The law was put into force at the period appointed, but it took some time for the machinery to get into working order. During the first two months of the fiscal year of 1863-1864, for instance, the yield amounted to only $172,770 on incomes below $10,000; to $277,461 on incomes above $10,000; to $1872 on incomes from abroad; and to $3637 on interest on bonds.1 The commissioner of internal revenue, in his report of December, 1863, stated that "the present tax laws on the whole have been not merely endured, but welcomed by the people in a manner it is believed elsewhere unparalleled." He called attention to the difficulties connected with the so-called dividends of life-insurance companies, and recommended that the income tax be not levied upon them. He suggested only a few changes: "This tax," he tells us, "though as fair in theory as any that can be laid, has been found by the experience of other countries to be incumbered with practical difficulties in the assessment which have deprived it of all claims to public favor. The people of this country have accepted it with cheerfulness, to meet a temporary exigency, and it has excited no serious complaint in its administration. In order that it may not be felt to be inquisitorial in its character, the instructions issued by this office required that the returns of income shall not be open to the inspection of others than officers of revenue. Some doubt having been entertained whether a proper construction of the law sustains the instructions, I recommend that the doubt be removed by express enactment." The commissioner also recommended that the provision allowing a deduction for rent paid for dwelling-houses be stricken from the law, and that owners of such houses, residing in them, be charged with their rental value as income. Furthermore, he recommended a decided increase in the scale of graduation, declaring himself in favor of taxing incomes from $5000 to $10,000 at four per cent, from $10,000 to $20,000 at five per

1 Report of the Commissioner of Internal Revenue for the Year ending June 30, 1863. Washington, 1864, pp. 183–184.

2 Op. cit., p. 3.

3 Cp. cit., p. 11.

cent, and incomes exceeding $20,000 at five and one-half per

cent.

§ 3. The Act of 1864

As the war progressed, the need of more revenue was apparent, and in the spring of 1864 Congress prepared a far more elaborate and comprehensive code of taxation, which finally became law on June 30. This law included some important changes in the income-tax provisions, which were preceded by an interesting discussion. A large part of this discussion turned on the question of graduation.

The law of 1862, it will be remembered, had imposed two rates, namely, three per cent up to ten thousand dollars, and five per cent above ten thousand dollars. The committee of ways and means, in introducing the bill for a new income tax in April, 1864, had suggested a proportional tax of five per cent. On April 26, Frank, following the recommendations of the commissioner of internal revenue, recommended a progressive scale of five per cent up to ten thousand dollars, seven and one-half per cent up to twenty-five thousand dollars, and ten per cent over twenty-five thousand dollars. He put it on the ground of increased revenue, and claimed that the system of graduation was not repugnant to the uniformity clause of the Constitution. The principle was defended, among others, by Grinnell and Spalding, not so much on the ground of revenue as of justice, It was opposed, however, by Morrill and Stevens. The latter said: "It seems to me that it is a strange way to punish men because they are rich," and declared that the committee were of the opinion that the principle was a vicious one. I think the principle of taxing a man who is worth twenty thousand dollars more in proportion to his wealth is an unjust one. . . . If he is worth over a million dollars, we might as well provide that the government shall take the surplus."2 Morrill stated that no one doubted the constitutional power of the government

1 Congressional Globe, 38th Congress, 1st Session. Washington, 1864, p. 1876. Op. cit., p. 1876.

2

either to levy an income tax or to provide for a progressive feature. But, he said, "experience shows that people who are taxed unequally on their incomes regard themselves as being unjustly treated, and seek all manner of ways and means to evade it. This inequality is in fact no less than a confiscation of property, because one man happens to have a little more money than another.” 1

The House, however, did not agree with the committee, and adopted a graduated scheme. Two days later Mr. Morrill reverted to the subject in a rather violent diatribe against the "spirit of agrarianism," predicting that the chief result of this "differential system" would be to lead American citizens to expatriate themselves. "On all other subjects we tax every man alike. We do not tax the manufacturer or producer of merchandise a greater percentage because he manufactures or produces more than his neighbor. . . . This provision goes upon the principle of taxing a man more because he is richer than another. The very theory of our institutions is entire equality; that we make no distinction between the rich man and the poor man. The man of moderate means is just as good as the man of more means, but our theory of government does not admit that he is better, and I regard it as an evidence of the spirit of agrarianism to present a law here which shall make any such distinction. It is seizing the property of men for the crime of having too much. . . . We have too few rich men in the country to make a distinction that may induce them to expatriate themselves. . . . Let us be just. . . . In this proposition there seems to me to be something unjust." 2

