1922 Encyclopædia Britannica/Income Tax
INCOME TAX (see 14.356). I. United Kingdom. The income tax position in 1910 was briefly this. The rate of the tax was 1s. 2d. in the £, and the exemption limit was £160. Earned income paid at 9d. in the £ if the total income did not exceed £2,000, at 1s. if the total income did not exceed £3,000. Earned income over the £3,000 limit, and all “unearned” income, paid at 1s. 2d. in the pound. Graduation was effected partly by a series of abatements (of £160, £150, £120, and £70 for individuals whose total incomes did not exceed £400, £500, £600, and £700 respectively) and partly by the recently introduced super-tax, which was an additional duty or income tax, centrally administered, and charged by direct assessment on the recipients of incomes exceeding £5,000. Super-tax was charged in those cases at 6d. in the on every pound by which the income exceeded £3,000.
It will be seen that in 1910 the principle of graduation, which, after a long struggle, had at last been definitely adopted into the income tax system, was very imperfectly applied. There were abrupt “jumps” in the effective rate immediately above the various abatement limits, but between £701 (where the abatements ceased to apply) and £5,000 (where the super-tax began) there was no graduation at all. The total yield of the tax for 1910 was £38,344,767, and the yield for each penny of the rate was £2,738,912. Super-tax produced £2,702,892 from 11,713 super-tax payers.
From this position there was no considerable change until the Finance Act of 1914 increased the rate to 1s. 3d. and made an attempt at a more complete graduation. The rate on earned income rose by five steps instead of three to the maximum rate, which was reached above £2,500; unearned incomes (graduated now for the first time) went by three steps to the maximum rate, which was charged on incomes above £500. The super-tax limit was reduced from £5,000 to £3,000, and the super-tax, instead of being charged at a uniform flat rate of 6d., was charged, on the income in excess of £2,500, at seven rates rising from 5d. to 1s. 4d. in the £ on successive “slices” of income. The children allowance was increased to £20.
The Finance Act of 1914 which made these changes—very characteristic of the natural development of the tax—was passed on July 31 1914. Next week the World War broke out.
War Developments.—Owing to war requirements the rate of tax rose rapidly. The second Finance Act of 1914 increased it to 1s. 8d.; the first Finance Act of 1915 to 2s. 6d., the second to 3s.; in 1916 it rose to 5s. and in 1918 to 6s. in the pound. In 1918 also the super-tax limit was put down from £3,000 to £2,500 (on the Income in excess of £2,000) with a new scale of charges running up to 4s. 6d. in the pound.
But in addition to mere increases in the rate of tax the war was responsible for many other changes and developments. In 1915 the exemption limit was reduced to £130, and the “abatements” allowed to persons whose total income did not exceed £700 were reduced. This lowering of the exemption limit which was an attempt to spread the cost of the war down the scale of incomes at the same time as the excess profits duty was laid upon the larger incomes brought an immense number of new taxpayers under the purview of the Inland Revenue Department; and these new taxpayers were not only very numerous, but they were largely of the weekly wage earning class, a class wholly unaccustomed to the payment of any annual tax, or indeed to annual payments of any kind. To have legislated to make them pay income tax in one sum on their whole year's income would have been to invite failure. It was therefore decided to assess quarterly and to collect tax quarterly from weekly wage earners employed by way of manual labour; and presently it was arranged that payment might be made in these cases by the purchase of income tax stamps to be stuck on a card and ultimately handed in to the collector.
The war and the high rates of tax also rendered necessary the provision of special reliefs for persons whose profits were adversely affected by the war; the granting of specially low rates of tax to soldiers and sailors; payment of tax in two half-yearly instalments; a further increase of the children allowance, and the grant, for the first time, of an allowance for a wife, in order that the heavy burden of taxation should be more fairly distributed between the bachelor and the family man.
