The Great Events by Famous Historians

In the levy of the normal income tax there is to be a limited application of the method of assessment and collection at the source of the income. This method is applied very completely in the taxation of income in Great Britain. It may be well to recall summarily the essential features of the British system. The tax is levied upon the property or industrial enterprise which yields or produces the income. But the person occupying the property or conducting the enterprise, and paying the assessment in the first instance, is authorized and required to deduct the tax from the income as it is distributed among the persons entitled to share in it either as proprietors, landlords, creditors, or employees. Under the English system, an industrial corporation, for instance, pays the income tax upon its gross earnings and then deducts it from the dividends, interest, salaries, and rents as these payments are made. The householder pays an assessment levied upon the annual value of his dwelling (less an allowance for repairs and insurance) and then if he occupies the premises as tenant deducts the tax from his rent. The income from agriculture is reached by a similar assessment upon the farmer, based upon the annual or rental value of the farm and with the same right of deduction from the rent if he is a tenant farmer.

From the standpoint of the government, the main advantage of this mode of assessment as compared with a tax levied directly upon the recipients of the income is the greater certainty with which it reaches the income subject to taxation. The opportunities for evasion by concealment of income are reduced to a minimum, partly because the sources of income are, in general, not easily concealed and partly because, to a considerable extent, the persons upon whom the tax is assessed are not interested in avoiding the tax. The advantages, however, are not all on the side of the government. The tax possesses certain advantages from the standpoint of the taxpayer, also, assuming him to be an honest taxpayer who is not seeking opportunities to evade taxation. One advantage is that he is relieved in almost every case from the necessity of revealing to the tax officials the whole of his personal income. The tax does not pry into his personal affairs. Another advantage is that the tax is paid out of current income, being deducted from the income as it is received. It is therefore distributed over the year and adjusted to the flow of income as it comes in. A tax thus collected is less burdensome in its incidence than a tax paid in one lump sum several months after the expiration of the year to which it related and after the income on which it is levied has been all received and perhaps all expended.

The English system of assessing an income tax at the source, however, has its disadvantages. It is admirably suited for a tax levied at a uniform rate on all income or on all income above a small minimum. But it is not well suited for the application of progressive taxation or for the introduction of gradations or distinctions based upon the size or character of the individual incomes. Nevertheless, the English income tax, besides exempting a minimum, provides for graded reductions or abatements in favor of the possessors of small incomes above the minimum, and for a reduced rate on "unearned" income within certain limits. All this, however, makes necessary a declaration or complete statement of income from the persons claiming the benefit of those provisions, and also necessitates refunding a large amount of the tax collected at the source. Moreover, the progressive principle has recently been applied by imposing a "super-tax" on incomes in excess of £5,000, which also requires a declaration, the tax being necessarily assessed upon the possessor of the income and not at the source. The super-tax, it may be observed, occupies a position in the English system similar to that of the additional tax in the United States, serving to increase the tax upon the larger incomes in accordance with the principle of progression.

Considering the various provisos and exceptions in connection with the general rule of the act, the scope of the application of the method of collecting the tax at the source may perhaps be safely stated thus: the normal tax is to be deducted (1) from all interest payments made by corporations on bonds and the like, without regard to the amount; (2) from all other interest payments when the amount is more than $3,000 in any one year; (3) from all payments of rents, salaries, or wages amounting in any one case to over $3,000 annually; (4) from all other payments of over $3,000 (excepting dividends) which may be comprised under the designations "premiums, compensations, remuneration, emoluments, or other fixed or determinable gains, profits, or income."