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The constitutional amendment of 1913 and the new income tax, 46. 

— I. The " normal " and " additional " taxes; the minimum exempt; 
the scale of progression, 47. — Dividends exempt from the normal 
tax, 49. — II. Limited application of stoppage at the source; its 
possible advantages and disadvantages, 50. — How applied as regards 
salaries and other single payments, 52. — As regards interest on bonds, 
55. — " Fixed and determinable incomes," 56. — III. How mini- 
mum exemption is secured, 58. — IV. Return of income required; 
yet possible exceptions, 61. — V. The "additional" progressive tax, 65. 

— VI. Conclusion, 66. 

Among the notable events of the year 1913, one of 
the most important in its influence upon the national 
finances and constitutional development of the United 
States is the adoption of an amendment to the Federal 
Constitution giving Congress the 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 
mere fact that an amendment of any kind has been 
adopted is notable, this being the first occasion on 
which the Constitution had undergone any change 
since the period of the Civil War, and the first amend- 
ment adopted in peaceful and normal times since the 
early days of the Republic. 

It is a little remarkable, altho perhaps not altogether 
accidental, that the adoption of this amendment should 
coincide with the return to power of the political party 
whose attempt to levy an income tax in 1894 was frus- 
trated by the decision of the Supreme Court in that year. 
Then as now an income tax was a component part of the 
program of fiscal and commercial reform to which that 


party was committed. This program included the 
reduction of protective tariff duties and the direct 
taxation of incomes. What the Democratic party 
failed to accomplish in 1894, it has had a free hand to 
do in 1913. Indeed, the national taxation of incomes 
might almost be regarded as a mandate of the people 
of the United States. At any rate, it was a foregone 
conclusion that the adoption of the constitutional 
amendment would be immediately followed by the 
enactment of an income tax law. 

The law instituting the income tax was approved 
October 3, together with the law revising the tariff, 
both measures being included in one comprehensive 
statute entitled " An Act to reduce tariff duties and to 
provide revenue for Government, and for other pur- 
poses." It is the object of the present article to give 
a general description of the income tax. This seems 
to be especially well worth while because the tax can- 
not be readily understood from a mere perusal of the 
involved and sometimes obscure phraseology of the law 
itself. For the same reason, however, the task of 
interpretation is not easy or entirely safe. The law 
has certain novel features; and some of the questions 
of detail to which they give rise cannot be answered 
until we have the official construction placed upon the 
language of the act by the executive branch of the 
government and possibly by the courts. At the same 
time the main features of the tax become fairly evident 
to any one who makes a careful study of the provisions 
of the act, even tho its application to specific cases may 
remain doubtful. 


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 progres- 
sive principle. 

The minimum exemption, at the same time, is com- 
paratively 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 cannot 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 ex- 
penses 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 sub- 
sistence, 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 limi- 
tation 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 distrib- 
utable 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 ex- 
empt. They are not to be included, so far as concerns the 
normal tax, in the taxable incomes of the individual stock- 
holders 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 condi- 
tions 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 per- 
ceptible, 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 com- 
parison 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. 


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 occupy- 
ing the property or conducting the enterprise, and pay- 
ing 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 house- 
holder pays an assessment levied upon the annual value 
of his dwelling (less an allowance for repairs and insur- 
ance) 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 consider- 
able 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 stand- 
point of the tax-payer also, assuming him to be an 
honest tax-payer 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 relates and after the income on which 
it is levied has been all received and perhaps all ex- 

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 abate- 
ments 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 in- 
come from the persons claiming the benefit of these 
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. 