“Double” Income Tax.—The rapid increase of taxation both in the United Kingdom and in the British Overseas Dominions brought into new prominence a grievance which, though long felt to be annoying and inequitable, had not hitherto been a very severe hardship. It arose from the fact that, owing to the income tax being imposed in the United Kingdom on all the income of a British resident irrespective of the country of its origin, income which arose in a Dominion and was taxed there was again taxed in this country in the hands of the resident recipient. With high rates of tax in both countries this hardship was suddenly and enormously magnified, and in 1916 an attempt was made to deal with it. Where the same income was assessed both in the United Kingdom and in a British possession relief was to be granted (as a maximum) so as to bring the United Kingdom rate charged on that income down to 3s. 6d. As the rate in force was then 5s. in the £, the maximum relief was 1s. 6d. When the rate was increased to 6s. in 1918 this provision was still continued, the effect being to increase the maximum relief to 2s. 6d. in the pound. The relief was granted at the expense of the British Exchequer. This attempt to remedy the double income tax grievance was admittedly only a temporary expedient, made without prejudice to the ultimate settlement between the Exchequers concerned, and it was coupled with an undertaking that the whole matter should be fully gone into after the war.
Non-deduction at Source.—The war was responsible also for a striking departure from the great principle of deduction of tax “at the source,” which since 1803 has been the characteristic feature of the collection of the tax. The necessity for attracting foreign money led to the issue early in 1917 of the 5% War Loan, 1929-47, subject to the condition that the interest on the loan should be paid in full without deduction of tax. Recipients of interest who were ordinarily resident in the United Kingdom were to be liable to direct assessment on the interest, but the interest paid to holders who were not ordinarily resident in the United Kingdom was altogether exempt from tax. The same course was followed in some other war issues, but the Treasury reverted after the war to the old method.
Farmers.—The rise in the price of commodities consequent upon the war drew attention to the income tax position of farmers. Under Schedule B of the Income Tax Acts, farmers had always been assessed not upon their actual ascertained profits but upon a conventional amount based on the rent or annual value of their farms. From 1896 to 1915 the Schedule B assessment, intended to represent the profit of the occupation of land, was fixed at one-third of the rent. Under war conditions this position rapidly became so favourable to the farmers that a change had to be made. In 1915 the Schedule B assessment for farmers was fixed at the full rent instead of one-third of the rent, and in 1918 it was raised to twice the rent. Seeing, however, that a farmer can always elect to be assessed under Schedule D on his actual average profits, and can, moreover, have his Schedule B assessment adjusted if his profits prove to be less than the conventional basis of twice his rent, he is still in a favoured position in spite of the six-fold increase in his Schedule B basis.
The Royal Commission, 1919.—Even before the war there had been many evidences of a desire for a general and searching inquiry into the income tax. Its administrative machinery was very old, and parts of it were in practice obsolete; the main features of the tax dated from a time when the conditions of business life were widely different from modern conditions; and the law on the subject could only be collected piecemeal and with much labour from half a hundred statutes. The Government had before the war promised to appoint a commission with full powers of inquiry, and this commission was on the point of being set up when war began. Postponement was inevitable. But in the meantime a very salutary work was undertaken by way of preliminary. This was the task of consolidating the existing income tax law into one comprehensive statute, a step very necessary to be taken before any thorough survey of the income tax position could be made by a commission consisting in the main of laymen.
As the result of much labour, first on the part of a departmental committee and then of a joint select committee of the House of Lords and the House of Commons, the Income Tax Act, 1918, was passed on Aug. 8 1918, with effect as from April 6 1919. It did not alter the law. It was merely a consolidating measure. The fact that the whole of 13 Acts and parts of 39 others were repealed by the 1918 Act is sufficient proof that the time was ripe for consolidation.
The long-expected and long-promised inquiry into the tax came within a few months of the cesssation of hostilities. A Royal Commission of 23 members, under the chairmanship of Lord Colwyn, was appointed by Royal Warrant dated April 4 1919. The terms of reference were widely drawn:—“To inquire into the income tax (including super-tax) of the United Kingdom in all its aspects, including the scope, rates and incidence of the tax; allowances and reliefs; administration, assessment, appeal and collection; and prevention of evasion; and to report what alterations of law and practice are necessary or desirable and what effect they would have on rates of tax, if it were necessary to maintain the total yield.” The Royal Commission held 50 sessions, examined 187 witnesses (including 21 official witnesses), and issued a long and comprehensive report (Cmd. 615) on March 11 1920. They also published in two volumes a verbatim report of the minutes of evidence, running to 1,383 pages, and a further volume containing 71 appendices to the minutes of evidence, and an index to the whole. These three volumes contain an enormous mass of information on the subject and are indispensable to the serious student. Among the appendices are a short history of the tax, an exposition of the existing income tax system, historical memoranda on various aspects of the tax, notes on the position in the Dominions and foreign countries, and much interesting statistical information.
