§ 3. Income taxes ; general nature. All taxes, whether assessed upon the capital value of goods or not, come out of (reduce) the incomes now or later available for individuals. But there are various ways of attacking incomes, i. e., of ap portioning the tax burden. Income taxation is that form in which the basis of the assessment and levy is the income of the taxpayer as it arises (not accumulated wealth, or capital, or business processes, or expenditures). Of the various concep tions of the one mainly employed in income taxation is monetary income arising in the course of business, supple mented occasionally (but not consistently) by some items of material income that are expected to come to the person.
There is not in the long run such a contrast between wealth taxation and income taxation in their ultimate burden and effect as is usually supposed. Indeed, wealth (or capital) taxation as applied to accumulated wealth is more far-reaching than income taxation, for it falls upon the present worth alike of monetary and of psychic 5 See Vol. I, p. 26.
incomes (e. g., the value of a house, whether it is let to a tenant or occupied by the owner). But, on the other hand, income taxation attacks directly the monetary incomes from labor, coming as wages, salaries, fees, and profits in busi ness (unfunded as distinguished from funded incomes). This feature goes naturally with the fact that the income tax is essentially a personal tax, grouping the items of assessment about a person, whereas the "property" taxes are mainly (though not consistently) impersonal, making the piece of wealth the primary object of assessment. This summation of each person's income makes income taxation peculiarly suit able for progressive taxation with the social-welfare motive of equalizing the distribution of wealth. It is doubtless this technical assessment feature, rather than any essential ad vantage as a mode of taxation, that has led to its recent growth in popular favor.
§ 4. Income taxation by the states. Income taxes have been used widely in European countries, but until 1913 very little in the United States. Numerous attempts have been made by the states to tax incomes, but with small results. Personal incomes, when sought by local assessors, proved to be most elusive. There were (in 1913) but seven states with any thing resembling a personal income tax.° These are Virginia, North Carolina, South Carolina, Mississippi, Oklahoma, Mas sachusetts, and Wisconsin. Of these states Wisconsin has the
most recent law, and one the widest in its application and the most important fiscally. The law applies a progressive rate to all incomes (with exemption of $700 from wages and salaries) and contains elaborate provisions for corporate tax ation. The proceeds are distributed 10 per cent to the state, 20 per cent to the country, and 70 per cent to the municipality in which the tax is collected. In the six other states the tax s In addition, certain items of receipts of companies or incomes of individuals are arbitrarily defined as property for purposes of taxation in a few cases in about fifteen other states. See Wealth, Debt, and Taxation, Report of the Bureau of the Census, 1907, p. 622.
III is on incomes only exceeding a certain amount (North Caro lina, $1000, the other states from $2000 to $3500 exemption) ; some apply to incomes from any source, but others do not apply to incomes from property otherwise taxed. The total receipts from these state income taxes in 1913 were but $314,000.
In 1919, four states, Alabama, New Mexico, North Dakota and New York adopted a general income tax. In New York the rate is 1 per cent on incomes up to $10,000, 2 per cent on the next $40,000, and 3 per cent on all over $50,000. The yield the first year was $20,000,000.
§ 5. Obstacles to federal income taxation. The income tax has now come to play a most important part in the fiscal system of the federal government. Until 1913, however, it had been used only in a small way under the law passed in 1861, frequently amended, and finally repealed in 1870, to continue in force until the year 1872. The rate was 3 per cent on the excess of incomes over $600, and 5 per cent on the excess over $10,000. This law was re peatedly upheld by the United States Supreme Court as not in conflict with the Constitution. Its fiscal results were not large, as it was never effectively administered.
The next income-tax law was that of 1894, enacted in con nection with the tariff revision of that year. It was declared unconstitutional before it had gone into effect. The main ground for the decision was that a tax on incomes from rent of land as well as on incomes from personal property was direct, and must therefore, according to the Constitution, be apportioned among the states according to population.