It has been stated above that the law which has just 
been enacted by Congress makes a limited application 
of this principle of assessment at the source, as regards 
the normal tax. The general rule of the law covering 
deduction at the source is of sufficient importance to 
be quoted in full. It reads as follows: — 


All persons, firms, co-partnerships, companies, corporations, 
joint-stock companies or associations, and insurance companies, 
in whatever capacity acting, including lessees or mortgagors of real or 
personal property, trustees acting in any trust capacity, executors, 
administrators, agents, receivers, conservators, employers, and all 
officers and employees of the UnitedStateshavingthecontrol, receipt, 
custody, disposal, or payment of interest, rent, salaries, wages, 
premiums, annuities, compensations, remuneration, emoluments 
or other fixed or determinable annual gains, profits, and income of 
another person, exceeding $3,000 for any taxable year, other than 
dividends on capital stock, or from the net earnings of corporations 
and joint-stock companies or associations subject to like tax, who 
are required to make and render a return in behalf of another, 1 
as provided herein, to the collector of his, her or its district, are 
hereby authorized and required to deduct and withhold from such 
annual gains, profits, and income such sum as will be sufficient to 
pay the normal tax imposed thereon by this section, and shall pay 
to the officer of the United States Government authorized to receive 
the same; and they are each hereby made personally liable for such 

Under this paragraph of the act every person, cor- 
poration, etc., making payments of more than $3,000 
in interest, rent, salary, etc., to any one person in any 
one year must in each instance deduct the normal tax 
and pay it to the tax collector. It should be noted, 
however, that the rule covers not only " payments " 
but also the " control, receipt, custody, or disposal " 
of such sums. It is impossible to say just what may 
be comprised under these terms. But the word " pay- 
ment " doubtless represents the typical or usual case, 
and in the discussion which follows will be used in a 
generic sense to cover all cases. 

The limitation of the operation of the above para- 
graph to payments in excess of $3,000 was presumably 
deemed necessary, or at least advisable, because income 

1 This restrictive clause appears to have very little significance, for the reason that 
the persons, firms, etc., " who are required to make and render a return in behalf of 
another " are apparently the persons, firms, etc., just enumerated, namely, those having 
the control, receipt, custody, etc., of the annual gains, profits, and income of another 
person, exceeding $3,000. The paragraph which defines the persons, firms, etc., who 
are to make returns in behalf of another person is cited on p. 64. 


up to that limit is exempt. The intention seems to be, 
however, that when the normal tax is deducted it shall 
be computed on the total payment and not simply on 
the excess over $3,000. That being the case it is evi- 
dent that the deduction of the tax under this rule, tho 
limited to sums of more than $3,000, will nevertheless 
reach a certain amount of income which is exempt. It 
will do this where the entire income of any person is 
derived from a single source or from several sources 
each of which yields more than $3,000. On the other 
hand, it is evident that a large proportion of the pay- 
ments made in sums of less than $3,000 will represent 
taxable income, being received by persons whose in- 
comes are above the limit of exemption. Many large 
incomes are derived wholly or in large part from sources 
which yield less than $3,000 each. The adoption of a 
$3,000 limit for the application of the method of deduc- 
tion at the source therefore appears to be a com- 
promise, a half-way measure. It comes far short of 
reaching at the source all income subject to taxation, 
and at the same time seems likely to reach some income 
that is exempt. This does not necessarily mean that 
any taxable income will escape assessment or that any 
tax-payer will lose the benefit of the exemption. Income 
not reached at the source is to be included in the taxa- 
ble income of the person who receives it; and the tax- 
payer's right to exemption is safe-guarded by special 
provisions which are discussed below. 

This $3,000 limit, however, and the general rule of 
the law as regards deducting the tax at the source 
are materially modified by the exceptions or provisos. 
It is to be noted, in the first place, that in the paragraph 
just cited, dividends are altogether excepted from the 
classes of payments which are subject to the deduction 
of the tax. The exception applies only to dividends 


paid by corporations " subject to like tax," but these 
include practically all corporations either located or 
doing business in the United States. The source of 
this income is supposed to have been reached by the 
tax on the earnings of the corporations. 