The report, which was signed by all the commissioners—the reservations being few and comparatively unimportant—ranged over the whole field of the tax. There was no minority report.
The recommendations of the Royal Commission were very numerous, detailed and far-reaching; only the more important need be summarized here.
In Part I. of the report, dealing with “the scope of the tax,” they recommended that certain classes of non-recurring or “casual” profits, which are now outside the charging words of Schedule D, should be made assessable (paragraph 91); and that British subjects residing abroad should no longer be deprived of the allowances and reliefs granted to residents (paragraph 65). They also proposed a modification of the relief in respect of “double income tax.” On this question of “double taxation within the Empire” a sub-committee of the Royal Commission had conferred with representatives of the Dominions and of India who had come to this country for the purpose, and the report of that sub-committee was accepted by the whole commission. The principle underlying their recommendation was that where income tax is charged on the same income both in the United Kingdom and in a Dominion the total relief to be given should be equivalent to the tax at the lower of the two rates of tax imposed. The recommendation was in the following terms:—
“Firstly, that in respect of income taxed both in the United Kingdom and in a Dominion, in substitution for the existing partial reliefs there should be deducted from the appropriate rate of the United Kingdom income tax (including super-tax) the whole of the rate of the Dominion income tax charged in respect of the same income, subject to the limitation that in no case should the maximum rate of relief given by the United Kingdom exceed one-half of the rate of the United Kingdom income tax (including super-tax) to which the individual taxpayer might be liable; and
“Secondly, that any further relief necessary in order to confer on the taxpayer relief amounting in all to the lower of the two taxes (United Kingdom and Dominion), should be given by the Dominion concerned.” (Paragraph 70.)
In Parts II. and III., which dealt with “Rates and Incidence of the Tax,” and “Allowances and Reliefs,” an entirely new system of differentiation and graduation was proposed. Differentiation in favour of earned income, instead of being effected by a special series of rates of tax, was to be made by deducting one-tenth of the earned income (paragraph 111), in order to arrive at the “assessable income”—a new term—subject to a maximum deduction of £200. The old system of graduation by means of a series of abatements was to be superseded by a new plan. From the “assessable income” various personal and other allowances were to be made—for the taxpayer himself, his wife, children and dependants—and the balance was to be called the “taxable income.” The first £225 of this “taxable income” was to be charged at half the standard rate, and the remainder at the full rate (paragraph 139). Further graduation in the higher ranges of income was to be by way of super-tax on the old lines. The new “personal allowance” was to be £135 for the unmarried taxpayer and £225 for the married couple (equal to £150 and £250 respectively in terms of “earned” income). This, in effect, was a raising of the old “exemption limit” and a considerable increase in the “wife allowance,” but the new “personal allowances” were to be given to all taxpayers, without regard to the amount of their total income. The allowances in respect of children and other dependants were also to be allowed irrespective of the size of the taxpayer's income—a notable change (paragraph 270). The incomes of husband and wife were still to be aggregated for income tax purposes (paragraph 260); the spouses were to be allowed (as before) to make separate returns and to pay tax separately if they wished, but this was not to alter the total amount to be paid, which was still to be fixed by reference to the amount of the combined incomes.
The effect of this new system of graduation was to produce a smooth and gradual rise in the effective rate of tax as the income increased. The old line of graduation proceeded by a series of steps, the rise in some parts of the scale being much steeper than in others; the new plan (as shown by the graphs appended to the report) produced a line which rose smoothly and evenly instead of by a succession of jerks.
The commissioners expressed their strong conviction that the principle of “taxation at the source,” a principle which underlies the whole scheme of the income tax in this country, must on no account be abandoned (paragraph 154). They recommended an allowance, subject to a good many qualifications, for certain wasting assets (paragraph 200).
When they came to deal with the administrative machinery of the tax, in Part IV. of the report, the Royal Commission had much to say that was of interest. The machinery provisions in the Act of 1842, when Peel reimposed the tax, were taken from the Act of 1806, which in its turn followed earlier models, and, as the commission said, looked back for its origin to the old Subsidy Acts (paragraph 331).
