The Great Events by Famous Historians

The law provides that incomes shall be subject to a tax of one per cent. on the amount by which they exceed the prescribed minimum limit of exemption. This is designated as the "normal income tax." There is, then, an "additional tax" of one per cent, on the amount by which any income exceeds $20,000. The rate is increased to two per cent. on the amount above $50,000, to three per cent. above $75,000, to four per cent. above $100,000, to five per cent. above $250,000, and to six per cent. above $500,000. Therefore, under the normal and additional tax combined, the first $20,000 of income, exclusive of the minimum exemption, will be taxed one per cent.; the next $30,000, two per cent.; the next $25,000, three per cent.; the next $25,000, four per cent.; the next $150,000, five per cent.; the next $250,000, six per cent.; and all income above that point seven per cent. This is a rigorous application of the progressive principle.

The minimum exemption, at the same time, is comparatively high,—$4,000 for a married person and $3,000 for everybody else. The higher exemption in case of the married is conditional upon husband and wife living together, and applies only to their aggregate income; that is to say, it can not be deducted from the income of each. It may be noted, in this connection, that in England the exemption allowed under the income tax is £160 or $800; in Prussia it is 900 marks, or $225; and in the State of Wisconsin it is $800 for individuals and $1,200 for a husband and wife, with a further allowance for children or dependent members of the family.

The sharply progressive rates and the comparatively high exemption have given rise to the criticism that this is a rich man's income tax and disregards the principle that all persons should contribute to the expenses of the government in proportion to their several abilities. It is often said that an income tax ought to reach all incomes with the exception of those which are close to or below the minimum necessary for subsistence, and that if people generally were called upon to contribute directly to the government they would take greater interest in public affairs and show more concern over any wasteful or unwise expenditure of public money. In reply it is contended that the limitation of the tax to the wealthy or well-to-do classes is justified because these classes do not pay their fair share of the indirect national taxes, or of local property taxes. These debatable questions lie outside the scope of the present article. It is evident, however, that the income tax should not be criticized as if it were a single tax or formed the only source of revenue for the Federal government. From the fiscal standpoint it occupies a subordinate position in the national finances, being expected to yield about $125,000,000 annually out of a total estimated tax revenue of $680,000,000.

The normal tax of one per cent, is to be levied upon the income of corporations. In effect this provision of the law merely continues the corporation or "excise" tax which was already in existence. But that tax now becomes an integral part of the income tax, covering the income which accrues to the stockholder and is distributable in the form of dividends. On the theory that this income is reached at the source by the tax upon the net earnings of the corporation the dividends as such are exempt. They are not to be included, so far as concerns the normal tax, in the taxable incomes of the individual stockholders and the law does not provide that the tax paid by the corporation shall be deducted from the dividend.

It is perhaps a question whether under these conditions income which consists of dividends should be considered as subject to the normal tax or as exempt. It may be contended that a tax upon the net earnings of corporations is virtually a tax on the stockholder's income, and in theory this is true. But so long as the tax is not actually withheld from the dividends, or the dividends are not reduced in consequence of the tax, the stockholder's current income is not affected. The imposition of the tax might indeed affect his prospective income and might depreciate the value of his stocks. It is hardly likely, however, that such effects will be perceptible, at least as regards the stocks of railroads and other large corporations. If, however, it be considered that income consisting of dividends pays the tax, it follows that the stockholder's income is taxed no matter how small it may be. No minimum is left exempt. On the other hand, if it be considered that all dividends are virtually exempt, the stockholder would seem to be unduly favored under this form of taxation in comparison with people whose incomes are derived from other sources. Doubtless in future the investor will look upon dividends as a form of income not subject to the normal income tax.