the good returns from the income tax, was "raised with probably less pressure upon the people than that of smaller amounts in previous years. Their enterprise and spirit of accumulation have prevented the depression of business which ordinarily attends heavy taxation." The chief reason, however, which he did not mention in this connection, was the one referred to above, namely, the prosperity connected with the general rise in prices.

In the winter of 1866-1867, the subject was again considered, and after a short discussion most of the amendments suggested in 1866 were adopted. In one respect, however, a change was made. Congress now decided, largely for the reason that the revenue was no longer needed, to abandon the progressive principle. The new law of 18671 imposed a tax of five per cent on all incomes over one thousand dollars. Income was declared to include the profits realized from the sales of real estate purchased within the year, or within two years previous. The amount of all premiums on gold and coupons was now also declared to be taxable as income, although the law did not state whether such premium was to be taxed only if realized. A slight change was made in the statement as to the produce of the farmer. Whereas the earlier laws had spoken of the "amount of live stock," etc., as being taxable income, the new law put it as "the amount of sales of live stock," etc. Deductions were allowed for all losses actually sustained during the year, although the provision was inserted that there should not be included in the deduction any "estimated depreciation of values and losses within the year on sales of real estate purchased two years previous."

With reference to the administrative features, the penalty for delay in payment was changed from ten per cent to five per cent, with interest at one per cent a month. The penalty for neglect or refusal to make lists was raised from twentyfive to fifty per cent, that for making fraudulent returns remaining at one hundred per cent. The dates of assessment

1 Act of March 2, 1867, c. clxix, sec. 13.

and payment were moved closer to the beginning of the year, the date of assessment being changed from May 1 to March 1, and the date when the tax was payable being changed from June 30 to April 30. Finally, the salaries tax was declared inapplicable to mechanics or laborers employed upon public works.

Wells, in his report in January, 1868, called attention to the fact that a "considerable falling off in the revenue to be derived from the income tax, for the present and succeeding fiscal years, may be expected, both from the reduction of the tax under the Act of May 2, 1867; and also from losses recently experienced through the shrinkage in the value of commodities." 1 He estimated that the revenue for the coming year would fall to about thirty-five million dollars. Wells discussed two points of principle in the existing law. The first was the matter of exemption, which was allowed unqualifiedly to all persons returning an income. He thought that "the original object of the exemption would appear to have been entirely lost sight of in making the exemption absolute and unqualified; for what in the one case is an allowance to necessity becomes in the other a mere increase of abundance." He therefore recommended that the English system be followed, and that the law be amended so as to permit the exemption to be applied only to incomes under fifteen hundred or two thousand dollars.

The other point to which he referred was the "curious anomaly which allows, on the one hand, an unqualified deduction from income of the amount paid for rent, and on the other hand does not consider as income in any degree the rental value of property held or enjoyed by its possessor." He pointed out that this was inconsistent, "for while in all other departments of the revenue it is accepted as a fundamental principle that luxuries especially should be taxed, in this they are especially exempted." He held that there was no good reason, "when a sufficient and proper sum is exempted 1 Report of the Special Commissioner of the Revenue. Washington, 1868, p. 62.

in the first instance from an income tax, why this exemption should be further increased by the addition of rentals or rental values." On the contrary, he thought that "all rental in excess of a certain amount should be considered as a luxury and taxed accordingly."1 Congress, however, refused to take any action

§ 5. The Contest over the Retention of the Tax

"2

The income tax was to expire in 1870. The readiness with which the people had submitted to it during the war diminished with the termination of the conflict, and as each year passed by, the tax became more unpopular and as a consequence less successful. With the approach, however, of the period of its projected disappearance, the discussion as to its continuance became more active. The commissioner of internal revenue, in his annual report of December, 1869, declared himself strongly in favor of its continuance. He queried as to whether "we can part entirely with the receipts from this source of revenue; and if not, whether any substitute can be devised more just and equitable, and less burdensome to tax-payers." "My opinion is," said he, "that, so long as a large internal revenue is required by the official necessities of the government, a portion of that revenue should be collected from incomes. The reasons for this seem apparent and forcible. This tax reaches simply the profits of trade and business, and the increased wealth of the individuals from investments." He thought that many of the complaints would disappear if the tax were "paid as these profits and accumulations accrue," and he proceeded to discuss the chief objection that "it leads to a system of espionage into private affairs that is not only offensive but sometimes injurious to individuals." "I do not see," said he, "why this objection may not with equal force be urged against all taxes upon personal property." And after