Again, the application of the method of collecting 
the tax by deduction is very materially affected, and 
in quite a different way, by a proviso which removes 
the $3,000 limit as regards interest payments made by 
corporations. The normal tax is to be deducted and 
withheld from the " interest upon bonds and mortgages, 
or deeds of trust or other similar obligations of corpora- 
tions, joint-stock companies or associations, and insur- 
ance companies, whether payable annually or at shorter 
or longer periods, altho such interest does not amount to 
$3,000." A large proportion of the bondsissued by cor- 
porations, however, guarantee the payment of interest 
without deduction on account of taxes. In such 
cases the corporations will undoubtedly assume the 
burden of the tax, as the provisions of the law just cited 
are hardly likely to be construed as requiring the viola- 
tion of contracts. At one stage in the preparation of 
the law, a clause was inserted providing that the interest 
in such cases as this should be included in the taxable 
income of the bondholder and assessed to him. This 
clause, however, was not retained in the act as passed. 
But a proviso was inserted that no " contract entered 
into after this act takes effect " shall be " valid in 
regard to any Federal income tax imposed upon a 
person liable to such payment"; it is intended to 
prohibit any future issue of bonds guaranteeing exemp- 
tion from the income tax. 

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 pay- 
ments 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 deter- 
minable gains, profits, or income." 

One general restriction upon the application of the 
method of deducting the tax at the source should per- 
haps be mentioned. It is indicated by the words 
" fixed and determinable." That these words are not 
unimportant would seem to be indicated by their recur- 
rence in other connections, and particularly by a pro- 
viso in the paragraph defining the deductions which 
may be made in computing taxable income. This 
proviso reads: 

Provided that whenever the tax upon the income of a person is 
required to be withheld and paid at the source as hereinafter required, 
if such annual income does not exceed the sum of $3,000 or is not 
fixed or certain, or is indefinite, or irregular as to amount or time of 
accrual, the same shall not be deducted in the personal return of 
such person. 

This proviso emphasizes the fact that there are at 
least two general conditions to be met before deduction 
at the source is required: first, as already explained, 
the amount of income paid out must (with exceptions 
already noted) exceed $3,000; and second, it must be 
fixed, certain, definite, and regular. Strictly speaking 
there would seem to be very little income which is 
fixed and certain in advance of its actual receipt and 
very little which is not fixed and certain after it has 


been received. Doubtless, the terms here used are 
intended to cover periodical payments of income, such as 
salaries or interest, made in fixed or stipulated amounts. 
But even as regards such payments there is usually 
no certainty in any given instance that they will con- 
tinue to be made to the same person throughout the 
year. Interest bearing notes and mortgages are 
usually transferable, and salaried positions are not 
always permanent. It will often not be possible to say 
in advance whether the aggregate payments will 
amount to $3,000. Instructions already issued by the 
Treasury Department provide that no tax shall be 
withheld until the accumulated payments of the cur- 
rent year pass the $3,000 limit, and that the person 
making these payments shall thereafter deduct the 
tax, the first deduction covering the tax on all pay- 
ments up to date. But simple as such a procedure 
may be in theory, in the complicated and shifting 
relationships of the business world it will not always 
be easy to follow. The payer of income as well as the 
payee may change, and change more than once, during 
the same calendar year. 

Income from investments in foreign countries is, of 
course, derived from sources which are inaccessible to 
this government. The law, however, undertakes to 
intercept the tax on certain classes of income of foreign 
origin by providing that the normal tax " shall be 
deducted and withheld from coupons, checks, or bills 
of exchange for or in payment of interest upon bonds 
of foreign countries and upon foreign mortgages or 
like obligations (not payable in the United States), 
and also from coupons, checks, or bills of exchange for 
or in payment of any dividends upon the stock or 
interest upon the obligations of foreign corporations, 
associations, and insurance companies engaged in 


business in foreign countries." This deduction of the 
tax is to be made by " any banker or person who shall 
sell or otherwise realize coupons, checks, or bills of 
exchange drawn or made in payment of any such 
interest or dividends (not payable in the United 
States), and any person who shall obtain payment 
(not in the United States), in behalf of another of such 
dividends and interest by means of coupons, checks, 
or bills of exchange, and also any dealer in such coupons 
who shall purchase the same for any such dividends 
or interest (not payable in the United States), otherwise 
than from a banker or another dealer in such coupons." 


