apply to future presidents or federal judges. The salaries of all officers and employees of a state or a political subdivision thereof, and the interest on bonds or other obligations of a state or any political subdivision thereof, are also exempted. It was indeed claimed that according to the contention of former Governor Hughes, the Sixteenth Amendment empowered the federal government to levy such taxes. The framers of the bill, however, while specifically disclaiming any opinion on this point, maintained that, as long as there was any doubt, no opportunity should be given to contest the constitutionality of the law for this reason. The provision therefore prevailed, although it was emphatically asserted that from the standpoint of equality of taxation such an exemption was illegitimate. It is, in our opinion, not at all unlikely that at some future time this exemption will be removed by special amendment to the statute, the constitutionality of which can then be tested.

The exemption of interest on bonds or other obligations of the United States or its possessions did not arouse any comment. This was partly due to the fact that the federal debt is so small and is so largely held by national banks. If the time should come when the national debt, in the hands of individuals, should again assume large dimensions, it is not unlikely that we shall have a controversy here comparable to the one that has been responsible for the recent fall of the French ministry. The issue will then be the equality of taxation versus the maintenance of the national credit.

Finally, it is to be noted that the exemption of $5000 accorded to corporations in the law of 1909 is eliminated in the present law.

The consideration of tax rates involves not only the question of exemption, but that of graduation. It is significant that the principle of progressive taxation evoked almost no discussion. The legitimacy of the theory was taken for granted, and in the few cases where it was mentioned, it was assumed to be a corollary of the theory of ability to pay. This shows the development which has taken place since the

discussion of the law of 1894. In considering the question of graduation, only two difficulties confronted the framers of the bill. The one was how to make a workable system of progressive taxation harmonize with the administrative methods employed; the other, how to oppose with success the demands of the radicals.

The former difficulty is connected with the principle of stoppage at source, to be discussed below. It is clear that if a tax is paid at the source by the income payer, rather than by the income recipient, it is not easy to introduce a graduated scale. The bonds of a corporation, the tax on the income of which is withheld by the corporation, may be owned by a person of very small or of very large total income.

This problem had, however, recently been solved in England, and a similar solution was adopted in the bill which passed the Chamber of Deputies in France a few years ago, and is now pending in the Senate.1 In England a uniform rate is imposed upon all tax-payers, and is assessed on the principle of stoppage at source. This remains the backbone of the tax. Then on all individual incomes above a certain figure, a so-called super-tax is levied upon the income as a whole. So in the French bill, the uniform tax levied according to the stoppage-at-source principle is supplemented by a complementary" tax levied upon the entire income. The

same plan has been adopted in the new American law. The uniform tax levied upon all incomes, primarily by the method of stoppage at source, is called the normal tax, and is assessed at the rate of one per cent. The extra tax is called the additional tax or the surtax and is assessed on the entire income of individuals, according to a graduated scale. The advantage of this ingenious scheme is that the constituent parts of the income of any individual will be reached in large measure by the normal tax, and in such a way that the government will be able to ascertain the facts. The returns made by individuals for the additional tax can, to a considerable degree, thus be checked up, and the fiscal interests of the government be 1 Supra, p. 324.

2 Y

protected. This protection is, however, not complete; for, as we shall see, the principle of stoppage at source does not apply to all incomes within the United States, and applies only in an imperfect way to incomes received abroad. To a very large extent, however, the protection is undoubted. Thus it may be said that the old problem of the incompatibility of graduated taxation with stoppage at source has been attacked with a fair prospect of success.

The other difficulty with which the framers of the bill had to cope was the danger of an exaggerated application of the progressive scale. In the original bill, the clause relating to the "additional" tax was so framed as to impose one per cent on incomes from $20,000 to $50,000, two per cent on incomes from $50,000 to $100,000, and three per cent on incomes above $100,000. In the course of the discussion, however, many amendments were introduced calling for much higher scales. It will suffice to mention the plan of Mr. Copley, who suggested a scale rising to no less than sixty-eight per cent on incomes over $1,000,000, a proposition so manifestly extravagant that it was voted down by a large majority. Another rather extreme proposition was subsequently advanced in the Senate. Senator Williams disposed of it with the statement that "the object of taxation is not to leave men with equal incomes after you have taxed them." The general feeling was, however, that the graduated scale contained in the bill was not high enough. Senator La Follette proposed a scale which ran up to ten per cent. Senator Bristow suggested a somewhat more moderate scale and scouted the idea of possible future complications :

"I am not worrying about where we are going to stop. I believe the American people are capable of self-government. I believe their purpose is to do what is right to every citizen. The American people, as a whole, would not do an injustice to a rich man any quicker than they would to a poor man. . .

1 Congressional Record, p. 4225, August 27, 1913. As to the leave-them-asyou-find-them theory of taxation, see Seligman, Progressive Taxation, 2d ed., 1908, p. 231.

I would rather trust the honesty of the American people as a whole in dealing with a rich man, than to trust a good many rich men in their dealings with the American people. If there is any prejudice in this country against the rich, it is because the rich have not been just in their dealings with the public. There is no fundamental prejudice in the AngloSaxon race against property or the rights of property. It is the very basis upon which every Saxon nation has been builded in the history of our civilization. Yet here in this, the most enlightened nation of all in my opinion, we are afraid to enter upon a system of taxation which England has been following for years, because, forsooth, the American people may confiscate the property of their well-to-do citizens. Such a suggestion is abhorrent to me. . . . In endeavoring to work out this amendment, I have tried to be conservative and just, so that no man could say it was a radical measure, and no man has declared here that it was an unjust measure. The only objection to it has been from those who were afraid that in the future somebody else might do an injustice."

"1

And Senator Williams, who was in charge of the measure in the House, stated in a similar strain, after speaking of the dangers of large fortunes:

I realize another thing: No honest man can make war upon great fortunes, per se. The Democratic party never has done it, and when the Democratic party begins to do it, it will cease to be the Democratic party and become the Socialistic party of the United States; or better expressed, the Communistic party, or Quasi-Communistic party of the United States. . . . The war that an honest man makes upon accumulated wealth must be a war upon the manner in which the wealth was accumulated. . . . I am not going to attempt to make this bill a great panacea for all the inequalities of fortune existing in this country; nor would it do any good if we did, because we would be doctoring the symptoms, and not the cause of the disease.” 2

...

1 Congressional Record, p. 4236.

2 Ibid., p. 4239.

Under the

As a result of the discussion the Finance Committee of the Senate saw that some concession was inevitable. law as it was finally enacted, the rates of the "additional" tax are as follows:

The maximum rate of the income tax as a whole, therefore, under the new law, is somewhat under seven per cent. This is somewhat lower than either the English maximum (Is. 8d. on the £), or that of the recent German Wehrsteuer (eight per cent on incomes over half a million marks).1

IV. Stoppage at Source

The provisions in the new law which deal with the methods of assessment and collection involve a fundamental departure from the theory of all preceding income taxes in the United States. As has been frequently pointed out, the two chief types of income tax are the personal or lump-sum tax, where every one is compelled to make a return of his entire income from whatever source derived, and the stoppage-at-source tax, the theory of which is that it should be collected from the person or agency paying the income, rather than from the individual who receives it. The argument in favor of payment at. source is the double one of protecting the honest taxpayer, and of safeguarding the interests of the treasury. Whatever may be true of a country like Germany where the administrative and political conditions are unique, there is little doubt

1 As to the German tax, see F. Stier-Somlo, Wehrbeitrag und Besitzsteuer. Die Reichssteuergesetze vom 3 Juli, 1913.