CHAPTER II A BRIEF OUTLINE OF THE In this chapter it is proposed to set out very briefly the principal features of the income tax laws of Great Britain and the United States as a sort of general outline of the two systems. While in the later chapters various particular features of the two income tax systems are discussed in more detail, the reader will find it convenient to have a summary of the more important features of the two laws set before him in one place. History. Great Britain. The great need of revenue of the British Government arising out of the war with France at the end of the eighteenth century was responsible for the introduction of the income tax in Great Britain. The first tax bore, indeed, little resemblance to the modern income tax. It was enacted in 1798 and imposed duties based upon the amount which the taxpayer had paid in the previous year as Assessed Taxes" (i.e. taxes on carriages, horses, man-servants, windows, inhabited houses, etc.). Taxpayers with total incomes under £60 a year were exempt. The duties were known as the "Triple Assessment," and were so successfully evaded that they were almost a complete disappointment as a source of revenue. They served, however, as an introduction for a real income tax which was imposed the following year. Under the Act of 1799 incomes under £60 were exempt, and the rate was graduated for incomes between £60 and £200. Above that figure the rate was a flat 10%. A return of income from all sources was required of each taxpayer, and the assessment was made on gross income after the allowance of certain deductions. The tax was repealed in 1802, but re-enacted, with a number of important changes, with the continuance of the war in 1803. The Act of 1803 is the basis of the present British income tax. It provided the five schedules under which income is still classified, and it introduced the system of collection of the tax at the source. The rate of tax was 5%, but the new system of deduction at the source was so effective that the yield of the tax was almost equal to the yield in 1799, when the rate had been 10 %. The tax was repealed in 1816 and was not again imposed until 1842, when it was revived by Sir Robert Peel. The Act of 1842 was practically a re-enactment of the Act of 1803 with certain important amendments passed in 1806 designed to prevent evasion. The rate of the tax as re-enacted in 1842 was 7d. in the pound, and the exemption limit was fixed at £150. The tax has continued from 1842 to the present day without a break. It was for many years deemed a temporary tax only, but no adequate opportunity for its repeal presented itself. In 1874 the rate dropped to 2d. in the pound, the lowest rate in the history of the tax. As early as 1851 a Select Committee investigated the advisability of differentiating the rate of tax on temporary and permanent incomes, but no recommendation was made. It was not until 1906 that a Select Committee reported favourably both on graduation of the tax by means of the extension of the system of abatements and a super-tax on large incomes, Superher and on differentiation between earned and unearned incomes. The latter change was inaugurated by the 1907 Act and the former by the Finance (1909-10) Act, 1910. By the latter Act a super-tax was imposed on incomes exceeding £5,000 at the rate of 6d. for every pound by which the individual's total income exceeded £3,000. Until 1919 income tax in Great Britain was administered under the Act of 1842 as frequently amended. In 1918 B income tax law was consolidated under one Act, the Income Tax Act, 1918, effective April 6, 1919, so that the entire British law of income tax is now to be found in the Income Tax Act, 1918, and the annual Finance Acts passed subsequently. Persons Within the Scope of the Tax. I The income tax applies to the entire income of persons ordinarily resident in the United Kingdom (except that such persons are only taxed on the amount of income from foreign possessions actually remitted to the United Kingdom) and to the income of non-residents, if such income arises within the United Kingdom. In case of persons not domiciled within the United Kingdom, or, if British subjects, not ordinarily resident therein, only the amount of income actually received by them in the United Kingdom is subject to the tax. Persons in the United Kingdom less than six months in any year of assessment, and for some temporary purpose only, are not taxed at all on foreign income. The tax applies to individuals and corporations, but the latter are not subject to the super-tax and, in effect, merely pay the tax on behalf of their shareholders. A corporation is deemed a resident of the United Kingdom if its seat of management is there and its operations controlled there. Partnerships are not taxable as entities, each partner being taxed on his separate share of the partnership income. Income. The tax is upon income, which, to be taxable, must be something capable of being turned into money. The annual value of a house occupied by the owner is, however, regarded as taxable income.3 The law distinguishes sharply between income and capital, and is careful to refrain from taxing the latter. Nevertheless, receipts which involve a The term foreign possessions" does not include stock, shares, rents or securities. Tennant v. Smith, [1892] A.C. 150. 3 In theory, such income is capable of being turned into money by letting the premises. wasting of capital, or, in some cases, a return of capital, are in many cases considered income in their entirety. The conception of income is that of annual gains or profits, and realized accretions to capital assets are not subject to tax as income, unless received by one in the business of dealing in such assets. For the purposes of computation and assessment, income is divided into five groups or categories known as "Schedules." Schedule A includes profits from the ownership of lands and buildings, as well as profits from the operation of certain trading concerns (mines, railways, gasworks, etc.). Schedule B includes profits from the occupation of land (in most cases, though not exclusively, farming lands). Schedule C includes interest, etc., payable out of public revenues. Schedule D, by far the most productive for revenue purposes, includes all gains and profits from trades and professions, interest, other than that included in Schedule C, income from foreign possessions and securities, and various miscellaneous kinds of income. Schedule E includes income from offices, employments and pensions. In the case of individuals the taxable income is determined as follows: From the taxpayer's total net income from all sources (that is, his gross income less expenses incurred in earning it) is deducted one-sixth of his earned income. This deduction on account of earned income may not exceed £250. The resulting amount is called the "assessable income." From this assessable income, a married man living with his wife (or where the wife is wholly maintained by the husband in such a way that he is not entitled to deduct the tax from the sums paid for her maintenance) may deduct £225. If the wife is in receipt of earned income, a further deduction of nine-tenths of the first £50 of such income may be made. A further deduction of £36 is allowed for the first child, and £27 for each subsequent child. In the case of a single person, the deduction from assessable income is £135. Under certain conditions a deduction of £25 is allowed for a depen dent relative and £60 for a housekeeper. The total income from all sources, reduced by the above deductions, becomes the taxpayer's taxable income. Rates of Tax. In Great Britain the income tax, properly speaking, does not include the super-tax. When income tax is spoken of, it means the normal or standard rate of income tax exclusive of super-tax. While both sets of rates are applied to the same income, nevertheless this distinction must be kept in mind. On the first £225 of taxable income the rate of income tax is 2s. in the pound, and on the remainder 4s. in the pound. This latter rate is termed the "standard rate." Super-tax applies to the taxpayer's total income from all sources in excess of £2,000. The present rates of super-tax are as follows:- The year of assessment begins on April 6th and ends on the following April 5th. It is described in the Income Tax Acts as the year 1923-24, the year 1924-25, etc. The income of the year of assessment is not necessarily the basis for the computation of tax for that year. In fact, it is seldom so. The tax in some cases is computed on |