least that the income allowed to be deducted for rental should not in any case be allowed to exceed $300. As the law now stands, rentals of an excessive and unreasonable amount are also deducted." The gain to the revenue in the state of New York alone, from the repeal of that part of the act authorizing the deduction of rentals would, in the opinion of the revenue officials, amount to over two millions of dollars per annum.1 Congress, however, refused to follow their advice. § 4. The Aftermath of the War With the close of the war the question arose as to the permanence of the income tax. For the time being, indeed, the revenue was still sorely needed, so that there could be no question of immediate change. On April 25, 1866, Morrill reported a bill from the committee on ways and means, and on May 7 explained the proposal. The committee, he said, "have prepared some modifications of the income law, but have not reached the conclusion, while the industrial employments must remain to a considerable extent heavily burdened, that it can yet be wholly dispensed with."2 Morrill called attention to the fact that, according to the terms of the original law, the act was to expire in 1870, "and thus a temporary character was put upon its face." That it had been a fiscal success, he thought, could not be doubted. After referring to the large revenues derived from the tax, and to the special income tax levied in 1864, he said: "I point to these facts not only as a broad evidence of their patriotism and wealth, but as a proud evidence of their strict integrity of character. Strong as the temptation might be for evasive returns, sore as they might be in consequence of the swift pursuit and the continuous exactions of the tax gatherer, they even paid more in 1863 upon the second call than on the first. Their country was in need, and even the greed for gain could not tempt 1 House Executive Documents, First Session, 39th Congress, no. 17, vol. vii. 2 Congressional Globe, 39th Congress, First Session. Washington, 1866, p. 2437. the American people to defraud their government. . . . .The law left it almost to the conscience of each man as to how much he should pay, and all seemed to vie with each other as to who should pay the most. I question whether any people ever paid a tax more honestly and accurately, and I question still more whether any free people ever imposed upon themselves, through their chosen representatives, taxes so thick and fast." ... If, however, the income tax were to be contemplated as · a part of the permanent policy of the country, many changes, he thought, would be needed. He declared the objections to be as follows: First, the law is "inquisitorial of necessity in its character, and Americans, like people elsewhere, though not averse to a knowledge of the secrets of others, are quite unwilling to disclose their own. Among commercial men such disclosures may be disastrous. . . . The temptation to make under-statements, to lend to these statements the sanction of an oath, tends to sap and mine public morals, until men begin to excuse themselves for their own wrong-doing, because, it being so common, that to do otherwise would be to fail in average smartness." Furthermore, "when we take into consideration the sources from which income is derived, the habitudes of the different persons who pay the tax, the difficulty of apportioning it so that each will have paid in just proportion to every other person, leaving each relatively in the same conditions, the perplexities become almost insurmountable." In accordance with these principles, Morrill declared that it was desirable to lessen the weight of the income tax, and he proposed that the exemption be increased to $1000, and that the rate be made uniform at five per cent, for "in a republican form of government the true theory is to make no distinctions as to persons in the rates of taxation. Recognizing no class for special favors, we ought not to create a class for special burdens." 1 The proposition led to some discussion. Raymond declared his surprise that the chairman of the committee of ways and 1 Op. cit., p. 2437. 1 means should have found it necessary to apologize for the continuance of the tax. He stated that "income is the first thing, so far as industry and the products of industry are concerned, which should be taxed." He also objected to the abandonment of the progressive principle. In a passage in which he displayed a slight acquaintance with foreign scientific literature, he stated: "I know that theoretical writers insist that it is unjust and impolitic to impose a graduated income tax; that every man should pay the same percentage on his income, whatever its amount may be." But he nevertheless upheld the principle on the ground of taxing "superfluities instead of luxuries." When the matter was again taken up a few weeks later, on May 23, Pike objected both to the proportional rate and to the proposed increase of exemption, suggesting a continuance of the progressive rate, and stating that "no one of those upon whom the high rate of income tax was charged had asked to be relieved from his burden," while on the other hand "petitions from struggling manufacturers were coming from all quarters of the land, asking for relief from the other taxes." 