INCOME TAX. Definition.—An income tax is a tax, the amount of which is determined with reference to the income of the taxpayer, The Income Tax as a Theory of Taxation. — The underlying theory of taxation has dergone many changes. But to-day the com monly accepted principle of taxation is that of faculty or ability — the principle that each in dividual should be held to help the state in pro portion to his ability to help himself. No one form of taxation entirely meets this theoretical test, but under modern conditions income is the best test and, in most cases, measures the abil ity of the individual better than most other forms of taxation. Quite properly, however, no modern tax system relies entirely upon an income tax. The income tax is therefore a method of taxation which should form an im portant part in any system of taxation, but which should not be the sole method of taxa tion.
Many perplexing questions arise in the prac tical application of the income tax. What is income? Is it gross or net income? Are gifts, inheritances and speculative revenues in cluded? Is money income only referred to, or, also, the equivalent of money income? Is in come derived from labor or services to be put on a par with income received from invested capital, inheritances or speculations? Is the small income to be taxed in the same propor tion as the large? Is the man of no family to be taxed in the same proportion as one having dependents? These questions not only bring out many of the perplexing questions which arise in connection with the income tax but also emphasize the necessity of incorporating in a well-rounded system of taxation other tests of ability to pay, such as property, product, ex penditure and even polls.
In addition to these more or less abstract questions as to the fairness of the income tax, we must consider the practical question of as sessment. The income, as a matter of fact, is notoriously the most difficult of all taxes to as sess with scrupulous justice and accuracy.
If rightly drawn and efficiently administered the income tax is undoubtedly an indispensable part of any progressive system of taxation.
History of the Income Tax.— The income tax is not entirely a modern invention, although the part which it played in general taxation be fore the last century was an insignificant one. The Italian cities of the Middle Ages, particu larly Florence, developed an income tax. There are some traces of the income tax in England during the 17th century. In France, however, the income tax was considerably developed be fore the 19th century. The dixieme or 10th, en acted in 1710 by Louis XIV, was a real income tax, which finally failed and disappeared because of administrative defects. The development of the income tax in Florence in the 15th century and in France in the 18th century was in each case the result of an advanced economic devel opznent and in each case failed because of de plorably inefficient administrative methods.
.(1) England.—Although the principle of taxing persons according to the size of their in comes had existed in one form or another in England for many centuries, the first English income tax in the modern sense of the term was originated by William Pitt in 1799. It divided incomes into four main schedules and made al lowances for children and life insurance pre miums. This law was repealed in 1802.
In 1803 an income tax strikingly like the one now in existence was imposed, known as Ad dington's Property and Income Tax. It pro vided for particular returns from particular sources and imposed a flat rate of one shilling on the pound, thus omitting entirely the pro gressive principle. This law, primarily a war tax, was repealed in 1815.
In 1842 Sir Robert Peel revised the tax and although continued for temporary periods and although there was much talk of abolishing it, Gladstone really established it as a part of the fiscal system of England in 1853, It has re mained in operation, with certain modifications, up to the present.