However well adapted to the social and commercial conditions of 1806 those provisions may have been, it was inevitable that they should be found wanting when examined in 1920. The Royal Commission found that the smooth working by the machine was “rendered possible only by considerable deviations from the scheme of administration originally conceived by the founders of the tax” (paragraph 331), and that “an attempt by the General Commissioners to carry out the Income Tax Acts literally would result in a breakdown of the machinery” (paragraph 342). They found that the position in the scheme originally allotted to the Crown's representative (the inspector of taxes) had gradually grown in importance with the development of the tax, and they reported that “without this gradual devolution to the inspector the machinery of the tax would have been found to be hopelessly inadequate” (paragraph 331). Most of their recommendations on this aspect of their subject were, as they themselves stated, “directed towards recognizing and giving legal sanction to those practical developments in the working of the tax which have so largely contributed to its success.” They include (a) the abolition of the office of assessor (paragraph 386), (b) the transfer of certain clerical work from the clerk to the local commissioners to the inspector (paragraph 369), (c) the granting to the inspector of the power to make assessments in certain cases. The fundamental feature of the existing system—the right of the taxpayer to appeal against any assessment to the general commissioners, a local and unpaid body—was approved by the Royal Commission, but they made various suggestions as to the personnel and the tenure of office both of those commissioners and of the additional commissioners (another local unpaid body by whom assessments under Schedule D are made).
Part V. dealt with “assessment, appeal and collection” and covered a great variety of subjects. Among other things the commission proposed a rearrangement of the contents of the five categories or “schedules” into which incomes are divided for income tax purposes. Certain properties (such as railways, mines, gasworks, docks, etc.) were to be transferred from Schedule A to Schedule D which is the schedule under which profits of trade are charged; farmers' profits were to be transferred from Schedule B to Schedule D; and all incomes from employments were to be assessed under Schedule E which now includes certain classes of employments only. To the new Schedule D as so reconstituted a new basis of assessment was to be applied. The existing basis for Schedule D assessments is, generally speaking, the average of the profits of the three preceding years; but some classes of income are assessed under Schedule D on other bases. The incomes proposed to be transferred to Schedule D are also assessed on a variety of bases. The Royal Commission recommended that all this assortment of bases should be swept away, and that all the incomes to be assessed under the newly constituted Schedule D should be charged on the one uniform basis of the income of the preceding year.
Recommendations were also made with regard to the income tax liability of cooperative societies, but to these proposals there were several reservations (printed at the end of the report) on the part of some of the commissioners.
Part VI. was confined to the question of evasion of the tax and to the suggestion of possible preventive measures. The commission were satisfied that a good deal of evasion existed and they made many proposals for dealing with it, mainly in the direction of giving the assessing authorities more power to call for accounts and information from the taxpayer, including (with certain safeguards) the power to have access to original books of account.
Growth of the Tax.—The accompanying tables will give some idea of the growth of the tax from the year 1911-2 onwards. In drawing inferences from the figures given it is always necessary to bear in mind not only the alterations in the rate of tax but also the effect of the various legislative changes made during the years in question.
Income Tax (Excluding Supertax).
| Actual income liable to Tax before deduction of personal or family allowances and reliefs Million £ |
Income on which Tax was received |
Net produce of Tax |
Normal rate of Tax |
Produce of each penny of the normal rate of Tax | |
| Million £ | Million £ |
s. d. | £ | ||
| 1911-2 | 866 | 720 | 39 | 1 2 | 2,830,830 |
| 1912-3 | 907 | 755 | 41 | 1 2 | 2,969,591 |
| 1913-4 | 951 | 791 | 43 | 1 2 | 3,108,810 |
| 1914-5 | 985 | 814 | 63 | 1 8 | 3,169,614 |
| 1915-6 | 1050 | 873 | 118 | 3 0 | 3,299,034 |
| 1916-7 | 1373 | 981 | 201 | 5 0 | 3,360,612 |
| 1917-8 | 1631 | 1083 | 220 | 5 0 | 3,668,133 |
| 1918-9 | 2072 | 1287 | 303 | 6 0 | 4,217,088 |
| 1919-2 | Not available | Not available | 330[1] | 6 0 | 4,580,000[1] |
| 1920-1 | do. | do. | 350[1] | 6 0 | 4,860,000[1] |
Super-Tax
Amount of assessments, and number of persons charged, years 1911-2 to 1916-7; estimated income, yield, and numbers of persons chargeable for 1917-8, 1918-9 and 1919-20.
