An Act to reduce tariff duties and to provide revenue for Government, and for other purposes.” This is the name of the law.
Continuing The United States Adopts the Income Tax,
our selection from The Income Tax of 1913 from The Quarterly Journal of Economics, Volume 28 by Joseph A. Hill published in 1913. For works benefiting from the latest research see the “More information” section at the bottom of these pages. The selection is presented in four easy 5 minute installments.
Previously in The United States Adopts the Income Tax.
Place: Washington, D.C.
Among the notable events of the year 1913, one of the most important in its influence upon the national finances and constitutional development of the United States is the adoption of an amendment to the Federal Constitution giving Congress the 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.” The mere fact that an amendment of any kind has been adopted is notable, this being the first occasion on which the Constitution had undergone any change since the period of the Civil War, and the first amendment adopted in peaceful and normal times since the early days of the Republic.
It is a little remarkable, although perhaps not altogether accidental, that the adoption of this amendment should coincide with the return to power of the political party whose attempt to levy an income tax in 1894 was frustrated by the decision of the Supreme Court in that year. Then as now an income tax was a component part of the program of fiscal and commercial reform to which that party was committed. This program included the reduction of protective tariff duties and the direct taxation of incomes. What the Democratic party failed to accomplish in 1894, it has had a free hand to do in 1913. Indeed, the national taxation of incomes might almost be regarded as a mandate of the people of the United States. At any rate, it was a foregone conclusion that the adoption of the constitutional amendment would be immediately followed by the enactment of an income-tax law.
The law instituting the income tax was approved October 31, together with the law revising the tariff, both measures being included in one comprehensive statute entitled “An Act to reduce tariff duties and to provide revenue for Government, and for other purposes.” It is the object of the present article to give a general description of the income tax. This seems to be especially well worth while because the tax cannot be readily understood from a mere perusal of the involved and sometimes obscure phraseology of the law itself. For the same reason, however, the task of interpretation is not easy or entirely safe. The law has certain novel features; and some of the questions of detail to which they give rise cannot be answered until we have the official construction placed upon the language of the act by the executive branch of the government and possibly by the courts. At the same time, the main features of the tax become fairly evident to anyone who makes a careful study of the provisions of the act, even though its application to specific cases may remain doubtful.
The law provides that incomes shall be subject to a tax of one per cent. on the amount by which they exceed the prescribed minimum limit of exemption. This is designated as the “normal income tax.” There is, then, an “additional tax” of one per cent, on the amount by which any income exceeds $20,000. The rate is increased to two per cent. on the amount above $50,000, to three per cent. above $75,000, to four per cent. above $100,000, to five per cent. above $250,000, and to six per cent. above $500,000. Therefore, under the normal and additional tax combined, the first $20,000 of income, exclusive of the minimum exemption, will be taxed one per cent.; the next $30,000, two per cent.; the next $25,000, three per cent.; the next $25,000, four per cent.; the next $150,000, five per cent.; the next $250,000, six per cent.; and all income above that point seven per cent. This is a rigorous application of the progressive principle.
The minimum exemption, at the same time, is comparatively high, — $4,000 for a married person and $3,000 for everybody else. The higher exemption in case of the married is conditional upon husband and wife living together, and applies only to their aggregate income; that is to say, it cannot be deducted from the income of each. It may be noted, in this connection, that in England the exemption allowed under the income tax is £160 or $800; in Prussia it is 900 marks, or $225; and in the State of Wisconsin it is $800 for individuals and $1,200 for a husband and wife, with a further allowance for children or dependent members of the family.
The sharply progressive rates and the comparatively high exemption have given rise to the criticism that this is a rich man’s income tax and disregards the principle that all persons should contribute to the expenses of the government in proportion to their several abilities. It is often said that an income tax ought to reach all incomes with the exception of those which are close to or below the minimum necessary for subsistence, and that if people generally were called upon to contribute directly to the government they would take greater interest in public affairs and show more concern over any wasteful or unwise expenditure of public money. In reply it is contended that the limitation of the tax to the wealthy or well-to-do classes is justified because these classes do not pay their fair share of the indirect national taxes, or of local property taxes. These debatable questions lie outside the scope of the present article. It is evident, however, that the income tax should not be criticized as if it were a single tax or formed the only source of revenue for the Federal government. From the fiscal standpoint it occupies a subordinate position in the national finances, being expected to yield about $125,000,000 annually out of a total estimated tax revenue of $680,000,000.
The normal tax of one per cent, is to be levied upon the income of corporations. In effect this provision of the law merely continues the corporation or “excise” tax which was already in existence. But that tax now becomes an integral part of the income tax, covering the income which accrues to the stockholder and is distributable in the form of dividends. On the theory that this income is reached at the source by the tax upon the net earnings of the corporation the dividends as such are exempt. They are not to be included, so far as concerns the normal tax, in the taxable incomes of the individual stockholders and the law does not provide that the tax paid by the corporation shall be deducted from the dividend.
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