irritation to taxpayers, but it also requires a large staff of administrative officers to deal with the claims. 2. Collection at the source is an obstacle to perfect graduation. It involves the imposition of a tax at a flat rate, and also at graduated rates, instead of permitting a perfectly graduated tax beginning with the very lowest incomes taxed. This is regarded by some authorities as sufficient reason in itself for the abolition of taxation at the source. In Great Britain the income tax (normal tax) is imposed at two rates, and in the United States it is imposed at three rates, but collection at source necessarily takes place at the highest of these rates.3 3. It is largely responsible in Great Britain for the retention of the various Schedules under which numerous rules exist, and which are the source of many of the complexities of the British tax.4 Little more can be done than to set out the arguments for and against collection at source. The disadvantages are serious, while its only important advantage is that it ensures the collection of the tax. This advantage is so weighty, however, that unless it can be shown that a system of direct assessment will not result in great loss of revenue it would be extremely foolhardy to give it up. It is impossible to make even a guess as to the extent that the system of direct assessment leads to evasion of tax in the United States. It has been estimated that the abandonment by Great Britain of the principle of collection at source would result in an annual loss of over £50,000,000.5 This estimate, however, can be nothing but a guess. It also assumes that such a loss would arise principally through forgetfulness and ignorance on the part of taxpayers rather than through Cf. the high rates of income tax in Great Britain with the lower rates of normal tax in the United States. A high rate of income tax is desirable, from the point of view of collection, under a system of deduction at source. See Hobhouse, Taxation in the New State, p. 104. See also Philip Snowden, Labour and National Finance, p. 104; Evidence before the 1920 Royal Commission, Cmd. 288-1, par. 126. 3 See Chapter III for a discussion of the rates of tax. In Chapter XVI we come to the conclusion that the Schedules are not necessary to a system of collection at source. s Evidence before the 1920 Royal Commission, Cmd. 288-1, par. 126. fraud. It is extremely doubtful if the British taxpayer is either quite as honest or quite as stupid and careless as this assumption makes him out. It is frequently pointed out that the yield of the tax was doubled in 1803 when collection at the source was first employed. The weight of this argument is rather doubtful. We should need to know a number of other circumstances, such as the conditions of business and administration in 1803 as compared with 1801, before inferring that abandonment of collection at source would cut the yield of the tax in two. There can be little doubt that the American requirements as to information at source would not in themselves prevent the evasion of tax that collection at source prevents. But there is another safeguard in the United States-the power of the revenue officers to examine books and compel the production of accounts. It would be folly to suggest the abolition of collection at source without at the same time suggesting the use of these two safeguards. It is possible that these two safeguards would permit the abolition of collection at source without the loss of revenue. But it is only a possibility, and the experiment of finding out might prove very costly. Whatever may be the respective merits of the systems of direct assessment and collection at source, it is certain that Great Britain will retain the latter. There is no strong demand for its abolition, and there is a very strong feeling, both administrative and otherwise, that it is the bulwark of the British income tax. The alternative device of information at source is not considered a sufficient safeguard against evasion. On the other hand, the United States regards its reliance on direct assessment as satisfactory, and there is little, if any, demand for a reversion to collection at source. See the Evidence before the 1920 Royal Commission, Cmd. 288–1 and 288-3, pars. 37 and 9611. * Idem., Cmd. 288-3, see par. 9783, in which Sir Josiah Stamp states: "There is, I believe, a house at Washington stocked with millions of these information-at-source documents which have never been looked at, and never will be." CHAPTER XVI THE SCHEDULES IT is customary in discussing the British and American income taxes to state as their chief difference that the British tax is distinguished by its Schedules and its reliance on collection of the tax at source, while the United States income tax has no schedules and makes but little use of the device of collection at source. Professor Seligman classifies the British as a "stoppage-at-source" tax and the American as a "lump-sum " tax.1 tax. He takes it for granted that a stoppage-at-source " tax involves classifying income under schedules. In one place he says, "There remains, then, only the stoppage-at-source or schedule income tax."2 This is in accord with the British view. While several witnesses before the 1920 Royal Commission advocated some changes in the existing Schedules, only one witness advocated their abolition.3 It is apparent from his examination by the Commission that his views were considered too radical to deserve any consideration. He was scarcely questioned on the point, and apparently had no reason for his contention except the general one that the abolition of the Schedules would tend toward simplification of the tax. The Commission did recommend that certain changes be made in the present Schedules, but apparently had very little definite theory back of its recommendations. While the Schedules are so firmly rooted in the British income tax, and have been in existence so long, that they are universally regarded in Great Britain as one of the most important features contributing to the success of British income tax, nevertheless, in the interests of a 2 Idem., p. 660. Seligman, The Income Tax, p. 36. 3 Cmd. 288-6, par. 24793. thorough comparison of the British and American laws, we are compelled, even at the risk of being thought a little ridiculous, to examine the Schedules with a critical mind and see just what are their merits and demerits. Let us first consider whether a system of schedules is essential or advantageous in an income tax system that relies largely on collection at source. It must be observed that the United States law of 1913 contained a thoroughgoing system of collection at source and had no schedules. Obviously, then, the schedule system is not essential to an income tax collected at source. If it is not essential, does it, none the less, facilitate collection at source? In the United States, collection at source is not now used to anything like the same extent as under the 1913 law. The difference, however, is not that any particular classes of income are freed from withholding at source, but that many recipients of income are so freed. In general, the same kinds of income are collected at source, but withholding is now required only when such income is paid to individuals, partnerships or corporations outside the territorial jurisdiction of the United States. So that it would seem that schedules are just as necessary, in so far as collection at source is concerned, to the United States income tax as to the British. Mr. R. V. N. Hopkins, one of the Commissioners of Inland Revenue, in a description of the British income tax, said: 2 One of the consequences of the taxation of income as far as possible at the source is seen in the classification of income that has been adopted for the purpose of assessment. As indicated above, this classification, which dates back to the year 1803, has given us the five well-known Schedules A, B, C, D and E of the Income Tax Acts, which together embrace all income chargeable with income tax. Schedules A and C are primarily deduction-at-the-source schedules, Schedules B and D are principally concerned with direct assessments, while Schedule See Chapter XV for details. • Minutes of Evidence of 1920 Royal Commission, Cmd. 288–1, App. 2, par. 21. E, which was largely a deduction-at-the-source schedule in 1842, now contains a higher proportion of direct assessments owing to the large number of officers of limited liability companies who are assessed under this Schedule." Income is classified under the five Schedules as follows: Schedule A. Income from the ownership of lands and tenements in the United Kingdom. Schedule B. Income from the occupation of land. Schedule C. Interest, dividends and annuities payable in the United Kingdom out of any public revenue. Schedule D. Profits from trades, professions, employments and vocations, certain interest, discounts, income from foreign securities and foreign possessions, and any annual profits not charged under any other Schedule. Schedule E. Income from public offices or employments of profit, and of annuities, pensions and stipends payable by the Crown or out of the public revenue of the United Kingdom. It must be noted that classification on the above basis leads to some curious results. For example, Schedule A charges income from the ownership of lands. There is included in this Schedule income from quarries of stone, slate, limestone or chalk, mines of coal, iron, tin, lead, etc., ironworks, gasworks, salt springs, waterworks, markets, railways, bridges, ferries and other similar concerns. It was apparently felt that the income from these concerns arises from the ownership of lands. But since they are mostly concerns engaged in trade they are assessed under the rules of Schedule D. It will be observed that income is not placed in any particular Schedule with strict regard to whether or not it is to be deducted at source. Indeed, if the Schedules were designed as an aid to collection at source, there seems no |