| Total income (including the first portion of income on which no super-tax is payable) Million £ |
Yield of the super-tax |
Number of persons chargeable |
Incomes chargeable | |
| £ | ||||
| 1911-2 | 150 | 2,842,177 | 12,253 | exceeding £5,000 |
| 1912-3 | 158 | 2,995,877 | 12,887 | do. |
| 1913-4 | 176 | 3,349,757 | 13,937 | do. |
| 1914-5 | 242 | 11,253,473 | 29,996 | exceeding £3000 |
| 1915-6 | 231 | 19,621,262 | 29,299 | do. |
| 1916-7 | 261 | 21,697,019 | 31,985 | do. |
| 1917-8 | 296 | 25,500,000 | 35,250 | do. |
| 1918-9 | 350 | 40,000,000 | 48,000 | exceeding £2,500 |
| 1919-20 | 410 | 46,000,000 | 56,000 | do. |
For 1920-1 and 1921-2 super-tax was charged on incomes exceeding £2,000; the estimated Exchequer receipt for 1920-1 was £55,281,000, and the number of persons chargeable was estimated at 81,000.
In the Finance Act of 1920 effect was given to some of the recommendations of the Royal Commission. Their suggestions were so numerous that they could only be carried into law by instalments, and the Finance Act, 1920, represented the first instalment. The new plan of differentiation, graduation and allowances was adopted in its entirety, and the relief proposed for double taxation within the Empire was also passed into law. At the same time the super-tax limit was brought down so as to include all incomes exceeding 2,000, and the super-tax rates increased, in close conformity with the suggestions of the commission.
A further instalment of the recommendations, dealing with the basis for assessment under Schedule D and with the machinery of administration, were embodied in a Revenue bill which was introduced in 1921 but was dropped for the session.
The Finance bill of 1921 contained no important income tax changes. The standard rate for 1921 remained at 6s. in the £, and the super-tax rates, on successive slices of income, were as they were fixed in 1920, viz:—
| s. d. | ||||
| On the | first | £2,000 | of the income | Nil |
| On the | next | £ 500 | (to £ 2,500) | 1 6 |
| On the | next | £ 500 | (to £ 3,000) | 2 0 |
| On the | next | £1,000 | (to £ 4,000) | 2 6 |
| On the | next | £1,000 | (to £ 5,000) | 3 0 |
| On the | next | £1,000 | (to £ 6,000) | 3 6 |
| On the | next | £1,000 | (to £ 7,000) | 4 0 |
| On the | next | £1,000 | (to £ 8,000) | 4 6 |
| On the | next | £12,000 | (to £20,000) | 5 0 |
| On the | next | £10,000 | (to £30,000) | 5 6 |
| On the | remainder | (above £30,000) | 6 0 | |
The effective rates of income tax (combined with super-tax) on selected incomes are shown in the following table:—
| Actual total Income |
Single Persons | Married Couples without children |
Married Couples entitled to allowance for 3 children | |||
| If Income all “Earned” Income |
If Income all “Investment” Income |
If Income all “Earned” Income |
If Income all “Investment” Income |
If Income all “Earned” Income |
If Income all “Investment” Income | |
| £ | s. d. | s. d. | s. d. | s. d. | s. d. | s. d. |
| 200 | 8 | 11½ | Nil | Nil | Nil | Nil |
| 300 | 1 4 | 1 8 | 5½ | 9 | Nil | Nil |
| 400 | 1 8 | 2 3½ | 1 0 | 1 4 | 4 | 7½ |
| 600 | 2 11 | 3 6½ | 2 0½ | 2 7½ | 1 1½ | 1 8½ |
| 800 | 3 6½ | 4 1½ | 2 10½ | 3 5½ | 2 2½ | 2 9½ |
| 1,000 | 3 11 | 4 6 | 3 4½ | 3 11½ | 2 10 | 3 5 |
| 2,000 | 4 8 | 5 3 | 4 4½ | 5 0 | 4 1½ | 4 8½ |
| 3,000 | 5 8 | 6 1 | 5 6 | 5 11 | 5 4 | 5 9 |
| 4,000 | 6 5 | 6 8 | 6 3 | 6 7 | 6 1 | 6 5 |
| 5,000 | 6 11 | 7 2 | 6 10 | 7 1 | 6 8 | 6 11 |
| 6,000 | 7 4 | 7 7 | 7 3 | 7 5 | 7 2 | 7 4 |
| 8,000 | 8 1 | 8 3 | 8 0 | 8 2 | 7 11 | 8 1 |
| 10,000 | 8 8 | 8 9 | 8 7 | 8 9 | 8 7 | 8 8 |
| 25,000 | 10 2 | 10 3 | 10 2 | 10 2 | 10 1 | 10 2 |
| 50,000 | 11 0 | 11 1 | 11 0 | 11 1 | 11 0 | 11 0 |
| 100,000 | 11 6 | 11 6 | 11 6 | 11 6 | 11 6 | 11 6 |
On incomes above £100,000 the effective rate continued to progress, approximating to 12s. in the £ on the highest incomes.
