income duty. The significance of this will appear when we come in a later chapter to discuss its constitutionality.

§2. The Act of 1862

As a matter of fact, the act of 1861 was never put in force. The law had provided that the tax should be payable on June 30, 1862, but in the meantime Congress was to reassemble. In his annual report in December, 1861, Secretary Chase referred to the "prudent forecast which induced Congress to postpone to another year the necessity of steps for the practical enforcement of the law," and expressed considerable doubt as to the wisdom of so enforcing it. "The Secretary is acquainted with no statistics which afford the means of a satisfactory estimate of the amount likely to be realized from the income tax. Considering, however, how large a proportion of incomes, after the deductions sanctioned by law, will fall within the exemption limit of eight hundred dollars a year; and considering also what numerous questions will certainly perplex its assessment and collection, he respectfully submits whether the probable revenue affords a sufficient reason for putting in operation, at great cost, the machinery of the act, 1 The Congressional Globe, 37th Congress, 2d Session. Washington, 1862 p. 1196.

with a view, should the states assume the direct tax, to the collection of the income tax alone."1

With his proverbial timidity he asked for only fifty millions to be raised from internal revenue, and did not include an income tax. But the committee of ways and means, who had a far better comprehension of the necessities of the situation, reported the following March an internal-revenue bill, which was not only to yield three times as much as Secretary Chase had asked for, but which also included an income tax. Morrill, as chairman of the committee, in reporting the income-tax bill, said: "The income duty is one, perhaps, of the least defensible that, on the whole, the Committee concluded to retain or report. The objection to it is that nearly all persons will have been already once taxed upon the sources from which their income has been derived. There are few persons in this country who have any fixed incomes for a term of years. . . . The income tax is an inquisitorial one at best; but, upon looking into the considerable class of state officers, and the many thousands who are employed on a fixed salary, most of whom would not contribute a penny unless called upon through this tax, it has been thought best not to wholly abandon it. Ought not men, too, with large incomes, to pay more in proportion to what they have than those with limited means, who live by the work of their own hands, or that of their families?" 2

The introduction of this bill led to some discussion, but almost entirely on minor points, for all realized that the need of revenue was imperative. On April 3 the question arose as to whether income meant net income, and whether profits and gains were equivalent to income. After the rejection of amendments to provide for the exemption of bondholders and of real estate, because of the existence of the direct tax, the bill went through without difficulty, and was introduced by

1 Report of the Secretary of the Treasury for the year 1861. Washington, 1861, P. 15.

2 Congressional Globe, 37th Congress, 2d Session, 1862, p. 1196.

8 Op. cit., pp. 1531-1532.

Fessenden in the Senate on April 10, the discussion beginning there in May. The Senate bill differed from the House bill in that it retained the three-per-cent rate only on incomes not exceeding ten thousand dollars, providing a five-per-cent rate on incomes from ten to fifteen thousand dollars, and a sevenand-one-half-per-cent rate on incomes over fifteen thousand dollars. In all cases the income was to be assessed only on the excess over six hundred dollars. These higher rates were due to the fact that the Senate had voted to strike out the provision imposing a direct tax. Howe objected, but in vain, to the lower rate on government bonds, and a similar fate met his amendment to levy an income tax to yield at least fifty million dollars.1 When the bill came out of conference, the direct tax was not abandoned, but its assessment was suspended for two years; while the principle of graduation which had been introduced into the Senate bill was retained, although in a modified form.

The law of 1862 imposed a comprehensive code of internal revenue taxes, of which the income duty formed only a part. In addition to a series of taxes on the gross receipts of certain specified corporations, all railroads were required to withhold and to pay over to the government as a tax three per cent on the interest of their bonds and the dividends of their stock; and all banks, trust companies, savings institutions, and insurance companies were to pay a duty of three per cent on dividends, and on assessments added to their surplus or contingent funds. A tax on salaries of government officials was imposed at the rate of three per cent on incomes over six hundred dollars, and the paymasters and disbursing officers of the government were required to withhold the duty at the time of the payment of the salary or pay. The "income duty" proper consisted of a tax of three per cent upon “the annual gains, profits or incomes of any person residing in the United States, whether derived from any kind of property, rents, interest, dividends, salaries or from any profession, trade,

1 Op. cit., pp. 2449, 2574.

2 Act of July 1, 1862, chap. cxix, secs. 81-82.

3 Sec. 86.

4 Secs. 89-93.

employment or vocation carried on in the United States or elsewhere, or from any source whatever," to the extent that the income exceeded six hundred dollars. If the income exceeded ten thousand dollars, the rate was to be five per cent. In the case of citizens residing abroad, the rate was also five per cent, while in the case of income from government bonds the rate was one and one-half per cent. In estimating the annual gains, profits, or income subject to duty, deductions were allowed for all other national, state, and local taxes assessed upon the property or the source of income, as well as for all incomes taxable under the other sections of the law. The act also provided that there should be deducted "all gains, profits or income derived from advertisements, or on any articles manufactured, upon which specific stamp and ad valorem duties shall have been directly assessed or paid." Strictly speaking, this badly-drawn provision would have meant a complete exemption for all business incomes, for inasmuch as the tax on manufactured articles applied to nearly all commodities, business income might be interpreted as meaning income derived from dealing in such commodities. It does not appear, however, that advantage was taken of this clause, and all danger of its application was removed by an act of the next year, which removed from the list of deductions the words " or on any articles manufactured." 1 The same amendatory act also provided that the amount actually paid by any person for the rent of the dwelling-house, or estate on which he resided, should be deducted from his income.

The tax was to be levied for three years, beginning July, 1863. Every one was required to make a return of his income on a list or schedule, to the assessor or assistant assessor; and in case of neglect or refusal, the latter was to assess the income at his discretion. If satisfied that the return was understated, he was privileged to increase the amount of the list or return; but if any one declared under oath or affirmation that his income did not amount to six hundred dollars, he was to be exempt.

1 Act of March 3, 1863, c. lxxiv, sec. 1,