Popular Science Monthly/Volume 53/July 1898/Principles of Taxation: Theory and Practice of Income Taxation XXVIII

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Popular Science Monthly Volume 53 July 1898  (1898) 
Principles of Taxation: Theory and Practice of Income Taxation XXVIII by David Ames Wells


By DAVID A. WELLS, LL. D., D. C. L.,



THE income-tax experiences of the United States are so little in accord with those of any other people or countries that their consideration with a view of obtaining a practical acquaintance and comprehension of the whole subject would seem to be best facilitated by grouping their most important characteristics under three heads—namely, their origin and history and undoubted influence on the political and fiscal policy of the nation.

Under the great financial necessities of the Federal Government by reason of the war the attention of Congress was directed to an income tax as a source of revenue as early as the summer of 1861; and in that and the following year laws establishing such a tax were enacted. Their provisions were, however, so complicated, and the methods authorized by them so inquisitorial, that the Commissioner of Internal Revenue reported in 1863 that they deprived the tax "f all claims to public favor." The revenue returns under such circumstances were very moderate: $2,741,858 in 1863, and $20,294,000 in 1864. In this latter year a more comprehensive and effective law was enacted, which was followed by better results, the collections to the credit of the income tax rising from $32,050,000 in 1865 to $72,982,000 in 1866, and $66,014,000 in 1867. But as the necessity for very large revenues on the part of the Government ceased with the termination of the war, and the spirit of patriotism engendered by the war on the part of the people abated, the collections fell off very rapidly. Thus, between 1866 and 1867 the total receipts on account of the income tax, without any change in the law, declined from $72,982,159 to $66,014,000; and in 1872, with an exemption of $2,000, only 72,949 persons in the United States, out of a population of over 39,000,000, admitted under oath that they were in receipt of any income liable to taxation in excess of the exemption. Those only who were officially and intimately connected at this time with the Internal Revenue Department of the United States Treasury can form any adequate idea of the amount of perjury and fraud that characterized and pervaded the country, during the years 1867 to 1872, as the outcome of the then existing system of internal revenue. And American ingenuity was never more strikingly illustrated—not even by the exhibits of the patent office—than it was at that time in devising and successfully carrying out methods for evading the taxes on incomes and distilled spirits.

One curious feature of Federal experience with this tax, the tolerance of which would now be regarded as incompatible with any just and efficient administration of it, was, that the returns made under it were thrown open to the public; and one commissioner of internal revenue instructed his officials to have them published in the pages of local papers, "in order," as he said, "that the amplest opportunity may be given for the detection of any fraudulent returns that may have been made." This idea did not, however, find much favor with the public, who, in fact, during the later years of the tax, were inclined to regard with great equanimity all successful attempts to evade it.

The income tax ceased to form a part of the internal revenue system of the United States after the year 1872. It was, however, made a part of the tax system of several of the States, and the following record (hitherto generally overlooked by the public) of the recent administrative experience of one State ought to be especially worthy of the attention of those who advocate the readoption of this form of taxation by the Federal Government.

No State in the Union has a more illiberal, all-pervading system of taxation than Massachusetts, and in no State is the administration of tax laws more stringent or arbitrary. What Massachusetts fails to accomplish in the assessment and collection of taxes would, therefore, seem to be of little use for any of the other States or the Federal Government to attempt with any anticipation of success. This Massachusetts system finds its fittest exemplification in the city of Boston; and the officials who constitute its department of municipal taxation never indulge, as the taxpayers well know, in much sentiment in the discharge of their duties. The acknowledged representative of this board for many years never hesitated to say that he recognized but one principle, and that was, that in matters of taxation the taxpayer had no rights which the State was bound to respect; and, as chairman of a State commission which some years ago made a report to the Legislature, and with the Declaration of Independence confronting him with its assertion that it is a self-evident truth that "all men are endowed by their Creator with certain inalienable rights," he also gravely asserted that "the individual person [in Massachusetts] has no inalienable rights except that to his own righteousness."

One of the specialties of municipal taxation in Boston, under the supervision of its Board of Assessors, is an income tax, and its methods of administration are substantially as follows: Taxpayers are required to make a return annually, and in detail, of all their property which the law makes subject to taxation (and that embraces almost everything in Massachusetts except their proprietary interests in graveyards); and in blanks officially furnished for such purpose there is a special space for a return of every individual's income. If no return is made, then the Board of Assessors meet in secret in an upper room of the City Hall, known as the "Dooming Chamber," and arbitrarily determine the amount of income for which each delinquent shall be assessed; and from such determination there is practically no appeal. The amount thus assessed for income to the individual is then "lumped in" with the aggregate of his other taxes; and if a dissatisfied taxpayer wishes to discover what amount has been decided upon as his income, the assessors will not afford him any information. Under such circumstances it might naturally be supposed that the administration of an income tax in the city of Boston would be an unqualified success. But what are the facts?

First, comparatively few of the taxpayers of Boston make any returns to the assessors of their income. Second, the returns that are made are not open to the inspection of the public. There is no law in Massachusetts covering this point, but one of the Boston assessors is reported as saying that if the returns were open to public inspection none would be made, as the chief objection of taxpayers to filing returns was the fear that their incomes from business or professions might be known. The statutes of Massachusetts, however, provide that the returns of each individual's property shall be made by the assessors of every city and town in the State to the secretary of the Commonwealth; but inquiry shows that the Boston assessors make no such returns. Third, although the amount annually collected from an income tax in the city of Boston is very considerable—$840,000 in 1892—it probably represents, according to the Boston Advertiser, "only about one fourth of what is due in the city from incomes." In the face of such an exhibit the question is pertinent, What measure of success do the present advocates of a Federal income tax expect will follow an attempt to expand the Boston system of its administration over an area of country extending from Florida to Alaska?

One would naturally think that the lesson of experience which the Government and the people of the United States have already had, would restrain further experimenting with this subject until the next war or the arrival of the millennium.