Bibliography. Professor Seligman, The Income Tax, second edition, 1914; Sir J. C. Stamp, British Incomes and Property, 1916, and Fundamental Principles of Taxation, 1921; Dowell's Income Tax Laws, eighth edition, 1919; Report of the Royal Commission on the Income Tax, 1920 (Cmd. 615); 63rd Annual Report of the Board of Inland Revenue, for the year ended March 31 1920 (Cmd. 1,083 of 1920). (H. M. Sa.)
II. United States
Although taxes on gains and profits derived from personal ability as distinguished from property—the so-called “faculty taxes”—were employed in the American colonies before the middle of the 17th century, no successful use of the general income tax was made in the United States until the Civil War; and the income taxes then adopted were soon thereafter repealed or fell into practical disuse. The demand for effective income taxation, however, showed great vitality. It kept moribund income-tax laws on the statute books in several states, led to abortive experiment with the tax, particularly in the “forties” and “nineties,” and finally in 1909 resulted in the adoption of a Federal excise tax “with respect to the carrying on or doing business” by corporations, equivalent to 1% of the annual net income over and above $5,000. This proved to be in substance an effective income tax.
In 1911 (after the adoption of an empowering amendment to its constitution in 1908), the state of Wisconsin passed a general income-tax law applicable to individuals, partnerships and corporations; and the practical success of this tax encouraged other states to adopt similar laws or to vitalize the administration of unsuccessful income taxes already on the statute books. The following states now use the modern income tax: Wisconsin, Massachusetts, Connecticut (corporations only), New York, Oklahoma (personal incomes only), West Virginia (corporations only), Missouri, Virginia, Delaware (personal incomes only), North Dakota, North Carolina, and Montana (corporations only). On Feb. 25 1913 the foundation for the Federal system of income taxation was laid by the ratification of the Sixteenth Amendment, which provided as follows:—
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 or enumeration.
The development of the Federal income tax in the Acts of Aug. 5 1909, Oct. 3 1913, Sept. 8 1916, Oct. 3 1917, and Feb. 24 1919, is suggested statistically in the appended tabular statement.