1 Report of the Special Commissioner, op. cit., p. 63.

2 Report of the Commissioner of Internal Revenue, for the Year ending June 30, 1869. Washington, 1869, p. xiii.

some further discussion, he concluded: "After all, it is but a tax upon the increased wealth of the nation. . I submit if it will be wise to abolish the income tax as long as the labor, industry and business of the country are directly or indirectly subjected to any considerable taxation." 1

Wells, in his report of the same year, took similar ground in a passage which, in view of his later opposition to the income tax, is worthy of note. He declared himself in favor of retaining the income tax, although he suggested that the rate be reduced from five to three per cent, not only because it would then be less burdensome to the individual, but because, in his opinion, the lower rate would yield almost as much as the higher. The existing rate he thought too high. for revenue purposes, and he held that the tax was "passing through much the same experience as the whiskey tax when at its maximum."2 Wells also repeated his recommendation that the exemptions for rentals be limited to two hundred dollars. "No claim can be made for the exemption of rent to any extent, which would not be equally valid in support of the exemption of any other expenditure; and certainly high rents are as much a luxury as any form of expenditure, and as little deserving of economical sympathy." If his adoption should be suggested both as to the abolition of this exemption and as to the reduction of the rate, he contended that the revenue from the income tax would be maintained and that but for the depression in business the yield would probably be considerably greater. Referring to the "proposition, seriously advocated in many quarters, that this tax should be wholly removed," he called attention to the fact that during the year 1868 the tax was paid by only two hundred and fifty thousand people, who nevertheless represented an aggregate income of not less than eight hundred millions. "Allowing, then, for the families of these two hundred and fifty

1 Op. cit., p. xix.

2 Report of the Special Commissioner of the Revenue upon the Industry, Trade, Commerce, etc., of the United States, for the Year 1869. Washington, 1869, p. lxix.

thousand contributors, it is evident that only about a million of the population are interested in having the tax removed, while the remaining thirty-eight and a half millions of the people are interested in having it maintained." 1

On June 1, 1870, the matter was taken up in Congress. The committee of ways and means had reported a bill to reduce the revenue by nearly thirty-four millions, but did not include the abandonment or reduction of the income tax, preferring to remit the inheritance tax, the tax on sales, the tax on gas, the tax on gross receipts, and many of the special taxes. The committee bill continued the tax, with the one important change of increasing the exemption to fifteen hundred dollars. McCarthy maintained that the revenues might be reduced still further, and that the income tax ought to be included in the list of the taxes to be dropped. "This income tax bears," said he, "what no other tax bears upon its face, the evidence that it was only considered and passed as a war tax, being limited to five years in its duration. The five years are up; the war is over; our revenue will bear the reduction, and we can afford to let it die. I do not hesitate to say there is more dissatisfaction with this tax than any other. Objections to its renewal are long, loud, and general throughout the country. Those who pay are the exception, those who do not pay are millions; and the whole moral force of the law is a dead letter. The honest man makes a true return; the dishonest hides and covers all he can to avoid this obnoxious tax. It has no moral force. This tax is unequal, perjury-provoking and crime-encouraging, because it is at war with the right of a person to keep private and regulate his business affairs and financial matters. Deception, fraud, and falsehood mark its progress everywhere in the process of collection. It creates curiosity, jealousy, and prejudice among the people. It makes the tax-gatherer a spy. . . . The people demand that it shall not be renewed, but left to die a natural death and pass away into the future as pass away all the evils growing out of the Civil War."2

1 Report of the Special Commissioner, op. cit.,

P. lxx.

2 Congressional Globe, 41st Congress, 2d Session. Washington, 1870, p. 3993.