That a free government can not efficiently collect a tax which its people regard as unjust without a resort to despotic methods that public sentiment in turn will not tolerate is illustrated in this further tax experience of Massachusetts:

The State laws require that citizens who are shareholders in corporations organized in other States shall be taxed in Massachusetts on the market value of shares so held; and such owners are required to make a return under oath of the amount of such property in their possession.[1] Yet a petition recently presented to the Legislature of the State by representative members of boards of trade and chambers of commerce recites that the law in question "is ineffective and therefore ridiculous, as is proved by the fact that although the market value of shares of foreign corporations held by citizens of Boston alone is believed to be over $600,000,000, the amount taxed by the assessors of Boston was then only estimated at $45,000,000; and nearly all of this that is known is taxed to the unfortunate people whose estates are in trust,"[2]

In the United States the income tax, as enacted in 1803, exempted $600 annual income for each person, together with whatever was paid annually for rent and repairs of residence. Five per cent per annum was then levied on all incomes above $600 and not in excess of $5,000; seven per cent on all incomes in excess of $10,000. In the income tax of the United States as it existed at one period there was, therefore, recognized the principle not only of exempting incomes below a certain amount from all taxation, which amount, in order to keep up the appearances of equity, was allowed to be equally deducted from all larger incomes; and in addition a further feature, not generally recognized in other existing systems of income taxations, of "graduating" the assessment by increasing the rate or the percentage on the larger incomes; a system most exceptional and peculiar, but which on first presentation seemed to find favor as an ingenious and equitable method of equalizing the burdens of the State between the rich and the poor.

The present is therefore an advantageous opportunity for asking whether any income tax which discriminates in any degree is likely, as is often claimed, to constitute the one perfect form of taxation of the future. And at the outset attention is asked to the following considerations, to which popular attention is not always intelligently given:

A Federal income-tax system necessarily involves multiple taxation on one and the same income, person, and property. For example, in the United States a citizen of any one State would be liable, in the first instance, to the Federal tax on his income; second, to a State tax on the same income; third, to a tax on the property or business producing the income, in virtue of its location and consequent territorial jurisdiction of the State. In some States—Massachusetts, for example—the State, in virtue of its jurisdiction, over a person, taxes him also for property beyond its territorial jurisdiction and subject to taxation in the State where it is an actuality. Doubtless such duplications in a greater or less degree will be inevitable in the case of all Federal taxation. But where there are so many sources available to the national Government for obtaining revenue, it would seem to be impolitic for it to encroach on those methods which are particularly applicable to the States—as income taxes, taxes on legacies and successions, which are governed and protected by State laws, and franchises, which are almost exclusively granted by the States and rarely by the Federal Government. Certainly there would seem to be no warrant in either justice or expediency in unnecessarily favoring such a system of multiple taxation; thereby increasing the real or fancied grievances of the people in respect to all taxation, and creating, by reason of a sense of injustice, additional temptations on the part of the taxpayer to fraud and evasion.

Again, all modern systems of income taxation have recognized the principle of discriminating in favor of persons in receipt of comparatively small incomes, and have provided as a fundamental feature of their policy, that all incomes below a certain rate should be exempted from assessment. Such exemptions, except in the ease of the United States, have always and until within a recent period been of a comparatively small amount. In Great Britain it is £160 ($800) per annum. No difference is made in England in levying the income tax, though often proposed and advocated, on account of the source whence the income is derived. Whether the income is earned by the exertions of its possessor, or arises from property, so that the recipient is sure of it without the slightest exertion at all on his part, the same proportion has always been deducted from it. In the administration of its income-tax system England has abandoned the idea of assessing an income derived from multiple sources as a whole to one taxpayer, and in place divides an assessable income into schedules according to its source; and, in fact, has given to such a system the popular designation of "the stoppage at source plan." Thus at present the sources of income in Great Britain are classified as pertaining to one or more of five schedules—designated as A, B, C, D, and E. For example, the profits or income derived from agricultural industry are classified as under schedule A, and those from manufactures, mines, gas works, and water supplies under schedule D, and the like; and it is only in schedules A and D that the income receiver must make a return of agricultural, mercantile, or manufacturing gains or profits.[3]

The result of a progressive income tax instituted a few years since in Vaud and other prosperous and populous Swiss cantons is reported to Lave already verified the predictions and prophecies of the European economists. The project has been often discussed in England, France, and other countries, but the tendency of economic discussion has always been generally adverse to it, on the ground that such forms of taxation would discourage the permanent investment of capital, and encourage capitalists to transfer their capital and business to other and foreign localities. Vaud, however, in particular, determined to ignore the economists and impose the tax, and the inevitable disturbance of capital is reported to have taken place. One of the chief capitalists of Lausanne, a Swiss tanner named Mercier, employing several hundred workmen, is moving his business from Lausanne to the other side of the lake (Geneva) at Evian. Evian is in French territory, and there is no progressive income tax there. "Up to this time," wrote M. Mercier, in a letter published by the Lausanne papers, "I have paid over 20,000 francs a year in state and town taxes. The new law would raise that figure to 80,000 francs or more. I owe it to my family to withdraw out of reach of what I can not consider otherwise than downright spoliation."

A recent economist, commenting on this transaction, thus curtly developed the whole subject: "The fact is that a progressive income tax will not work under modern conditions. The modern movability of capital has made all the difference. The Florentine

democracy taxed capital to death, no doubt, but in the middle ages once a Florentine always a Florentine. Cosmopolitanism was not invented, and a man hesitated long before seeking his fortune among strangers when 'stranger' and 'enemy' were almost equivalent terms. All that is now changed. A progressive income tax in England, unless very moderate and managed with the utmost circumspection—and even then the experiment would be too dangerous to try—would certainly result in an enormous transference of English capital to Belgium and Germany. If the idea of progressive taxation is feasible at all, it is only feasible in the death duties, and even there the difficulties are formidable enough."[4]

In Germany, the income exemption being very small, nearly the whole population of the country, male and female, are made subject to the provisions of the income tax. According to M. Soetbeer, the German economist, the total income of the classes in Germany who pay income taxes is $2,190,000,000, and of this amount fifty-one per cent is owned by people whose incomes range between two hundred and twenty-five dollars and four hundred and twelve dollars. And the New York Nation surmises that a similar state of things would be found if an analysis of all classes of income-tax payers were to be made in England.

In Austria a new law has been reported by a special Government commission since a previous statement (see Chapter XYIII). At present all persons of Austrian nationality whose annual income exceeds six hundred florins will be liable to a personal income tax, which will be levied on a sliding scale. The scale is graduated so that five per cent will be levied on small incomes and as much as six per cent on large ones. Employees whose total incomes are less than six hundred florins per annum are exempt. In addition to the income tax, persons of either sex trading or carrying on business on their own account are subject to an additional impost. The new law is intended to supersede the existing system by the introduction of a general tax on private trading and industrial establishments of all descriptions, a tax on all joint-stock companies and other enterprises legally bound to publish annual balance sheets, a tax on incomes derived from invested capital, and a personal income tax based on a progressive sliding scale.

