INCOME TAX. A tax upon the income of individuals. It may be levied directly upon the individuals receiving the income, or it may be collected from the income at its source in the form of a tax upon dividends, interest on bonds. etc. It may be uniform. taxing all incomes at a uniform rate, or progressive, increasing the rate of taxation with the amount of income received by the individual. An income tax may I'u.tiate between various forms of insane, as, for example, between incomes from labor and in comes front property, or 1)0%1(41 permanent and temporary- incomes. Differentiation may be at tained either by levying a higher rate upon some forms of income than upon others, or by the imposition of a supplementary tax property of upon consumption which will in effect fall uuon the incomes discriminated against.
In States which levy an income tax it is usual ly the practice to exempt small incomes, or that portion of the income necessary to mere inde I.•ndent existence or to the maintenance of the usual standard of life, and to levy the tax only upon the excess. The theory of such exemption is that the State should not take from the indi vidual in the form of taxes what it will be obliged to return to him in the form of poor re lief or otherwise.
In theory the income tax. more nearly than any other system, meets the requirements laid down in the most advanced canons of taxation. A man should be taxed according to his ability, or and income is the best test of ability. A graduated tax on incomes is popularly de fe on the ground that it may be employed to bring about a more equal distribution of wealth. In the latest financial theory. however, gradu ated taxation is justified on the ground that a man's ability to pay taxes increases more rapidly than his income. Differentiation of taxation is advocated on similar grounds. One who receives an income from permanent property is in a more favorable position than one who receives an equal income from labor, since the latter is vgmwIled to make provision against unemployment, while the income of the former is quite at his disposal. It is, therefore, in accordance with the faculty test that incomes from property should pay a higher rate than incomes from labor.
In practice it is found to be difficult to deter mine directly the magnitude of a man's income. This is especially true in countries like America and England. where it is the policy of Go•ern ment to interfere as little as possible in the busi ness affairs of the individual. This difficulty is greatly reduced when the tax is levied, not di rectly upon the individual. but upon the source of the income. Under this system, corporations troy he requiied to withhold n part of the divi dends for the payment of the tax as well as a part of the salary of employees. When the tax is levied at the source. however, it is difficult to graduate it so as to tax those who receive large incomes at a higher rate than those whose in comes are small.
The income tax was introduced in England as a purely fiscal expedient. The huge expenditure
of the Napoleonic wars forced the adoption in 1199 of an income tax. which, with a short in termission. lasted till the close of the war. It was again revived in IS t2. and although in 1S7t an attempt was made by Gladstone to secure the repeal of the tax, it has maintained its position to this day as an integral part of the British firancial structure. The British income tax is levied on the source of the income, and does not attempt to provide for graduation or differentia tion. It has proved to be a very productive tax; and by changing the rate the Government is en abled to increase or diminish its revenue so as to cover exactly fiscal needs. In Italy the income tax was introduced by the law of 1864 (amended in 1877), and the fiscal needs of France after the Franco-Prussian War forced it also to adopt a na tional tax upon the income of corporations and associations. By a law of 1891 Prussia intro duced a direct tax upon incomes. The tax was graduated. but at first made no provision for dif ferentiation. In 1893 an auxiliary tax was levied upon property, thus establishing differentiation in effect. In 1893 Holland adopted an income tax law which provided both for graduation and differentiation. By this law corporations as well as individuals are subject to the tax: but the holders of corporate securities pay no additional income tax on the revenue from them. A similar law was introduced in New Zealand in 1893. Switzerland. Denmark. and Austria levy income taxes, as does also Australia.
During the War of 1812 an income tax was advocated for the Federal Government by Secre tary Dallas, and in 1S62 such a tax was actually adopted. and remained in force until 1872, de spite the opposition of the propertied classes. No satisfactory machinery was established for its application. Individuals were required to submit estimates of their incomes, and as there was no means of verifying these estimates, the tax was paid only by those who were scrupulous enough to admit that their incomes exceeded the untaxed minimum. In spite of the great increase in national wealth, the receipts from the income tax declined from year to year. In 1894 the income tax was again introduced as a part of the ilson Tariff Bill, and was carried largely by the Western and Southern members, despite vio lent opposition from the cities of the East. The tax, however, was declared unconstitutional (May 20. 1894) because, although a direct tax, it was not apportioned among the States according to population.
Income taxes have been imposed in several States (Massachusetts, Pennsylvania, Louisiana, Virginia, North Carolina. South Carolina ). but in no case have they been rigidly enforced and just ly administered, and in no case have they been productive of large revenue. The Income Law of Massachusetts dates from colonial times, and exempts incomes under $2000, as well a' income derived from property already taxed. See FINANCE; TAXATION.