Returns and Payment of the Tax.

Returns of gross income, deductions and credits are required from (1) individuals with net income for the taxable year of $1,500 or over, if single, or if married and not living with husband or wife; (2) individuals with net income for the taxable year of $3,500 or over, if married and living with husband or wife, and (3) individuals having gross income of $5,000 or over, regardless of their net income. All corporations subject to the tax must make

returns.

Returns, in the case of citizens or residents, domestic corporations and foreign corporations having an office or place of business in the United States, must be made on or before March 15th in the case of taxpayers reporting on the calendar year basis. The return must be made on or before the 15th day of the third month following the close of the taxpayer's fiscal year if such year is not the calendar year.

In the case of non-resident aliens, or foreign corporations not having an office or place of business in the United States, returns must be made on or before the 15th day of June, or on or before the 15th day of the sixth month following the close of the fiscal year of such non-resident alien or foreign corporation if returns are not made on the calendar year basis.

In all cases, except those of non-resident alien individuals or foreign corporations not having an office or place of business in the United States, the tax is payable at the time of filing the return or, at the option of the taxpayer, in four equal instalments, the first to be paid at the time of filing the return, the second three months, the third six months, and the fourth nine months, after that date. Provision is made for an extension of time for payment in the discretion of the Commissioner of Internal Revenue. When such an extension is granted, interest is charged at the rate of 6% per annum. It will be noticed that the United States, to a great extent, employs what amounts to a system of self-assessment.

Administration of the Law.

The administration of the income tax in the United States is in the hands of the Bureau of Internal Revenue, a part of the Federal Treasury Department. The Bureau is under the charge of the Commissioner of Internal Revenue (appointed by the President of the United States, with the approval of the Senate), who, under the Secretary of the Treasury, has general superintendence of the assessment of the income tax. The United States is divided into sixty-four collection districts, each under a collector of Internal Revenue and one or more deputy collectors. Returns are filed with the collectors, and the tax is paid to them, although assessments are made (and self-assessments confirmed) at Washington by the Commissioner. The Commissioner has under him a large number of revenue agents or inspectors. He has power through these agents to investigate the books of taxpayers, and may summon any person or corporation to produce books and to answer questions under oath.

The law contains provisions for appeals from assessments. The procedure on appeals is too technical to be given in the brief outline which this chapter attempts, but may be studied in detail in the later chapter on administration.1

The Commissioner makes the necessary regulations under the Revenue Acts for the enforcement of the law. The regulations and formal decisions of the Commissioner are, from time to time, published for the information of taxpayers. In addition to the above, the Bureau of Internal Revenue maintains a bulletin service consisting of weekly bulletins containing statements of rulings made in cases coming before the Bureau, bi-monthly digests of rulings published in the weekly bulletins, and semi-annual cumulative bulletins containing in full all rulings of the weekly bulletins for the preceding six months.

See Chapter XVIII.

CHAPTER III

THE RATES OF TAX

A COMPARISON of two income tax laws necessarily involves a comparative statement of rates, but a number of considerations make it necessary to use such a statement with caution, and not to fall into the error of assuming that if rates are similar the tax burdens under the two laws will correspond.

It should first be observed that, in so far as rates are concerned, the method in use in the two countries is the same. That is, both Great Britain and the United States impose the income tax at rates which are progressive-large incomes are taxed at higher rates than small incomes. In both countries income is exempt up to an amount fixed by the law, and this amount is higher for married people than for single people. It is still higher for people with children and other dependents. Both countries make use of a flat rate of tax applicable to all income above these limits of exemption and of a super-tax applicable to incomes above a certain minimum. It will not be difficult, therefore, to make a comparison of exemptions, rates of income tax and super-tax, but it will be difficult to arrive at any exact idea of the burden of the tax in the two countries by a study of the rates.

The first point to be kept in mind in comparing the rates is concerned principally with the exemption limits. It cannot be assumed that if the exemption limits are the same, the tax burdens will be similar. If the cost of living is twice as high in the United States as it is in Great Britain, then the United States must make the exemption limit twice as high in order to impose on its taxpayers, other things being equal, the same burden as that imposed in

Great Britain. The same consideration will apply to the rates of income tax and super-tax, but with less weight as incomes are higher. Nor can standards of living be neglected. If the standard of living is higher in the United States than in Great Britain, other things being equal, then income taxes at the same rates in both countries will interfere more with the habits and comfort of taxpayers in the United States, and will impose a heavier burden (because more keenly felt) on them than on taxpayers in Great Britain. But, on the other hand, if the standard of living is higher, then real incomes will be larger, and income tax at a given rate will be less felt than in a country where standards of living are lower, and real incomes smaller. Accordingly, in estimating the relative burdens of the income taxes of Great Britain and the United States by a comparison of the rates, we must not neglect the purchasing power of money or the standards of living in the two countries. It will not be enough to turn pounds into dollars, or vice versa, at the current rate of exchange. A comparison of the money burdens will not be a true comparison of the real burdens.

The second consideration is the question of what income is subject to tax. This question is considered in detail in later chapters, but a general reference must here be made to it. If the law of one country regards as taxable income only half the total receipts of those subject to tax, and the law of another country taxes all such receipts, it is obvious that the former country will be able to impose rates twice as high as those of the latter country and still impose no greater total burden on its taxpayers. The burden on particular taxpayers will not, of course, be the same in each country. Some will derive all their income from non-taxable sources and others all theirs from taxable sources. It must be noted, then, that the conception of income in Great Britain is different in many particulars from that in the United States. In Great Britain the annual value of a house occupied by the owner thereof is

1 See Chapters VIII to XII, inclusive, as to the conception of income in each country.

treated as taxable income. It is not so regarded in the United States. The United States taxes capital gains and casual profits, while Great Britain, as a general rule, does not. On the same theory the United States permits the deduction of capital losses, while Great Britain does not. In the United States interest on State and municipal bonds escapes the income tax on constitutional grounds. It has been estimated that in 1924 the capital amount of fully tax-exempt securities outstanding in the hands of the public in the United States was $13,284,000,000, and that this amount is increasing at the rate of about $1,000,000,000 a year. Again, the allowances for depreciation and depletion of wasting assets vary in the two countries. These, and many other, differences in the two income tax laws make it necessary to use with the greatest caution any comparative tables of rates in estimating the relative burdens of the two taxes.

Another factor making comparison difficult is the treatment of corporate earnings. In Great Britain a corporation, in reality, acts merely as a withholding agent for the Government. It pays the standard rate of income tax each year on its income, but when paying out such earnings as dividends, it deducts and retains tax at the same rate. Shareholders subject to tax at a lower rate may recover from the Government any excess of tax withheld. In the United States, corporations pay tax at a higher rate than that of the normal tax on individuals, and, while shareholders are subject only to surtax on dividends, yet they may in no case recover the normal tax paid by the corporation if the rate of tax applicable to them is less than the rate at which the corporation has paid tax on its earnings. In other words, corporations are taxed by the United States as separate entities and at higher rates than individual taxpayers.

• Annual Report of the Secretary of the Treasury for the year ended June 30, 1924, p. 10. The exemption of such income provides a means of escape from high surtax rates. The effective yield of tax-exempt bonds is very high in the hands of persons with very large incomes. See Chapter X.

See Chapter VI for a discussion of this subject.