Problems in American Democracy

by Thames Williamson

The chief defects of the income tax are two. In the first place, the effectiveness of the tax depends upon the willingness of the individual to declare his full income. This is not always done, especially where the income tax is regarded as an undue interference in the private affairs of the individual. Second, wealthy individuals often migrate to states where there is either no income tax or only a relatively light one. This last defect of course applies only to the state income tax.

406. THE INHERITANCE TAX.—Taxes upon inheritances have come into prominence since the opening of the twentieth century. Since 1916 the Federal government has levied an inheritance tax. At the present time most of the states also levy this form of tax upon property passing by will or under the inheritance laws of the state. The essential features of the tax are everywhere the same. Small legacies are generally exempt. Legacies to direct heirs are either exempt, or are taxed at a lower rate than are legacies to collateral heirs. The rates are progressive, that is to say, they increase with the size of the legacy.

Many benefits are claimed for the inheritance tax. It brings in a large revenue, and falls upon those who are best able to pay. The tax cannot be shifted and it cannot easily be evaded. It is easily assessed and collected, because all wills must pass through the probate court. It is held that the state has a social claim upon the property of an individual who has amassed wealth under the protection of its laws, and that this property ought not to be transferred intact to those who did not aid in its accumulation.

If carried too far the inheritance tax would undoubtedly discourage the accumulation of wealth, but tax authorities are already guarding against this danger. On the whole, the inheritance tax is an important addition to our tax system. Its scope is being rapidly extended: rates are being raised, the principle of progression is being more frequently applied, and exemptions allowed direct heirs are being reduced. The tax is increasingly used in the effort to redistribute unearned wealth, though the extent to which this is true depends very largely upon local sentiment.

407. CORPORATION TAXES.—The rapid growth of American industry has been accompanied by an enormous increase in the number and importance of industrial corporations. The proper taxation of these bodies is now challenging the attention of both state and Federal governments.

The difficulties of taxing corporations are two: First, how to prevent that form of double taxation which results from the fact that several states may levy taxes of varying weight upon interstate corporations. Second, how to prevent that form of double taxation which imposes a burden both upon the tangible property of the corporation and upon the stocks and bonds representing ownership in that tangible property.

A number of taxation experts suggest meeting the last-named difficulty by exempting from taxation stocks, bonds, and other securities, and by imposing, instead, a tax directly upon the capitalization of the corporation itself. In the case of corporations which are local and of moderate size, this might be effected by the reform of tax laws within a single state. Where, on the other hand, corporations are distinctly interstate in character, such reform would require either a careful co÷rdination of the tax laws of the several states, or a corporation tax which should be purely Federal in character.

The first difficulty mentioned above would likewise have to be met, either by the co÷rdination of state tax systems, or by allowing taxes on interstate corporations to be levied solely by the Federal government.

It is claimed by some economists that the virtual impossibility of effectively co÷rdinating the tax laws of the various states renders it imperative that all interstate corporations be taxed solely by the Federal government. In such a case the Federal government would be taxing interstate corporations partly for its own benefit, and partly as the agent of the various states. It is said also that such a Federal tax should be levied on corporations at the source, i.e. upon capitalization rather than upon stocks and bonds. Being applied at the source, it would reach all forms of corporation wealth. It would be easy and economical to administer. So far as corporations are concerned, a purely Federal tax on interstate corporations might prevent both forms of double taxation.

Even though the states consented to a purely Federal tax on interstate corporations, however, it might prove difficult for state and Federal governments to agree upon a fair division of the joint revenues derived from such a tax.