Federal Income Tax
| 1913 | 1916 | 1917 | 1918 | 1919 | |||||||||
| Personal Income Tax. | |||||||||||||
| Total number of returns | 357,598 | 437,036 | 3,472,890 | 4,425,114 | 5,332,760 | ||||||||
| Total net income | $3,900,000,000 | $6,298,577,620 | $13,652,383,207 | $15,924,639,355 | $19,859,491,448 | ||||||||
| Total tax yield | $28,253,535 | $173,386,694 | $691,492,954 | $1,127,721,835 | $1,269,630,104 | ||||||||
| Average tax per individual | $79.01 | $396.60 | $199.11 | $254.85 | $238.08 | ||||||||
| Average rate of tax:— | |||||||||||||
|
— | — | 0.66% | 1.19% | 0.87% | ||||||||
| — | .61% | 2.41% | 4.34% | 3.10% | |||||||||
| — | 1.41% | 7.34% | 13.32% | 12.13% | |||||||||
| — | 3.48% | 13.92% | 33.68% | 33.12% | |||||||||
| “$1,000,000 and over | — | 11.09% | 35.65% | 64.65% | — | ||||||||
| General average rate | 1% | 2.75% | 5.06% | 7.08% | 6.39% | ||||||||
| Normal rate $4,000 and under | 1% | 2% | 4% | 6% | 4% | ||||||||
| Normal rate over $4,000 | 6% | 2% | 4% | 12% | 8% | ||||||||
| Maximum surtax | — | 13% | 63% | 65% | 65% | ||||||||
| Incomes under $5,000:— | |||||||||||||
| Per cent. of total returns | — | 36.59% | 87.56% | 89.17% | — | ||||||||
| Per cent. of total net income | — | 9.91% | 48.66% | 59.00% | — | ||||||||
| Per cent. of total tax | — | 1.14% | 10.58% | 12.84% | — | ||||||||
| Incomes over $100,000:— | |||||||||||||
| Per cent. of total returns | — | 1.54% | 0.56% | 0.33% | — | ||||||||
| Per cent. of total net income | — | 29.47% | 17.96% | 10.49% | — | ||||||||
| Per cent. of total tax | — | 73.11% | 65.83% | 54.73% | — | ||||||||
| Per cent. of total tax returned in:— | |||||||||||||
| New York | 44.32% | 44.96% | 36.96% | 31.41% | 31.49% | ||||||||
| Pennsylvania | 11.24% | 10.15% | 11.53% | 12.22% | 10.10% | ||||||||
| Illinois | 7.34% | 6.31% | 7.02% | 7.50% | 7.83% | ||||||||
| Massachusetts | 5.33% | 6.28% | 6.47% | 7.21% | 6.82% | ||||||||
| Per cent. number of returns to population | 0.37% | 0.43% | 3.40% | 4.27% | 5.03% | ||||||||
| War profits and excess profits tax | |||||||||||||
| returned by individuals | — | — | $101,249,781 | — | — | ||||||||
| Returned by partnerships | — | — | $103,887,984 | — | — | ||||||||
| Personal exemptions:— | |||||||||||||
| To individual | $3,000 | $3,000 | $1,000 | $1,000 | $1,000 | ||||||||
| To head of family | $4,000 | $4,000 | $2,000 | $2,000 | $2,000 | ||||||||
| For each dependent | — | — | $200 | $200 | $200 | ||||||||
| Corporation Taxes. | |||||||||||||
| Total number of returns | 316,909 | 341,253 | 351,426 | 317,579 | [2]330,000 | ||||||||
| Returns showing taxable income | 188,866 | 206,984 | 232,079 | 202,06l | — | ||||||||
| Returns showing no taxable income | 128,043 | 134,269 | 119,347 | 115,5l8 | — | ||||||||
| Total net income | $4,714,000,000 | $8,765,900,000 | $10,730,400,000 | $8,400,000,000 | [2]$9,100,000,000 | ||||||||
| Income tax yield | $43,127,740 | $171,805,150 | $503,698,029 | $653,198,483 | — | ||||||||
| War profits and excess profits tax yield | — | — | $1,638,747,740 | $2,505,565,939 | — | ||||||||
| Total tax yield | $43,127,740 | $171,805,150 | $2,142,445,769 | $3,158,764,422 | [2]$2,050,000,000 | ||||||||
| Grand total—Income and profits taxes, | |||||||||||||
| individuals and corporations | $71,381,275 | $345,191,844 | $2,921,583,203 | $4,286,486,257 | [2]$3,319,630,104 |
The most important characteristic of the Federal income tax is its striking productivity, the elasticity of which is illustrated by the increase of the Federal taxes based on income from $345,191,844 for 1916 to $2,921,583,203 for 1917 and to $4,286,486,257 for 1918. These enormous sums (now collected from taxpayers in four quarterly instalments each year) have been raised without causing bankruptcy or widespread distress to taxpayers. As appears in the table, the personal exemptions granted by the Federal law are high compared with the similar exemptions allowed in other countries, and only a small proportion of the population is directly affected by the tax. A large proportion of the tax is collected in the industrial or urban states, and is thus marked by some unfortunate class and sectional characteristics. Compared with the similar taxes of other countries, the rates on small and moderate incomes are low: while the rates on the larger incomes are comparatively high, probably the highest collected in any important country.