2 Ross, of Illinois, suggested a far higher scale of progression, rising to twenty-five per cent on incomes over sixty thousand dollars. Morrill opposed this vehemently, stating that the proposition could "only be defended on the same ground that the highwayman defends his acts." Spalding, however, who proposed a somewhat modified rate, objected to this characterization of the progressive principle by Morrill as "highway robbery," and after an argument which based the defence of graduation on the principle of ability to pay, stated, “I cannot see upon what ground, in morals or in ethics, or in logic, the argument of my learned friend from Vermont has a resting place." Sloane also stated that "if a perfectly just system of taxation could be devised, every man would be taxed just in proportion to his ability to pay the tax; that is, in proportion to the excess which he has left after meeting all the legitimate demands upon him."3 The House seemed to be 1 Op. cit., p. 2440. 8 Op. cit., p. 2784. 2 Op. cit., p. 2783. convinced by the arguments in favor of graduation and accepted Pike's amendment for a duty of five per cent on incomes up to five thousand dollars and ten per cent on the surplus. Several other points were touched upon in the discussion. Nicholson dwelt upon the injustice of deducting six hundred dollars or one thousand dollars from ordinary incomes, but not where the tax was stopped at its source and paid by the corporations. Morrill, however, pointed out that the difficulties of applying the principle in that case "are almost insuperable."1 Wilson called attention to the fact that the commissioner of internal revenue had decided that no loss should be deducted from the income which was not incurred in some business out of which the property derived a profit, and where the loss incurred overbalanced the amount of profit. He suggested that all losses actually sustained in any way should be deducted, and his amendment was agreed to.2 Hale referred to the abuses on the part of the assistant assessors in making their corrected returns of income, and imposing the high penalty whenever they consider the returns fraudulent. He contended that this ought never to be done without a preliminary hearing accorded to the taxpaper.3 Garfield called attention to one feature of the tax "which has made it very odious in many parts of the country," namely, the publicity of the returns. He suggested that, while the list of incomes should be open to the inspection of the public, it should not be furnished for publication. Morrill defended the amendment, although he conceded that "there is no question that the publication of these lists has a tendency to increase the revenue." 4 When the bill came up in the Senate on June 21, Fessenden reported for the committee that the changes proposed by the House could not be put into operation until another year, and since Congress would have a later opportunity to consider some of these important criticisms, he proposed that 1 Op. cit., p. 2786. 8 Op. cit., p. 2788. 4 Op. cit., p. 2789. no material change be made for the present.1 The Senate adopted this suggestion, which was concurred in by the House, and thus the new act introduced only a few amendments. The tax which, it will be remembered, had hitherto been applicable only to all persons residing in the United States and to all citizens residing abroad, was now extended so as to include the income from all business, trade, and professions carried on in the United States by persons residing without the United States not citizens thereof.2 The income tax, moreover, was now declared payable every year "until and including the year 1870 and no longer." The scale of the salaries tax was also altered so as to conform to that of the income tax proper, being made respectively five per cent on the excess over six hundred dollars, and ten per cent on the excess over five thousand dollars. In December, 1866, the commissioner of internal revenue made a report on the administration of the tax, and for the first time stated the number of taxpayers and the amount of revenue in each class of the progressive tax. He then proceeded to advert to the amendment suggested by the House in the discussion of 1866, calling attention especially to the question of exemption. He declared that the purpose of the law originally had been to exempt so much of one's income as was demanded by his actual necessities; and he pointed out that the raising of the minimum of existence from six hundred to one thousand dollars was advisable on the ground that "since then the internal tax upon commodities, the increase of customs duty, and the depreciation of the currency have wrought an almost universal advance in prices." 3 He characterized the provision governing the profits and losses from real estate as a quite “arbitrary rule,” and stated that "there seems to be little reason for its existence." He closed his discussion by calling attention to the fact that the large revenue of the year just ending, including 1 Op. cit., p. 3221. 2 Act of July 13, 1866, c. clxxxiv, sec. 9. 3 Report of the Commissioner of Internal Revenue for the Year ending June 30, 1866. Washington, 1866, p. xxiii, |