In France, the republic, although groaning under an almost overwhelming burden of debt, has recently refused, by a vote in its Chamber of Deputies of 267 to 236, to reconstruct its income-tax system, with a view of increasing the revenue derived from it; and subsequently, by a majority of 289, refused to reconsider its position, although the organic law framed for France in 1875 gives the national legislature unlimited power over taxation, direct as well as indirect. During the popular discussion that preceded this legislative action, it is interesting to note that a progressive income tax was not properly regarded as more oppressive than many other forms of taxation, and as a matter of French experience a heavy income tax—about four per cent—is now levied on French bonds and shares, in fact, on every dividend of a French company, while no income tax is levied on French Government stocks or foreign bonds; and this apparently unfair treatment is accounted for because the revenue derived from French companies can be easily ascertained and the companies made responsible for it, while such a result would be impossible in the case of foreign bonds or foreign stocks and shares, and hence the difficulty has arisen of how to compel the taxpayer to pay: as, if the declaration was left to him, it was not unreasonable to suppose he would not declare it, or only declare it in part; while if left for ascertainment by French officials, it was feared that the income tax in France would become a political weapon, which would be freely used against the legislators in power.

M. Paul-Beaulieu, a distinguished French economist, has recently advanced and advocated the view that a state in instituting an income tax for the sole purpose of obtaining revenue, ought not to grade the tax at all, or lay a higher rate on large incomes than on smaller ones; or, in other words, that it is better to tax all incomes that are taxed at all at one uniform rate; and the reason for this is that the large incomes form so small a percentage of the total that the increased rate adds no great amount to the revenue, while greatly increases the difficulty of assessing large incomes at their true value.

In support of this view lie submits in general terms the following results of his careful examinations in Prussia, Saxony, and England: In Prussia, where incomes above one hundred dollars were taxed, for the year selected by M. Beaulieu, about one fourth of the people were entirely exempt. Of the rest, thirty-five thirty-sixths paid on incomes of from one hundred dollars to seven hundred and fifty dollars. Only one person out of forty-three had more than seven hundred and fifty dollars income. Only a little over four per cent of the total income of the country belonged to persons having an income of from $4,000 to $20,000, and only 1.7 per cent to those having over $20,000 income.

In Saxony one fifth of the total incomes belonged to persons having less than one hundred and fifteen dollars yearly. The incomes of those having less than four hundred and seventy-five dollars each aggregated about two thirds of the total income. The great incomes, exceeding $25,000 to the person, belonged to seventy-three individuals, and comprised less than one and a half per cent of the total.

In England incomes under one hundred and sixty pounds, or eight hundred dollars, are not taxed. In the year selected by M. Leroy-Beaulieu 381,000 persons paid income taxes of a total of $750,000,000. Of the contributors 342,000, or about nine tenths, paid on incomes of less than $3,000, but it is noticeable that they were taxed on not much more than a third of the total amount. Thus nearly two thirds of the taxable income belonged to 39,000 persons. One fifth of the total incomes assessed belonged to 1,222 persons, with an income of over $50,000 each.

It will be seen that there is a striking difference in the results shown by M. Leroy-Beaulieu's figures in Germany and England. Much of this difference is due to the nature of the laws, by which all small incomes in England are free from taxation, but a part of it is to be attributed to the larger fortunes in England.

Italy.—There is no income tax in Italy in the sense in which that term is used in England and the United States, but there is a so-called professional income tax which was by an old law fixed at seventeen per cent on half the estimated income, and which has been somewhat increased by a new law in which there are variations made according to the sources of income. While Italy is, in fact, potentially one of the richest countries in Europe, and in ancient times was so regarded, its name to a certain extent has come to be synonymous with poverty. The explanation of this is that its government is prodigal and dishonest; and in gathering its income the dishonesty of its officials causes its taxation to fall most oppressively on the classes which a wise statesmanship would protect, and leaving the minimum burden on those who are most capable of bearing its maximum.

A new feature of the British fiscal system, which in a certain sense may be regarded as an increase of the exemption under the existing income tax, has recently been sanctioned by Parliament under the name of the "Farm Rating Act," which proposes to mitigate existing agricultural depression by relieving farm lands of a large part of their share of local taxation—i. e., as pointed out in debate in the House of Commons, by Sir William Harcourt, "by taking £2,000,000 ($10,000,000) out of the general taxation of the country," inasmuch as, if certain existing sources of revenue supply less, other taxes must supply more. "This will bring up the total governmental contribution for like purposes to £6,000,000 in 1868, and £11,000,000 in 1892." In a debate on this subject before the Royal Statistical Society, it was maintained that an assessment of the English poor rate, to which nearly all other English rates were now mere additions, was originally founded on the principle of ability to pay, and that principle had never been expressly repudiated. But the making of this expenditure a local charge was in itself a negation of the principle of taxation according to ability, and the only question now was whether an attempt to establish in each locality a principle which had been established as regards the nation as a whole. The answer was in the negative.

"Speaking very broadly," wrote Mr. Goschen a quarter of a century ago, "in England fifty years ago land bore two thirds of the taxation on real property, and houses and other property one third; the latter now bears two thirds, while lands bear one third. In Erance lands bore over two thirds more than fifty years ago, and bear more than two thirds still. Land, in short, is not as a rule highly rated in England, and where it is highly rated what is wanted is a revised assessment."

What is Exemption from Taxation?—An exemption is freedom from a burden or service to which others are liable; but an exemption for a public purpose, or a valid consideration, is not an exemption except in name, for the valid and full consideration, or the public purpose promoted, is received in lieu of the tax. Xor is an exemption from taxation a discriminating burden on those who pay an income tax, provided the person or institution benefited by the exemption is a pauper, or a public charitable institution; for then there is consideration for the exemption, and it is justified as a matter of economy, and to prevent an expensive circuity of action in levying the tax with the sole purpose of giving it back to the intended beneficiary of the Government. The avoidance of this unnecessary circuity of action is not, moreover, an injury but a gain to those who pay the tax. It can not, however, be seriously claimed that a man having $100,000 dollars of productive capital, and receiving from it $4,000 of annual income, is entitled to receive support from the Government as a public pauper.

