laws, partly to the fact that in progressive communities a gradual improvement in administrative methods may be expected, and partly to the fact that public sentiment slowly accommodates itself to a fait accompli. For the present generation in England or Germany to read of the imprecations heaped upon the income tax by an earlier generation is almost to read an unfamiliar language, so completely has both the governmental and the individual attitude changed. Is it unreasonable to expect that the similarly extreme opposition which is still manifested by certain individuals or classes in France and in the United States will be regarded with the same feelings of wonder by a future generation?

Finally, the success of an income tax depends, perhaps more than almost any other modern institution, upon administrative machinery. Simply to adopt the principle of an income tax and to enact a law providing for its imposition is by no means adequate. If we select the correct machinery and elaborate a scheme which is in harmony with administrative possibilities and public sentiment in any particular country, the tax will work. If we choose the opposite course, and attempt too much, the result is bound to be disastrous. Certain methods, which promise well from the point of view of the symmetry of the tax, work badly amid a democratic environment. We must decide between ideal perfection of theory which cannot be made to work in actual life, and a less ambitious, but more realizable, programme of practical efficiency. The United States has had a sad trial with the first alternative; shall we not profit now by the lessons of experience and choose the second?

APPENDIX

THE INCOME TAX OF 1913

THE enactment of the income tax law of October 3, 1913 marks a new stage in the history of American finance. As in the case of England with its first income tax of 1798, our Civil War income tax was avowedly a temporary measure; and just as the English income tax was reintroduced in 1842 in order to make good the loss in revenue occasioned by the repeal of the Corn Laws, so the American law was enacted to compensate for the loss of revenue due to the new tariff. The English tax, indeed, was not intended to be a permanent part of the revenue system, but the force of circumstances soon gave it that position. The American tax, on the other hand, was designed from the very outset as an integral and permanent part of the fiscal arrangements.

The chief argument which was responsible for the passage of the Sixteenth Amendment and for the enactment of the law was, as we have elsewhere pointed out,1 that wealth is escaping its due share of taxation. Again and again in the course of the discussion attention was called to the fact that our federal system of taxes on expenditure puts an undue burden on the small man; and when the objection was made that the principle of ability to pay is recognized in state and local taxation, the ready answer was found that in actual practice our state and local revenue systems fail almost completely to reach those taxpayers who can best afford to contribute to the public burdens. It is true that some of the more extreme supporters of the income tax based their advocacy on the ground of opposition to the tariff alone; but

1 Supra, p. 640.

the more influential legislators did not tire of stating that, far from purposing to make an attack on wealth as such, their aim was solely to redress the inequality of taxation which was a predominant feature of the American fiscal system as a whole.1

In our consideration of the measure, it will be convenient first to consider what the law actually provides and then to call attention to its shortcomings. Under the first head the chief points are: who is taxed; what is taxed; how much is taxed; and how is the tax imposed? In other words, the main problems are: on whom is the tax levied; what is meant by income; what are the rates and exemptions; and what are the administrative methods pursued? Let us consider these in turn.

I. Who is Liable to the Income Tax?

Under the provisions of the statute the tax is imposed upon the entire income of every American citizen, whether residing at home or abroad, as well as upon that of every person residing in the United States although not a citizen thereof. In the case of non-citizens of the United States residing abroad, the tax is assessed upon the income from all property owned, and from every business, trade, or profession carried on, in the United States. It will be noticed from these provisions that no attempt is made to avoid double taxation. Under the law, an American citizen living abroad and subject to an income tax there, or a resident alien who has already paid the income tax in his own country, is again subject to the tax here. It is to be noted, however, that the rigor of these provisions is somewhat abated by the clause, to be considered later, which virtually exempts the foreign holder of the bonds of American corporations. It is still to be regretted that the United States failed to lead in the movement

1 See especially the speech of Senator Borah, who ascribes to the present writer the unmerited honor of responsibility for the impetus given to the income tax. Cf. Congressional Record, 63d Congress, 1st sess., pp. 4260-4261, Aug. 28,

to do away with this undoubted infraction of international justice.

In the second place, the law applies not only to individuals but to corporations. The income tax is payable by every corporation, joint stock company, or association, and every insurance company organized in the United States, with a few exceptions. This part of the law contains provisions similar to those of the corporation or excise tax law of 1909. The chief differences between the two, apart from the matters which will be considered later under other heads, are that the former specific deduction of $5000 is no longer permitted and that corporations are now allowed to make a return for their fiscal year when this does not coincide with the calendar year. The objection that the taxation of both individual and corporation on the same income involves double taxation is sought to be met by the provision which permits individuals to deduct from their taxable income the amount of corporate dividends or other income on which the tax has been paid by the corporation. The American law, therefore, seeks to avoid double taxation by the same jurisdiction, while making no effort to prevent double taxation by competing jurisdictions.

II. What is Taxable Income?

As we have observed elsewhere 2 it is easy to say that income should be taxed, but it is not so easy to define what is meant by income. The law of 1913 states that net income "shall include gains, profits, and incomes derived from salaries, wages, or compensation for personal services of whatever kind, and in whatever form paid; or from professions, voca

1 The exceptions are: labor, agricultural or horticultural associations; mutual savings banks not having capital stock; fraternal beneficiary societies, orders or associations, operating under the lodge system; domestic building and loan associations; cemetery companies operated exclusively for the mutual benefit of members; associations operated exclusively for religious, charitable, scientific or educational purposes; business leagues, chambers of commerce, boards of trade, and civic leagues and organizations not organized or operated for profit.

2 Supra, p. 19 et seq.