From the technical standpoint, the striking characteristics of the Federal tax are: its taxation of gains from the occasional sale of capital assets (the constitutionality of which was affirmed March 28 1921 by the U. S. Supreme Court in Merchants' Loan and Trust Co. v. Smietanka) its failure, largely because of constitutional limitations, to reach interest on municipal bonds and other tax-free securities; the relatively small and decreasing use of “stoppage-at-source” (whereby the normal tax is withheld and paid direct to the Government by payers out of the payments due to corresponding payees); the full credit accorded for income and profits taxes paid to any foreign country on income derived from sources therein; the complexity of the law arising largely from the “cushions” or relief provisions (such as the deduction for amortization and the allowance for depletion on the basis of discovery value in the case of mines and oil wells discovered by the taxpayer) designed to protect the taxpayer against hardship; the great centralization in the administration of the tax; and the delay in the audit and inspection of the larger and more important returns due principally to the complexity of the law and the centralization of the administration. The structure of the tax creates some difficulties. Individuals pay a “split-normal” tax of 4 and 8% (see table) and surtaxes rising from 1 to 65%, while corporations pay 10% (on income in excess of the specific exemption of $2,000), and excess profits tax. This plan is unsatisfactory and the excess profits tax, it was believed, would be repealed at the close of 1921. The other principal defects of the tax the excessive rates of surtax; the demoralizing influence of tax-exempt income; the complexity of the tax; the delay in audit; and the over-centralization of administration—were generally acknowledged even by the friends of the tax, and legislative efforts to correct these failings were (1921) being made.
In the states, the adoption of income taxes was hastened by the unsatisfactory operation of the personal property tax, particularly on intangible personal property, and the so-called corporation franchise taxes. The income tax is being used (1921) to replace these taxes. The newer state income taxes are generally administered by state or central authority. There is an increasing tendency to compute the tax on the basis of the Federal return, and an effort is made by apportionment devices to exempt, in whole or in part, business or corporation income derived from property located and business transacted without the state. Jurisdictional questions and multiple taxation thus constitute fundamental problems. The Wisconsin tax is progressive on both individuals and corporations, rising (with surtaxes for soldiers' and educational bonus) to 13.2% on individual incomes in excess of $12,000 and on corporation incomes in excess of $7,000. The Massachusetts tax varies in rate for different classes of income, being 1½% on annuities and income from salaries and trade or business, 3% on the excess of gains over losses sustained from the purchase and sale of securities and intangible personal property, and 6½% on interest and dividends. The corporation tax in Massachusetts is at the rate of 2½%. In New York the personal tax rises from 1% on income not exceeding $10,000 to 3% on income in excess of $50,000, and the corporation tax is at the rate of 4½%. While the rates at which the state taxes are imposed are thus not immoderate, they create when added to the Federal tax a serious burden. The newer state laws, while centrally administered, provide for the return of a substantial portion of the tax to the county or local governments.
Bibliography. E. R. A. Seligman, The Income Tax (2nd ed. 1914); K. K. Kennan, Income Taxation (1910); D. O. Kinsman, The Income Tax in the Commonwealths of the United States (1903); R. M. Haig (Ed.) The Federal Income Tax (1921); George E. Holmes, Federal Taxes (1920 ed.); Robert H. Montgomery, Income Tax Procedure (1921); Federal Excess Profits Tax Procedure (1921); New York State Income Tax Procedure (1921); Standard Statistics Co., Standard Income Tax Manual (1921); The Corporation Trust Co., The Federal Income Tax Service (1913-21); Treasury Department, Bureau of Internal Revenue, Regulations 45 (1920 ed.); Income Tax Rulings (1919-21); Income Tax Primer (1918-21); Income Tax Primer for Farmers (1920-1), Excess-Profits Tax Primer (1918-21); Statistics of Income (1916-8); Annual Report, Commissioner of Internal Revenue. For New York, see H. M. Powell, Taxation of Corporations and Personal Incomes and for state income taxes in general, see reports of the State Tax Commission or Commissioner of Wisconsin, New York, Massachusetts, etc., and the Annual Proceedings and monthly Bulletin of the National Tax Association.
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