§ 8. #Exemptions and stoppage at source#. There are various exemptions, the first being that of $3000 on every individual income and of $4000 on the aggregate income of husband and wife living together.[11] Among other exceptions are sums paid for taxes (except assessments for local benefits), necessary business expenses, losses sustained, and (for the normal tax only) those parts of individual incomes derived from corporations which have paid the tax on them.
The difficulty of getting an honest and complete assessment of incomes is great. All taxation is deemed by the taxpayer to be "inquisitorial" in some degree, and this is particularly true of an income tax. In England had been developed the plan called "stoppage at source." In our law the taxation of corporations at the rate of the normal tax, while requiring them to report the names of those receiving dividends and interest payments, affords an ingenious way of checking up the returns of individuals in respect to a class of investments which is steadily increasing in importance.
§ 9. #The graduation principle#. The most disputed feature of the income tax is the principle of graduation, or of progression. It is upheld in part because in this case it but offsets regression, that is relatively heavier taxation on the smaller incomes, in the case of the other kinds of taxes (tariff, property taxes, etc.). It is urged further that those of larger incomes, especially the largest, have marked advantages over others in making investments. Further it is urged that the higher the income the less does a certain rate cut into "the amount necessary for good living" (as was said in Congressional debate). This is in accord with the psychological principles of choice, of value, and of diminishing gratification. Finally, there is a widespread approval of the progressive rate just because it in so far acts as a leveling influence upon fortunes. The "additional" tax is already important fiscally, yielding over one-half of the total paid by individuals and one-fourth of the total from corporations and individuals.
The income tax returns for the first ten months of the law (March to December, 1913) showed 356,598 taxable individual incomes, equal to about 1 per cent of the taxable population (considering minors to be usually not taxable). Even this proportion, small as it is, is much larger than that of the European countries having a general income tax.
The first ten months' yield (March 1, 1913, to December 31, 1913) was over $60,000,000. A remarkable fact is that 21 per cent of all taxable incomes (not persons) were in the single Borough of Manhattan (the main part of New York City). The receipts from the income tax in 1913 were nearly 10 per cent of the ordinary receipts of the federal government, and about 2 per cent of total revenue receipts of all branches of government, the income taxes paid by individuals being about 1 per cent of the same total, and the super-tax about 1/2 per cent of the same.
The receipts from the income tax during the fiscal year ending June 30, 1915, were $80,000,000, of which $39,000,000 was paid by corporations and $41,000,000 by individuals. Of the latter sum, over $24,000,000 was from the super-tax.
§ 10. #A system of taxation.# The task of reforming and developing the various kinds of taxes and of uniting them into a just and consistent plan for each of the divisions of government in the United States is a vast and difficult one. There are many conflicting interests among states, between states and nation, among the various minor political divisions, and among individuals and classes. There are also conflicting opinions regarding many features of the possible practical plans. Because of these it is safe to predict that progress will not be made quickly, steadily, nor always directed toward a clear ideal. If progress is to be rapid, the public must, however, have consistent principles by which its steps may be guided. In the foregoing kinds of taxation are the various elements which may be united into a system of taxation. It is useful to consider how this might be done.
At the basis of the whole tax structure is taxation, by value, of concrete wealth at the place where it is situated (in situ). This should be regardless of the distribution of ownership or of the residence of the owner. The present misnamed "general property tax" already presents the main outlines of this form of taxation and the general changes necessary in law and method of assessment have been indicated above.[12] Corporation taxation may be adjusted to this either by separate treatment and assignment to state purposes only, or more simply for most states, by assimilating it with the general taxation of wealth and allotting due shares of the proceeds to the various taxing divisions.[13] The national government can, because of its exclusive power of levying tariff duties and also because of its exclusive control over interstate commerce, reach the tax-paying ability of the nation effectively by a combination of tariff and internal revenue taxes. These become a part of business costs, and are diffused over the whole population in general prices.[14]
This system of impersonal wealth taxation may then be supplemented by personal taxation, applied through inheritance and income taxes. These forms of taxation extend over and reach many of the same persons and incomes as do ultimately the impersonal taxes. But the summation of personal incomes gives the necessary condition for applying the principle of progression so far as this is, by public opinion, deemed desirable either for fiscal or for social reasons.
[Footnote 1: See above, ch.17, sec. 3, note, and sec. 5, on this distinction. The poll tax also is personal: see ch. 16, sec. 9.]