In so far as the law requires the taxation of incomes 
at the source, some special provision must be made to 
ensure to the recipients of the incomes thus taxed the 
benefits of the minimum exemption and of any other 
deductions to which they may be lawfully entitled. 
The procedure to be followed is set forth in the following 
provisions of the law, the letters and numerals which 
mark subdivisions of the paragraph being inserted by 
the writer. 

(1) In all cases where the income tax of a person is withheld and 
deducted and paid or to be paid at the source, as aforesaid, such 
person shall not receive the benefit of the deduction and exemption 
allowed in paragraph C of this section, except (a) by an application 
for refund of the tax unless he shall, (6) not less than thirty days 
prior to the day on which the return of his income is due, file with 
the person who is required to withhold and pay tax for him, a signed 
notice in writing claiming the benefit of such exemption and there- 
upon no tax shall be withheld upon the amount of such exemption; 
(2) nor shall any person under the foregoing conditions be allowed 
the benefit of any deduction provided for in subsection B of this 
section unless he shall, not less than thirty days prior to the day on 
which the return of his income is due, either (a) file with the person 
who is required to withhold and pay tax for him a true and correct 


return of his annual gains, profits, and income from all other sources, 
and also the deductions asked for, and the showing thus made shall 
then become a part of the return to be made in his behalf by the 
person required to withhold and pay the tax, or (6) likewise make 
application for deductions to the collector of the district in which 
return is made or to be made for him. 

The first part of this paragraph prescribes the steps 
which must be taken in order to secure the benefits 
of the general exemption of $3,000 or, in case of a 
married man, of $4,000. The second part relates to 
the deductions on account of business expenses, interest 
on indebtedness, taxes, losses, dividends and the like, 
which, as set forth in subsection B of the act, are per- 
mitted in computing the net income subject to taxation. 
The procedure to be followed does not seem to differ essen- 
tially in the two cases. The initiative rests with the 
tax-payer, or person from whose income the tax will, 
in absence of any action on his part, be deducted at 
the source. The law apparently gives the tax-payer 
the option of two alternatives — either to forestall the 
deduction of the tax or to secure a refund of the tax 
after it has been collected. The right to have the tax 
refunded in order to secure the benefits of the minimum 
exemption is clearly implied by the clause, " except 
by an application for the refund of the tax," appearing 
in the first part of the paragraph. That the deductions 
allowable on account of expenses and interest may 
likewise be obtained by a refund of the tax collected 
at the source is indicated by the clause at the end of 
the paragraph giving the tax-payer the option of making 
" application for deductions to the collector of the 
district in which return is made or to be made for him." 

If the tax-payer prefers to forestall the deduction of 
the tax, the procedure prescribed by the law as applied 
to exemptions and as applied to deductions of income 
on account of expenses differs in one particular. As 


regards the exemption all that he need do is " to file 
with the person who is required to withhold and pay 
the tax for him, a written notice claiming the benefit 
of such exemption." But if he wishes to forestall 
the retention of the tax on any income which is not 
taxable because it is offset by allowable deductions, 
he must file " a true and correct return of his annual 
gains, profits, and income from all other sources and 
also the deductions asked for." This return likewise 
is to be filed with the person " required to withhold and 
pay the tax." It would seem hardly possible, however, 
to make such a return prior to the completion of the 
calendar year for which the income is to be computed; 
and therefore it is difficult to see how the tax-payer can 
exercise this right in such a way as actually to forestall 
the retention of the tax at the source, unless the tax 
officials construe the law as permitting the acceptance 
of a statement of prospective income filed in advance 
of the actual receipt of the income. It may be noted 
in this connection, however, that the person retaining 
the tax at the source apparently is not required to pay 
it over to the government until the expiration of six 
months after the completion of the year for which the 
tax was assessed. 1 It is conceivable, therefore, that 
the tax-payer, instead of attempting to forestall the 
retention of the tax, might file his claim and return of 
income after the close of the tax year, not with the tax 
collector but with the person withholding the tax, so 
as to obtain a refund of it before it has been paid over 
to the tax collector. This possibility is suggested by 
the provision as to the period within which the claim 

1 As to time of payment there is no provision in the law except the general provision 
that all assessments shall be paid on or before the 30th of June. This would seem to 
cover assessments at the source, in view of the fact that the special provision requiring 
deduction of the tax simply states that the person withholding the tax shall pay it to 
officers of the government authorized to receive it, without specifying when it shall be 


may be filed, namely, " not less than thirty days before 
the day on which his return of income is due." The 
" return of income " is due on March 1st and therefore 
the claim may be filed at any time prior to the 29th or 
perhaps 30th of January following the year in which 
the income accrues. 