An income tax which permits of any exemption whatever is a graduated income tax, not by the rate of the tax but by the amount of the exemption, because all incomes below an arbitrary line are entirely exempt from the tax. Again, in treating of an income tax it should be always borne in mind that, when a Government taxes the income of property, it in reality taxes the property from which the income is derived. In England and on the Continent of Europe land is taxed on its yearly revenue, or income value, and these taxes are always considered as land taxes. Alexander Hamilton, in discussing the taxation of incomes derived directly from property, used this language: "What, in fact, is property but a fiction, without the beneficial use of it? In many instances, indeed, the income is the property itself." (Hamilton's Works, vol. iii, p. 523.)

As in theory all citizens ought to contribute in proportion to their revenue to the support of the Government under which they have chosen to live and to which they look for protection in respect to their persons and property, the exemption of any from an income tax can only be justified on the assumption of the non-receipt by the citizen of an income beyond what is necessary to defray the expenses of a moderate living. In truth, any exemption under a general income tax is in principle an act of charity on the part of the Government. It is interesting, therefore, to note where the authors or special advocates of the income tax of 1884 proposed to draw the line in respect to charity and as to the amount of property the possession or enjoyment of which, in their opinion, constituted riches.

If the law exempts from taxation income from property to the extent of $2,000, it in effect exempts property to the capital value of $50,000 from taxation, for at present four per cent is about the average profit of money, land, or other property, over and above all charges and taxes, and at that rate of profit $2,000 will be the annual income value of $50,000. If, however, we asssumefive per cent as about the present annual average profit on money, land, or other property in the United States, over and above all charges and taxes, then an exemption of $4,000, the rate fixed upon in the income-tax act of 1884, would represent an accumulation, or business, or profession, of the value of $80,000. If we take the rate at which the United States can borrow money—namely, three per cent—then an exemption of $4,000 would represent an accumulation of a citizen, invested in United States securities, of $133,333+. And, according to any lair interpretation of the action of the committee which reported in 1884 a $4,000 exemption, a citizen who is worth less than $80,000 of ordinary property yielding income, or $133,000 of property invested in United States bonds, was a legitimate object for national charity; the above sums representing the dividing line in the United States between those who were entitled to be regarded as poor and those who were entitled to be considered rich. Such an assumption finds no precedent in fiscal history, and was an unwarranted favoritism to nine tenths of the well-to-do people of the country, who were abundantly able to pay any just proportion of the taxes which the Government then considered it necessary to impose for its support. Under such circumstances it would be a misnomer to call such an extortion taxation. It was unmasked confiscation and a burlesque on taxation. In the case of the income tax of 1868, when the amount of exemption was $1,000, experience demonstrated that more than nine tenths of the entire property of the country, and more than ninety-nine hundredths of its property owners, escaped payment from this form of taxation.

Again, an income tax which exempts $4,000 of income in the United States can not be defended by any rational rule or doctrine, legal or economic, for the property and income exempted would be infinitely greater in the aggregate than the property and the income of the same class made subject to the tax. Under this form of an income tax there could be no equality between taxed-producers and non-taxed-producers, and more especially as the non-taxed-producers will be the most numerous and the greatest producers in quantity as a body.

]o man is a freeman whose industry and capital are subject to exaction, and from which his immediate competitors are entirely exempt. Equality of taxation of all persons and property brought into open competition under like circumstances is necessary to produce equality of condition for all, in all production and in all the enjoyments of life, liberty, and property; and government, whatever name it may assume, is a despotism, and commits acts of flagrant spoliation, if it grants exemption or exacts a greater or less rate of tax from one man than from another man, on account of the one owning or having in his possession more or less of the same class of property which is subject to the tax. If it were proposed to levy a tax of five per cent on annual incomes below $4,000 in amount, and exempt all incomes above this sum, the unequal and discriminating character of the exemption would be at once apparent; and yet an income tax exempting all incomes below $4,000 is equally unjust and discriminating. In either case the exemption can not be founded or defended on any sound principles of free constitutional government; and is simply a manifestation of tyrannical power, under whatever form of government it may be enforced. The great republican principle of equality before the law, and constitutional law itself, alike preclude any exemption of income derived from like property.

M. Thiers, in his work on the Rights of Property, thus forcibly condemns confiscation under the name or form of a graduated income tax: "Proportionality," he says, "is a principle, but progression is a hateful despotism. . . . To exact a tenth from one, a fifth from another, and a third from another is pure despotism—it is robbery."

Finally, the principle involved in this question of discriminating income taxation is one that affects the foundation and continued existence of every free government—namely, the equality of all men before the law. Any exemption whatever, under an income tax, be it small or great, except to the absolutely indigent, is purely arbitrary; and the principle once allowed may be carried to any extent. Any exemption of any portion of the same class of property or incomes is an act of charity which every patriotic American citizen ought to reject upon principle and with scorn, except under circumstances of great want and destitution. Equality and manhood, therefore, demand and require uniformity of burden in whatever is the subject of taxation.

The Inception or Origin of the Income Tax in the United States.—The subject of taxation in the new Government which it was proposed to establish in place of the colonial system which the Revolution had supplanted, constituted one of the most important and salient points of interest in the convention which framed the Constitution of the United States, and was the cause of much difference of opinion among its members and earnest contention between the States. The great source of weakness of the Confederation was its inability to levy taxes of any kind for the support of its Government. To raise revenue it was obliged to make requisitions upon the States which were respected or disregarded at their pleasure. Great embarrassments followed the consequent inability to obtain the necessary funds to carry on the Government. One of the principal objects of the proposed new Government was to obviate this defect of the Confederacy by conferring authority upon the new Government by which taxes could be directly laid whenever desired. Great difficulty in accomplishing this object was found to exist. The seaboard States were unwilling to give up their right to lay duties upon imports, which were their chief source of revenue. The inland States, on the other hand, were unwilling to make any agreement for the levying of taxes directly upon real and personal property, the smaller States fearing that them would be overborne by unequal burdens forced upon them by the action of the larger States. In this condition of things great embarrassment was felt by the members of the convention. It was feared at times that the effort to form a new Government would fail. But happily a compromise was effected by an agreement that direct taxes should be levied by Congress by apportioning them among the States according to their representation. In return for this concession by some of the States, the other States bordering on navigable waters consented to relinquish to the new Government the control of duties, imposts, and excises, and the regulation of commerce, with the condition that the duties, imposts, and excises should be uniform throughout the United States; so that, on the one hand, anything like oppression or undue advantage of any one State over the others would be prevented by the apportionment of the direct taxes among the States according to their representation; and, on the other hand, anything like oppression or hardship in the levying of duties, imposts, and excises would be avoided by the provision that they should be uniform throughout the United States.

