ing that the former is a thing, while the latter is only the representation or shadow of the thing.
In levying taxes on realty the owner, as a rule, is not allowed to offset or reduce its valuation by the amount of his outstanding indebtedness; but in the case of the taxation of personal property such an offset is generally permitted, on the ground that a man should be taxed only upon what he owns and not upon what he owes; and even when not allowed by law, the circumstance of indebtedness is almost always taken advantage of by persons assessed, for reducing valuation in making returns to the tax officials of the value of their property. In assessing an income tax a deduction is allowed for interest paid on mortgages, and such business expenses as lessen income. Personal expenses, as house rent, cost of living, and the like, can not, on the other hand, be properly deducted from income before it is taxed, because income is sought for and exists for the purpose of defraying such expenditures. By the income-tax law of the United States, enacted in 1865, and also in 1894, deductions were allowed from the amount of taxable income, of all taxes paid within the year, of all interest paid on indebtedness, and the rent or rental value of any homestead actually occupied by the taxpayer.
One of the most curious features of recent tax experiences in the United States has been the extent to which this practice, or right of reducing valuations of personal property for taxation by debts, has been made the opportunity for evading taxation. Thus, by the very structure of the Federal Government, its various instrumentalities, as heretofore explained,[1] are necessarily exempted from all taxation by the States of the Federal Union. Recognizing this, it has been the habit of individuals to effect credit purchases to a greater or less amount of United States securities a short time previous to the time fixed for tax returns or valuation, and then offsetting the debts thus incurred against valuation, evade the taxation on their personal property to which they would otherwise be subjected.[2] And for such moral wrong there would appear to be no legal remedy on the part of the State, except by the commission of a greater wrong—namely, the prohibition of the offsetting of all debts in tax valuations; or, what is
- ↑ See Popular Science Monthly, vol. 1, No. 3, p. 289; vol. 1, No. 4, p. 468.
- ↑ When the Federal Government effected in November, 1894, a loan for $50,000,000, a premium was paid on no inconsiderable amount for the privilege of purchase, or investment, so large as to net to the purchaser an abnormally low rate of interest—2·5 per centum. The explanation of this action was that, apart from the recognized value of an unquestionable security, the investment carried with it an exemption from a national income tax of two per cent, as well as from State and municipal taxation—so that the rate of interest accruing to the purchaser was not as low as it might have seemed to be, and by the holders and managers of trust properties was generally regarded as satisfactory.
