In the active discussion of social legislation in the years fol lowing this decision public sentiment developed, favoring an amendm,ent to the Constitution. It is a remarkable fact that, when the bill for the sixteenth amendment to the Con stitution was finally passed, it was voted unanimously by the Senate and almost unanimously by the House. It was ratified by three fourths of the states, and became a part of the Constitution February 25, The Democratic party, which had passed the law of 1894, was pledged to the passage of an income-tax law when it came into power again in 1913. The reduction of the tariff, as well as growing expenditures, moreover, made necessary the development of new sources of revenue for the national government. In other countries the income tax had been found to be a part of a system of taxation especially valuable as a "balance wheel" to equalize the revenues and expenditures. It was deemed by some to be an additional advantage of an income tax that it would make the richer citizens better realize the nature and burden of public expenditure. Most other federal revenues, being derived from the tariff and from taxes on merchandise, are borne mainly by the purchasers and con sumers.
An income tax was opposed as sectional taxation by many in the eastern states, where the owners of most of the larger fortunes reside. But to this Senator Elihu Root replied that the states where there was the greatest ownership of wealth pay the largest taxation under any scheme, and ought to.
§ 6. Federal taxation of individual incomes. The law as first enacted constituted section 2 of the tariff act of 1913 entitled, "An act to reduce tariff duties, and to pro vide revenue for the government and for other purposes." The development of this law, and the growth of taxation under it as it was successively amended between 1913 and 1919 to meet new needs, is one of the most remarkable chap ters in our financial history. The law of 1913 applied both to individuals and to corporations. As "incomes" in these two cases are so different in nature, and as these two features in the law have had somewhat different developments, we may do well to treat them separately, beginning with the tax upon individuals.
Article XVI. The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census enumeration.
The law of 1913 imposed upon individuals a "normal" tax of 1 per cent (on the excess above exemption), and an "additional tax" (in later amending laws called a surtax) ranging from 1 to 6 per cent on individual incomes of larger amounts than $20,000. There were thus eight classes of persons: those entirely exempt; those paying only at the normal tax rate; and six different classes paying a surtax, which on the portions of income exceeding a half million dollars was at the maximum rate of 7 per cent. This law
applied retroactively to the last ten months of the calendar year 1913 (beginning March 1), and continued to apply for the calendar years 1914 and 1915. The act was then succes sively amended (or superseded by new laws) beginning in 1916. These changes will be tabulated below to simplify as far as possible the somewhat complex Let us note first, however, some important new features of taxation in volved in this act.
§ 7. Important features. There were various exemptions, $3000 on every individual income and $4000 on the aggregate income of husband and wife living together (this distincton, it will be observed, offers a reward of $20 per annum to make marriage a failure). Among allowable deductions 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 that 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," by which corporations and other businesses were required to deduct taxes before paying dividends, salaries, etc., to taxable persons. 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, gave an ingenious way in our law of checking up the returns of individuals in respect to a class of investments that is steadily increasing in importance. By amendment, stoppage-at-source was in many cases changed to the requirement of reporting-at-source, as less troublesome and equally efficient.
The most disputed feature of the income tax probably was the principle of graduation, called also progression. It is up held 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 in vestments. 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 wide spread approval of the progressive rate just because it in so far acts as a leveling influence upon fortunes. The "addi tional" tax is already important fiscally, yielding more than one half of the total paid by individu,als and one fourth of the total from corporations and individuals.