The Federal Constitution accordingly upon completion divided the taxes that Congress might impose under it into two classes: those which are direct and those which are indirect, or, as the letter of the Constitution expresses it, "duties, imposts, and excises." It also provides that the former shall be apportioned, equally with representation in Congress, among the several States of the Union, according to their respective numbers, that "no capitation or direct taxes shall be laid unless in proportion to the census"; and that the latter class of taxes shall be "uniform throughout the United States."

But from the beginning of the Federal Government the determination of the exact legal meaning of the word "direct" as applied in the Constitution to taxation has been one of great difficulty and embarrassment, although the doctrine in England and her colonies, before the adoption of the Constitution, was a favorite one, that "taxation and representation should go together."[5]

In almost one of the first cases that came before the United States Supreme Court after the adoption of the Constitution it was decided that a tax on carriages, the payment of which was resisted by one Ilylton, of Virginia, on the ground that such a tax was a direct tax, and had not been apportioned among the States as required by the Constitution, the court held that the tax in question was to be considered as a tax on the expenses of living and not a direct tax within

the meaning of the Constitution, as the evils which would attend its apportionment according to population would be so great "that the Constitution could not have intended that an apportionment should be made."

On the other hand, when a citizen of Illinois—Hon. William M. Springer—resisted, in 1880, the payment of a national income tax on the ground that such a tax was a direct tax, and, not being levied in the proportional manner presented by the Constitution, was not legal, the court decided that "direct taxes, within the meaning of the Constitution, are only capitation (head) taxes, and taxes on real estate; and that the tax of which the plaintiff complains (i. e., a direct tax) is within the category of an excise or duty."

If, now, it had been clear and certain as to the exact meaning that the framers of the Constitution intended to apply to the word direct when they used it in connection in former years with prospective Federal taxation, the cases referred to would never have begun. But they left no clear and certain expression of opinion on this subject, and it was doubtful if they collectively ever had one. On this point the evidence of Hamilton is conclusive; for in his legal brief in the carriage case, in which he appeared as counsel for the Government, he says: "What is the distinction between direct and indirect taxes? It is a matter of regret that terms so uncertain and vague on so important a point are to be found in the Constitution. We shall seek in vain for any antecedent settled legal meaning to the respective terms. We shall be as much at a loss to find any distinction of either which can satisfactorily determine the point." But it is to be further noted that in his argument in behalf of the Government in the carriage case, Hamilton mentioned as taxes which were to be considered, capitation (poll) taxes, taxes on land and buildings, and general assessments. (See his brief in the case referred to.)

All historical data explanatory of the constitutional meaning of the term "direct" have accordingly been of an indirect character, and so imperfect that the court has heretofore apparently not regarded them as worthy of consideration. But this condition of

things no longer exists; for in the brief submitted to, and in the argument made before the United States Supreme Court adverse to the constitutionality of the provisions of the income-tax enactment of August, 1894, by Hon. Clarence A. Seward, a department of national history which no historian or jurist had ever before completely exploited, was so traversed by him that it is difficult to see how any one can acquaint himself with its results and doubt that, although the framers of the Constitution and the people they represented might not fully agree as to a full and comprehensive definition of a direct tax, there was apparently a perfect unanimity of opinion among them that an income tax was a typical example of that kind of taxation.

Previous to the adoption of the Constitution there were no Federal taxes, and all precedents for helping to a correct determination of the constitutional meaning of direct taxation must therefore be drawn from the prior experience of the several States.

What was that experience? Recent historical research shows that Massachusetts had taxed incomes for more than a hundred years prior to the assembling of the Constitutional Convention; other of the leading States were imposing like taxes at or about 1787, and the receipts therefrom were used to help pay the quotas demanded by the then Government of the Confederation for the maintenance of the Federal Government. The income tax so paid, and all the other internal taxes collected by the States, were known as and called direct taxes and are so called to-day.

The Constitutional Convention empowered Congress to levy any of the authorized forms of taxation on the States; but the levy of direct taxes was guarded by a provision that such taxes should be apportioned to the population. The explanation of this curious anomaly is that the consensus of opinion in the convention was that wealth at that period was so equitably divided among the people of the States that population was the best measure of wealth and consequently of equitable taxation. But what would become of the element of equality if the levy was in the form of indirect taxes—duties, imposts, and excises—which, falling on the consumption of tea, coffee, sugar, spirits, and the like, leave it optional with the citizen in a great degree whether he will pay or not? Hamilton certainly thought that the door had been effectually closed against the possibility of any such evasion, for, when speaking of direct taxes in The Federalist, he says: "An actual census or enumeration of the people must furnish the rule; a circumstance which effectually shuts the door to partiality or evasion."

But any doubt on this subject ought no longer to be tolerated, for we now have, almost for the first time, a definition of or distinction between direct and indirect taxes that is founded on sound philosophy and large experience, and can not be refuted—namely, a direct tax has always in it an element of compulsion. The person against whom or on whose property or income a direct tax is levied has no option whether or when he shall pay. There is nothing voluntary about it. On the other hand, an indirect tax, whoever may first advance it, is paid voluntarily, and primarily by the consumer of the taxed article.

But the most important and vital issue involved in the income tax enacted 1894 (August 18th) was that it designedly provided for discriminating taxation, and this fact may be best demonstrated and brought to popular comprehension in the following manner: In a recent interview (1885) with a leading British parliamentary authority, the conversation turned on the new and unprecedented discriminating rates in the legacy and succession taxes imposed by the present British Parliament, and the opinion of the writer was asked respecting them. He returned, offhand, the answer that he could only discuss them from a British point of view, for, under the Constitution of the United States, such taxes could not be levied by the Federal Government, contemporaneously, and how promptly foreign authorities recognize the truth of this position is shown by the following extract from an editorial in the London Times on the phase of the income statute then before the United States Supreme Court: "Were we," it said, "under the United States Constitution, Sir William Harcourt's budget would have been declared unconstitutional. Populist leaders in America must envy us the freedom of dealing with other people's property, enjoyed in this motherland of liberty." This conversation led to a historical investigation, and the recognition of what seemed to be a fact little or not before noted, that the United States is the only nation that now exists or ever has existed which, through constitutional or other provisions, has, or has had, any limitations on its Government in respect to the general exercise or extent of the power of taxation. If there are any exceptions, they are to be found in the legislative enactments of the French National Assembly of 1789, and possibly in what is now known as the referendum system of Switzerland.

