purely local market has enabled them to shift the burden to consumers.

Because of the failure of the property tax, many tax innovations besides income taxes have been suggested. Chief among those advocated in recent years has been the sales or turnover tax in its various forms. A sales or turnover tax puts the burden on the purchaser. Income taxes are based more fully on the ability to pay and in theory cannot be passed on where free competition exists, because of the presence of the "marginal producer." A marginal producer is one whose profits are nil or barely sufficient to keep him in business and who thereby establishes the price of an article; he pays no income taxes. While it is doubtless true that real competition has ceased to exist in certain lines of enterprise, the fact nevertheless remains that the marginal producer has set the price in many well-defined cases.

Income taxes in the United States date back to the colonial period. In 1646 a law was passed by the court of assistants of the Massachusetts Bay Company whereby the produce of estates was taxed. In 1673 the assembly of Rhode Island passed a similar bill taxing the profits of merchants and tradesmen, and an almost identical bill was passed in New Jersey in 1684. These taxes were fundamentally not on income, but they deserve mention because they show the trend toward income taxation as opposed to a land or property tax. Laws imposing a tax on the salaries of various professions, such as the law, medicine, and the ministry, were passed in Pennsylvania, Delaware, and Maryland shortly before and during the Revolutionary War. In 1777 Massachusetts passed a law assessing all taxpayers on the amount of money accruing from business sources, and in some form or another this law spread to all the New England states. This old faculty 1 tax law disappeared, however, from all the states before the end of the eighteenth century, with the exception of Massachusetts,

1 The word "faculty" oncé meant "trade" or "profession."

where, though still in existence, it is practically a dead letter today.

A further impetus was given to state income taxation in the second quarter of the nineteenth century. The period around 1836 saw the disappearance of government from the field of internal improvement, and the financial depression of 1837 left the states laboring under heavy debts. The result was the imposition in several states of an income tax.

In 1844 Pennsylvania passed an income tax law with a $200 exemption. Evasion of the law, and no very serious attempt to enforce it, resulted in an exceedingly small return to the state, and the law was repealed in 1871. Maryland, Georgia, Louisiana, North Carolina, Virginia, Alabama, and Florida passed income tax laws, none of which was successful in raising revenue. In all these states the tax was not enforced rigorously and the laws became practically nominal. At the present time income tax laws are operative in several states, most of them patterned after the Federal laws.

FEDERAL INCOME TAX ACTS PRIOR TO 1909

Federal income tax acts for purposes of comparison may be divided into four groups: (1) those enacted during and immediately following the Civil War; (2) the act of 1894, declared unconstitutional immediately after its passage; (3) the corporation excise tax act of 1909; and (4) the income tax acts since 1913.

Pressed with the burden of providing revenue to carry on the Civil War, Congress on August 5, 1861, passed the first income tax law which, as was the case of all other acts of the Civil War period, applied only to the incomes of individuals. This was followed by the act of July 1, 1862, the amendment thereto of March 8, 1863, another new law June 30, 1864, with amendments as of March 3, 1865, March 10, 1866, and July 13, 1866. All these laws and amendments increased the tax rates, but the amendment

of March 2, 1867, lowered the tax. The fourth and last act of the Civil War group was signed July 14, 1870, remained in force until the end of 1871, and lowered the tax rate still further. Evasion was common, and income taxes had become thoroughly unpopular.

After the lapse of more than 20 years Congress enacted a new tax law, intended to apply to the years 1895 to 1899, inclusive. This act of August 15, 1894, the only income tax law Congress has enacted which has not been retroactive, was short-lived. In Pollack v. Farmers' Loan and Trust Co. (1895, 158 U. S., 601), the act was declared unconstitutional because a tax upon income from realty or personalty was a direct tax,1 and, hence, unconstitutional unless apportioned among the several states as required by paragraph 4 of section 9, article I, of the Federal Constitution. Further, a tax upon income from municipal bonds was viewed as being opposed to the spirit of the Constitution in that it taxed the power of a state to borrow money, and since the sections of the act relating to the levy on income constituted one entire scheme of taxation the entire act was declared unconstitutional. It is advantageous, however, to study this act because of several similarities to recent legislation.

This was the first of the acts to tax corporations as such, although the Civil War acts taxed dividends declared and undistributed profits. Net profits included all gains: dividends paid, "amounts carried to the account of any fund, or used for construction or investment." The tax did not apply to partnerships, to states, counties, or municipalities, to charitable, religious, educational, or fraternal organizations, or to property or securities held by a trustee for such purposes, to building and loan associations, to mutual savings banks, or to mutual insurance companies. Corporations

1 Taxes are sometimes distinguished as being either direct or indirect. A direct tax cannot be passed on; an indirect tax is one which may be passed on to another by the person who pays it. The classification is not a distinct one, however.

were required to keep accurate books of account, and to render returns of income each calendar year.

EXCISE TAX OF 1909

1

A tax on the income of corporations was again enacted on August 5, 1909, under the guise of a "special excise 1 tax." This act was declared to be constitutional in Flint v. Stone-Tracy Co. (1911), 220 U. S., 107, and in other cases, because there was "geographical uniformity." It was declared not to be a direct tax but rather an excise tax on the privilege of doing business in a corporate capacity. All corporations, joint-stock companies and associations "organized for profit and having a capital stock represented by shares, and every insurance company" were subject to the act, provided they were engaged in business. Foreign corporations were taxed on income derived within the United States. It was not applicable to labor, agricultural, and fraternal organizations, mutual building and loan associations, and religious, charitable, and educational organizations not carried on for profit.

ACTS OF 1913, 1916, AND 1917

The fourth group of income tax acts began with the act of October 3, 1913. On February 28, 1913, the Sixteenth Amendment had been ratified, providing that "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." This act continued the act of 1909 to January and February, 1913, and provided a normal tax effective March 1, 1913, on the net incomes of individuals and corporations after the allowance of specific exemptions.

1 An excise tax is one usually attaching to the production or sale of a commodity, but the term may also refer, as here, to any internal tax as distinguished from a customs duty.

Surtaxes 2 were levied on individuals only. In addition to the exempt corporations of the 1909 act, the 1913 act excluded mutual savings banks, mutual cemetery associations, scientific organizations, chambers of commerce, and civic leagues. Persons collecting interest and dividends for foreign payment were required to secure a license. A partnership return was not required unless requested by the Treasury Department. The 1913 law granted to corporations the privilege of accounting on the basis of fiscal years rather than calendar years, but this privilege was not given to individuals. The act adopted an elaborate system of collection of taxes on income at the source, but because of its impracticability the system was soon abandoned. Information at the source succeeded the plan of collection at the source in the act of 1916 and subsequent acts.

On September 8, 1916, the 1916 law was passed, effective on income from January 1, 1916. Individuals and corporations were both given permission to use a method to reflect income other than cash receipts and disbursements. The tax was not applicable to the following organizations: cooperative banks, clubs operated for pleasure, mutual local organizations, cooperative market bureaus, associations collecting income to be turned over to exempt organizations, Federal land banks and associations, and joint-stock land banks. An amendment to this act was passed October 3, 1917, after the declaration of war with Germany, increasing the normal tax rates.

An act of March 3, 1917, had levied a surtax on corporations for the first time. Subsequent events have proved that the selection of the term "excess profits tax," retained in subsequent acts, was, however, most unfortunate. This additional tax applied to the net income of all corporations and partnerships, except corporations exempt under the 1916 act, partnerships carrying on the same kind of exempt busi

1 A surtax or supertax is one levied on the same source as that of another tax called the normal tax and usually is larger in amount than the other and may apply only to the larger sources.