When the bill reached the Senate, the finance committee slightly modified the graduated scheme, reducing the upper limit from ten per cent on incomes over twenty-five thousand dollars to seven and one-half per cent on incomes over ten thousand dollars. Fessenden, in reporting the bill, stated that there had been considerable discussion in the committee

1 Congressional Globe, 38th Congress, 1st Session. Washington, 1864, p. 1876. 2 Op. cit., p. 1940.

...

and that, "for myself individually, my own opinion is not exceedingly well fixed on this point. The income tax at best. is a discrimination. . . . I have been in favor, from the beginning, of making some discrimination as against large incomes." He declared himself to be in accord with "the principle that those having very large incomes can afford, and perhaps better afford than those who have smaller ones, to pay a tax, and a larger tax, the discriminating tax if you please." But he declared that "there is and ought to be a sort of conservative sentiment to protect property," and "that no odious and ungenerous discrimination" should be made.1 Sumner, although undecided as to whether to prefer the Senate to the House proposition, declared himself not ready to oppose the principle of graduation in general, and read a long quotation from Say in favor of progressive taxation.2 Sherman also felt doubtful about the whole. matter, while Foote and Johnson took strong ground against it. Davis, however, declared that the principle of graduation was nothing but a "recognition of the idea that taxes shall be paid according to the ability of persons to pay." The result was that the amendment was adopted.

A few days later Grimes introduced another amendment, making incomes over fifteen thousand dollars taxable at ten per cent. Referring to Sumner's quotation from Say, he stated that he was simply proposing "to carry the principle out to a little greater extent, and cause those men who have large fortunes and derive therefrom large incomes, to pay a little amount in addition to the rate paid by the small men who exhaust nearly all of this income in the support of their families. If there is any class of men," he continued, "that the distinction ought to be made in favor of and not against, it is the very class of men we have discriminated against, and now we reach a class of men who have a surplus over and above the money that is necessary to meet their family expenses, and it is that class that I propose to reach."4 The

Senate again agreed to this proposition. When the bill, however, emerged from conference, the ten per cent rate was made to begin at ten thousand dollars, a fact which shows that the feeling in favor of a higher rate on the larger incomes was constantly growing.

A few other provisions of the bill were also discussed. According to the law of 1863, it will be remembered that the amount paid for house rent was deducted from income. The House bill of 1864 cut down the deduction for house rent to two hundred dollars, but introduced the provision that if a man lived in his own house, the rental value up to the extent of two hundred dollars should also be deducted. In other words, the House bill introduced the principle that income was to include not alone money income, but also benefit or psychic income. When it reached the Senate, however, the committee of finance, as Fessenden explained, "came to the conclusion that it was impossible to carry out that provision without making a very odious discrimination especially between town and country." He thought "the safer and better principle would be to allow every man the rental value of his house, whether he owned it himself or rented it.2" Another interesting discussion arose over the question of profits on sales. The commissioner of internal revenue had decided that if a man bought a piece of land and sold it after the expiration of a given period, the difference between the cost and the selling price was to be returned as income within the year of sale. Fessenden pointed out that this was erroneous, because the difference in the selling price was

1 "Inasmuch," he continued, "as it depended upon the rent, it would have no sort of connection with the cost of men's houses originally, but merely upon the rental value, and the rental value would depend, in a very great degree, upon the place where it happened to be located. Thus it would be impossible to make it equal in any way. It would impose a burden upon certain men who happened to live in a city, from which men living in the country where rents are low, comparatively nothing, would be exempted entirely."— Op. cit., p. 2517.

2 Senator Fessenden, however, was mistaken in thinking that this was the provision of the old law. As has just been explained, the old law applied only to the actual rent paid, not to the rental value.