But a government that has no limitations on its power of taxation, that can arbitrarily take in whatever manner, to whatever extent, and at whatever time it pleases, the property of its people or subjects, whether that right exists in theory, as in England, or in actual practice, as in Germany, Austria, and Russia, is a despotism. If this assumption and reasoning may seem to any one extravagant and unwarranted, his attention is respectfully asked to the following expression of opinion on this subject by the United States Supreme Court, as given through Justice Miller in the celebrated "Loan Association vs. Topeka" case (20 Wallace, 665):

"It must he conceded that there are rights in every free government beyond the control of the State. A government which recognized no such rights, which held the lives, the liberty, and the property of its citizens subject at all times to the absolute disposition and unbounded control of even the most democratic depository of power, is after all but a despotism. It is true it is a despotism, of the many—of the majority, if you choose to call it so—but it is none the less a despotism."

And yet can there be any doubt that the American people would have abandoned its proud historical position if the Supreme Court had decided in 1885 that the income-tax enactment of 1894 was constitutional?

For such a decision would practically have removed any constitutional limitation on the exercise of the power of taxation by Congress, and in this way: First, by establishing that an income tax is not a direct tax, there can be practically thereafter no direct taxes to which the constitutional mandate of apportionment will apply, for popular sentiment will never sanction the enactment of a general "capitation" or "poll" tax, or a direct tax on land.

Then it certainly could not be unconstitutional to multiply classes for taxation according to wealth and increase the rate up to the point of confiscation. Can any one, furthermore, doubt that the primary object of the enactment proposed in 1889 was not the raising of revenue for the national Treasury, but rather to permit a part of the people of the country to impose discriminating taxes on the people of another part, and then jS.xing a general exemption at so high a rate that those of the first part, who are entirely able, should not be required to pay anything? If this exemption, in place of $4,000, had been fixed only to include the average annual wages or earnings of the working masses of the country, is it probable that Congress would have even considered the enactment of the income tax of 1884? Even before the form of the statute of 1884 was reported from the proper committee, speculation was indulged in to the effect that the constituents of certain districts would not have to pay anything in the way of income taxes under it. That the Government also practically conceded that the income-tax enactment of 1884 was pre-eminently class legislation is also evident from the following extract from a statement made in a brief by the Attorney General of the United States pending the consideration of the income-tax question by the United States Supreme Court:[6] "Congress," he said, "has adopted as the minimum income for the purpose of taxation the limit of four thousand dollars. This limit may be said to divide the upper from the lower middle class, financially speaking, in the larger cities, or to divide the middle class from the wealthy in the country districts." (Opening argument by William D. Guthrie, in support of the contention that the income-tax law of 1894 was unconstitutional.)

Attention is next asked to what seems to be by far the most serious point in this whole matter, and which has not as yet attracted public attention in any marked degree. The American people have been trying an experiment as a nation which has never before been attempted by any other nation—namely, that of universal suffrage, by which the power to elect legislators and shape the policy of the Government has been put under the control of those who, through no fault of their own, have not enjoyed such educational facilities as will enable them independently to form correct opinions on great constitutional, legal, financial, or economic questions, thereby creating almost endless possibilities for injudicious legislation. How such possibilities were being made actualities in the case of the income-tax statute of 1894 can be made evident to almost any one who makes himself fully acquainted with the circumstances attendant on its inception and almost concurrent legal adjudications and contentions.

The members of the convention that framed the Constitution of the United States had the very questions before them that have already been in issue before the American people, and may at no distant day be again presented for their serious consideration. It was inequalities in methods and facilities for the raising of revenue among the States of the Confederation for the support of the Federal Government that threatened the existence of the Confederation and necessitated the assemblage of the Constitutional Convention. And the members of this convention, taught by experience, incorporated in their work the provisions respecting the exercise of the power of taxation, the meaning and validity of which are now called in question. And in so doing they gave to the people of the United States an instrument of which one great feature, if not its chief feature, and one not recognized as it ought to be, is that it guards the rights of minorities as no other governmental instrument devised by mortal

man ever has done. As long as this great feature is preserved intact and the nation adds to it another principle, that every question of doubt concerning it shall be always determined in a way to strengthen it, the perpetuity of the present Government is assured. But if now the Supreme Court invalidates this great feature by nullifying the mandate of the Constitution, and thereby practically removes all limitations on the powder of Congress to impose taxes, sanctions discriminating taxation and disregards the rights of minorities, the hour when this Government enters upon the path of decadence will have struck. How puerile it is for any one to favor such a decision and its inevitable results, on the ground that a contrary decision would oblige the Government to repay to the people a large sum of money that it had illegally collected from them! This would, however, have one recommendation—namely, that it would approximately solve the difficult question. How much, in terms of money, is the existing Government worth?

Conclusion.—The following extract, incorporated by Mr. Justice Field in his opinion, delivered in concurrence with a majority of his colleagues, and adverse to the constitutionality of the income-tax statute of 1884, which imposed discriminating taxes on the American people, is also pre-eminently worthy of notice in connection with any general history or review of this great subject:

"Here I close. I could not say less in view of questions of such gravity that go down to the very foundation of the Government. H the provisions of the Constitution can be set aside by an act of Congress, where is the course of usurpation to end? The present assault upon capital is but the beginning. It will be but the stepping-stone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich—a war constantly growing in intensity and bitterness. 'If the court sanctions the power of discriminating taxation, and nullifies the uniformity mandate of the Constitution, 'as said by one who has been all his life a student of our institutions,' it will mark the hour when the sure decadence of our present Government will commence.' If the purely arbitrary limitation of four thousand dollars in the present law can be sustained, none having less than that amount of property being assessed or taxed for the support of the Government, the limitation of future Congresses may be fixed at a much larger sum, at five or ten or twenty thousand dollars, parties possessing that amount alone being bound to bear the burdens of government; or the limitation may be designated at such an amount as a board of walking delegates may deem necessary. There is no safety in allowing the limitation to be adjusted except in strict compliance with the mandates of the Constitution which require its taxation to be uniform in operation and, so far as practicable, in proportion to their property, equal upon all citizens. Unless the rule of the Constitution governs, a majority may fix the limitation at such rate as will not include any of their own number.

"Cooley, in his Treatise on Taxation (second edition, 215), justly observes that 'it is difficult to conceive of a justifiable exemption law which should select single individuals or corporations, or single articles of property, and, taking them out of the class to which they belong, make them the subject of capricious legislative favor. Such favoritism could make no pretense to equality; it would lack the substance of legitimate tax legislation.'

