(4) The Income Tax of 1913.—The income tax now in operation in this country became a law on 3 Oct. 1913. It marks a new era in the history of American finance. It aims to re dress the inequality of taxation which was a predominant feature of the American fiscal system.
(a) Who is liable to the Income Tax? The law applies to every American citizen, includ ing those resident abroad. It applies to every person residing in this country. It applies to non-residents having incomes obtained from this country.
The law applies to every corporation, joint stock company or business association (with a few exceptions) in the United States. Double taxation is avoided by permitting individuals to make deduction for income on which the tax has already been paid.
(b) What is taxable income? The law of 1913 states that net income *Shall include gains, profits and incomes derived from salaries. wages, or compensation for personal services of whatever kind, and in whatever form paid; or from professions, vocations, businesses, trade, commerce, or sales or dealings in prop erty, whether real or personal, growing out of the ownership or use of or interest in real or personal property; also from interest, rents, dividends, securities, or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever, including the income from, but not the value of, property acquired by gift, be quest, devise, or The term income in this connection is con fined to actual money income. The general view is that income is regular and periodic and that irregular returns in the shape of inherit ances should be reached by the inheritance tax. Profits from transactions in stocks and real estate are included only when realized. A clear distinction seems to be made between gross and net income.
(c) The Tax Rates.— The tax applies to in dividual incomes only when they exceed $3,000; $4,000 in case of married persons. There is no minimum exemption in case of corporations. The tax is a graduated one, and the rates are progressive. A tax of 1 per cent is imposed on all incomes exceeding the minimum, and an tax is imposed on higher incomes in accordance with the attached schedule.
(d) Stoppage at Source.— In respect to
collection this law is unlike any preceding law in this country. It provides that all payers of income, whoever they may be, shall deduct the annual legal tax. There are three excep tions only: (a) dividends on stocks of corpora tions; (b) interest on bonds; (c) payments to a corporation.
(e) Certain Administrative Features.—It is specifically provided that no income return shall be divulged. Every person having an income in excess of $3,000 must file on or before 1 March under oath a complete return of his in come. Corporations are required to file this statement at regular periods. Delay or fraud are heavily penalized in the case both of indi viduals and corporations.
(5) Amendments of 1916.—In the revenue act of 1916, an entirely new income tax law takes the place of the one enacted on 3 Oct. 1913. Essentially the law is the same, but there are some modifications which are of consider able importance. The most significant changes are a doubling of the °normal') rate and in creases in the 'tadditionalp rates, especially those falling upon the very large incomes. The normal rate has been raised from 1 to 2 per cent. The following table compares the old and the new rates: A serious attempt was made in Congress to tower the $3,000 exemption, but this was finally retained as in the original act. Under the old law it was held that profit, however made, must be included; the new law allows for losses in incidental transactions, not exceeding profits of a similar kind. Non-resident aliens are now required to pay the tax so far as it concerns interest on bonds with underlying assets situated in the United States.
The new law, then, aside from the increase in rates, makes no great changes in substance. Practically all of the changes that are made are for the better and represent a natural develop ment following administrative experience. The changes in form are much more noticeable and extensive. The arrangement of the old law was unfortunately haphazard and unsystematic; ref erences were unnecessarilydifficult, various terms and phrases were ambiguous, and there was a looseness in the use of even technical terms that was very confusing. The recast law is a great improvement in regard to these matters.