"The income-tax law under consideration is marked by discriminating features which affect the whole law. It discriminates between those who receive an income of four thousand dollars and those who do not. It thus vitiates, in my judgment, by this arbitrary discrimination, the whole legislation. Hamilton says in one of his papers (The Continentalist): 'The genius of liberty repudiates everything arbitrary in taxation. It exacts that every man, by a definite and general rule, shall know what proportion of his property the State demands. Whatever liberty we may boast of in theory, it can not exist in fact while [arbitrary] assessments continue.' (1 Hamilton's Works, edition 1885, 270.) The legislation, in the discrimination it makes, is class legislation. Whenever a distinction is made in the burdens a law imposes or in the benefits it confers on any citizens by reason of their birth, or wealth, or religion, it is class legislation, and leads inevitably to oppression and abuses, and to general unrest and disturbance in society. It was hoped and believed that the great amendments to the Constitution which followed the late civil war had rendered such legislation impossible for all future time. But the objectionable legislation reappears in the act under consideration. It is the same in essential character as that of the English income statute of 1691, which taxed Protestants at a certain rate. Catholics, as a class, at double the rate of Protestants, and Jews at another and separate rate. Under wise and constitutional legislation every citizen should contribute his proportion, however small the sum, to the support of the Government, and it is no kindness to urge any of our citizens to escape from that obligation. If he contributes the smallest mite of his earnings to that purpose he will have a greater regard for the Government and more self-respect for himself, feeling that, though he is poor in fact, he is not a pauper of his Government. And it is to be hoped that, whatever woes and embarrassments may betide our people, they may never lose their manliness and self-respect. Those qualities preserved, they will ultimately triumph over all reverses of fortune."

  1. The tax laws of New Hampshire and Vermont are drafted especially with a view to compelling the disclosure of income.
  2. If any one thinks that this extraordinary tax experience is limited to one section of the country, he would do well to acquaint himself with the recent results of the State of Ohio in attempting to tax money on deposit. Ohio has even a more efficient and minute scheme of taxing all classes of property than Massachusetts. Not only is every citizen bound under oath to make a complete return of his property, but the law, in addition, empowers each county in the State to contract with certain so-called "tax inquisitors" for the payment of twenty per cent of all taxes collected through their agency on previously assessed property. How successful this scheme has been in collecting taxes on money on deposit is shown by the fact, revealed in a recent report of the State Board of Tax Commissioners, that while the amount of money on deposit in the State, national, and private banks of Ohio in 1892, and subject to State taxation, was at least $190,000,000, the amount actually returned for taxation in the whole State during that same year was but a little over $32,000,000. There is a remark that has almost assumed the character of a proverb, that a text suitable to and illustrative of every situation may be found in the Bible. The text that is most applicable, and which ought to be full of instruction to every congressional advocate of the enactment of an income tax by the Federal Government in time of peace, will be found in the sixth chapter of the First Epistle of Paul to the Corinthians, where the apostle, as if he had the existing situation in view, remarks, "All things are lawful unto me, but all things are not expedient."
  3. A recent number of the London Times reports the following additional illustration of the ingenuity of the people of every country subject to an income tax to evade the payment of the same.

    "There is an argument in favor of the separation of the incomes of married couples for the purpose of income tax which has not yet been advanced. It is the immoral state of the law as it stands at present. John and Mary, each possessing incomes of less than £500, but in the aggregate exceeding that sum, agree to live together as a certain 'advanced' couple did who made themselves notorious only a short time since. They are both entitled to relief under the act Should they, however, legalize their union, neither is entitled to any rebate, and they are actually taxed for rendering themselves respectable members of society. And this is in moral England."

    In the earliest of Mr. Gladstone's budget speeches, that of 1853, he distinctly refused, while admitting that a great deal might be said in favor of taxing incomes at different rates, according as they proceed from property or from skill, to break up the income tax into classes, and to make a difference in the assessment according to the source from which the income was derived. Mr. Gladstone's argument, in this instance, applied to the difficulty of discriminating between the various degrees of the durability of incomes; but his definite refusal to "vary the rate of the tax according to the source of the income"—on the ground, to use his own words, that "I think that I should be guilty of a high political offense if I attempted it"—may suffice as a sufficient expression of his opinion in favor of a proportional system. In a recent number of the Nineteenth Century Mr. Gladstone referred to his budget of 1853, in which he continued his income tax, and to his proposal, in 1874, to carry on the national finance without its assistance. He refers to the preparations made, through successive reductions of the tax, for its ultimate abolition, and observes that "in 1874, for the first time since 1845, the opportunity arrived. The nation had its opportunity and took its choice. It may have been wise or unwise; but it was made by competent authority. The result is told in our present expenditure." In general discussions on the income tax, especially those which have characterized the financial debates in the British Parliament, the proposition has been often advanced that it is a hardship that incomes arising from the exertions of a man's brain should be charged at as high a rate as those resulting from invested capital; and during the present Parliament (1896) a motion was made by a leading member that the financial committee of the House may have permission to amend the assessment in such cases. In a debate which followed (instituted by Sir John Lubbock) it was stated that "while there was an immense difference, no doubt, between the two classes of incomes. If extreme cases were considered, they nevertheless passed the one into the other by imperceptible gradations. Nor had any satisfactory treatment of investments ever been suggested. Let them take one class—the securities of foreign nations. Some were excellent, others, unfortunately, as investors knew to their cost, were almost valueless. An arrangement, however, proposed by Sir Robert Peel in 1858 gave a substantial relief to those who had precarious incomes. They made their returns on an average of the income during the three preceding years, and, if the amount fell short, a rebate was given on the difference. He urged that they might make an effort this year to induce Parliament and the Government to revert to the old system, which, it was evident, would be only fair and a great boon to all those whose income depended upon their own exertions, whether in law, medicine, or commerce." He contended that the rising and successful man was assessed on less than his income, while the man whose income was falling was made to pay on more than his income. The Chancellor of the Exchequer said in reply that "his friend had urged the desirability of returning to the system that existed prior to the passing of the act of 1865. He seemed to have overlooked the fact that the alteration effected by that act, which he now wished to overthrow, was introduced at the express instance of Mr. Hubbard, who was a strong advocate for lightening the burden of the income tax wherever practicable. Taking the average of a man's income for three years was a plan specially devised to meet the difficulty in the way of appeal that would be experienced by business and professional men. He was quite willing to allow that system to continue, as he believed that it was, on the whole, fair to both parties. The proposal of his friend, however, while adhering to the form of making a return upon the average, did not in fact carry out that principle at all, for the first year was only to be struck out where the fourth year showed a loss. Surely, therefore, if the revenue was to collect only on the small receipts, the principle of average ceased at once. For this reason he did not feel justified in accepting the amendment."

  4. The rate of tax progression in Canton Vaud is much less heavy in the ease of real than in respect to other descriptions of property. The amount of taxation is fixed yearly. It was for the first year, after the law was passed, at the rate of one hundred and twenty per mille on the lowest class of personal property, with exemptions on movable property, tools, kitchen utensils, clothes, and household furniture. A much more intricate arrangement exists for income derived from personal exertions. Sixteen pounds a year is allowed to be deducted from the income, and exempted from taxation, for the head of the family himself, his wife, for each of his children or descendants who are minors, and for each person for whose maintenance the head of the family is legally liable. Thus, a man with a wife and twelve children, possessing an income of five thousand six hundred francs (two hundred and twenty-four pounds) a year, would be entirely exempt from taxation, as also would be a man with a wife and three children and an income from labor of two thousand francs (eighty pounds) a year. It can not be supposed that a low taxation of this character, with all the risks involved of causing capital to emigrate, and of preventing strangers, who, after an interval, are also to be subject to the same tax, from settling in the canton, or from remaining there, with all the differences of class-feeling which it evoked, could have become law without calling forth some strong and almost passionate expressions. It has to be remembered that besides the taxation for the administration of the canton proper, those levied for the expenses, which we include under the head of local government, such as roads, watercourses, education, free to all classes in Switzerland, and carried out with much vigor and cost, are likewise levied according to the same system. We may form some idea of the weight of the burden thus imposed.
  5. The framers of the Constitution intended that the apportionment of direct taxes among the States should be in more exact ratio to the population even than it is possible to apportion the representation. For example: Suppose one representative to every ninety thousand inhabitants, a State might have a large fraction left over; but the apportionment of direct taxes was designed to be with mathematical accuracy to the precise number of persons ascertained by the census. After the first apportionment of representatives had been made in the Federal Convention by estimated population, before an actual census, it was held that the estimate of the population of the different States was not sufficiently accurate for the apportionment of a direct tax; and that, consequently, the General Government could not lay a direct tax until a census should have been taken. Elbridge Gerry, of Massachusetts, moved that until a census be taken direct taxation be apportioned to the number of representatives. Mr. Carroll, of Maryland, replied that "the number of representatives did not admit of a proportion exact enough for a rule of taxation" (Elliot's Debates, v, 451). Mr. Ellsworth "thought such a rule unjust. There was a great difference between the number of inhabitants, as a rule, in this case. Even if the former were proportioned as nearly as possible to the latter, it would be a very inaccurate rule. A State might have one representative only, that had inhabitants enough for one and a half or more, if fractions could be applied" (ibid., 453). Mr. Gerry's motion was defeated. The convention, after debate, decided that direct taxes must be apportioned in the States in more exact ratio to the population than the representatives could possibly he apportioned (Elliot, v, 453).

    Many of the leading patriots of the Revolution—Patrick Henry among them—were distrustful of granting this power, even with the restriction placed upon its exercise. Massachusetts accompanied her adoption of the Constitution with a resolution, signed by John Hancock, recommending an amendment of the Constitution which should prohibit Congress from levying a direct tax until they should first have made a requisition on the States (I Elliot, 323). The same amendment, word for word, was recommended by the State of New York and the State of North Carolina, and similar resolutions were adopted by South Carolina, Rhode Island, and Virginia.

    In the apportionment of the direct taxes which had been laid by Congress previous to the income tax the ratio to the census was preserved with scrupulous accuracy, and the actual use of the authority up to the time of the imposition of the income tax was in accordance with the understanding of the framers of the Constitution.

    Mr. Madison, who was probably the most active participant and member in the convention that framed the Constitution of the United States, in a letter written after the adoption of the Constitution but before the organization of the new Government, and never discovered (by Mr. Worthington Ford) and its contents made public until 1895, embodies much new information in regard to the intent and purpose of the term "direct" taxes as used in the Constitution and in regard to the understanding of the people of the United States concerning that term when they adopted the Constitution. It shows, what is extraordinary, "that the term, in the estimation of the men who used it, did not refer to the kind, or character, or nature of the tax itself, and that the framers of the Constitution never considered the subject of taxation from the philosophical or politico-economic point of view, but were wrestling with the stern necessities of the question, How shall the people of these several States be induced to pay a Federal tax?

    "Manifestly, it could be raised by but one of two methods: either indirectly, by 'requisitions' on the several States, as under the still existing Confederacy, or by taxes laid directly by the Federal Government. Duties and excises were not indirect taxes; they were not under discussion or consideration; they were not in the case at all. Indirect taxes were taxes procured indirectly by 'requisitions' on the States; direct taxes were taxes laid directly by the Federal Government. The framers of the Constitution evidently had never looked at the subject from a politico-economic point of view; they had never given a thought to the philosophy of taxation; the term 'direct taxes,' as they used it, did not refer to the kind or character or nature of the tax, but to the fact that such taxes were no longer to be laid indirectly through 'requisitions' upon the States, but directly upon the taxpayer by the newly constituted taxing power. Indirect taxes would be a thing of the past, of the expiring Confederation; taxes directly laid by the future Government would supply its extraordinary revenue when needed.

    "But here State jealousy had entered into the problem which the framers were solving—the difficult problem of taking power from the individual States and transferring it to this new, unknown, and distant central authority. If Congress could lay a tax directly upon the property of the citizens of all the States, might it not be so laid that the citizens of Virginia would have to pay more than the citizens of New York? How should the power so transferred be restrained?

    "The convention answered the question by the word population. The new power of direct taxation should be given to Congress, but the system of quotas, with which the people of the country were familiar, should be retained."—New York Nation.

  6. By an enactment of Congress, August 18, 1894, establishing an income tax for the United States, a tax of two per cent was imposed on the gains, profits, and incomes of persons derived from any kind of property, including rent and the growth and produce of lands, and profits made upon the sale of land if purchased within two years. Every element that could make real or personal property a source of value to an owner was taxed. An excise duty was also imposed upon income derived from any profession, trade, employment, or avocation. The tax upon persons generally was not upon their entire income, bat on the excess over and above the sum of four thousand dollars. All persons having incomes of four thousand dollars or under were exempt.