No similar difficulty stands in the way of forestalling 
the retention of the tax when it concerns the exemption 
of a minimum. Here, as previously explained, the 
tax-payer's application need not be accompanied by a 
statement of income, presumably because this exemp- 
tion is not dependent upon the amount of his income. 
He is entitled to the relief whatever his income may be. 
It would seem, therefore, entirely practicable in most 
cases to forestall the retention of the tax at the source 
where it affects the tax-payer's right to exemption. 

The claim to exemption or deduction, with the accom- 
panying return of income, when filed with the person 
who would otherwise retain the tax, is to be submitted 
by the latter, in making his own returns to the tax col- 
lector as his authorization for not having collected or re- 
tained the tax. This appears to be the meaning of the 
provision that " the showing thus made shall then become 
a part of the return to be made in his [the claimant's] 
behalf by the person required to withhold and pay the 


The principle of assessing income at its source as 
applied in this act does not relieve the individual from 
the necessity of making a full revelation to the tax 
officials of his personal income from all sources. Tho 
this statement needs to be qualified in one or two 
particulars, the law provides in general that every 
person subject to the tax and having an income of 


$3,000 or over shall make a true and accurate return 
under oath or affirmation " setting forth specifically 
the gross amount of income from all separate sources 
and from the total thereof deducting the aggregate 
items or expenses and allowance " authorized by the 
law. Altho income from which the tax has been with- 
held is not included in the net personal and taxable 
income of the tax-payer, it must, nevertheless, be 
accounted for and included in his declaration as a part 
of his gross income, forming one of the specified items 
which are to be deducted from the gross income in 
arriving at the income subject to taxation. 

As already intimated, the general requirement of the 
full and complete statement of income is subject to 
certain exceptions. One relates to the income from 
dividends, the law providing that " persons liable to 
the normal tax only . . . shall not be required to 
make return of the income derived from dividends on 
the capital stock or from the net earnings of corpora- 
tions, joint-stock companies or associations, and insur- 
ance companies taxable upon their net income." It 
will be noted that this proviso is restricted to persons 
who are " liable for the normal tax only," i. e., persons 
having net incomes under $20,000. It would seem, 
therefore, that the tax-payer claiming and securing this 
privilege must in some way, without revealing the 
amount received from dividends, satisfy the tax asses- 
sors that his total net income including the dividends 
(amount not stated) does not exceed $20,000. Of 
course a form of statement can easily be devised to 
cover the situation. But whether the law will be 
administered in such a way that this provision affords 
some relief from the general obligation of making a 
detailed and complete statement of income remains 
to be seen. 


Another exception to the general requirement of a 
complete declaration of income covers the case of the 
tax-payer whose entire income has been assessed and 
the tax on it deducted at the source. The law relieves 
such persons from the obligation of making any declara- 
tion of income ; altho it is not certain that this privilege 
can be secured without foregoing or sacrificing the 
benefits of any abatements to which the individual 
tax-payer might be entitled on account of business 
expenses, interest payments, losses, etc. It seems 
probable that where the income is all assessed at the 
source the tax-payer may obtain the benefit of the 
minimum exemption without making a declaration of 

It appears, therefore, that assessment at the source 
does not, under this law, operate in such a way as to 
afford the tax-payer any substantial relief from the 
necessity of making a revelation of his income to tax 
officials. Whatever basis there may be for the common 
criticism or complaint that an income tax is inquisitorial 
remains under the operation of this law to nearly the 
same extent that it would if the tax were levied wholly 
and directly upon the recipients of the income, with no 
resort to taxation at the source. 

In addition to the returns which the individual is 
required to make covering his own income, every 
individual, firm, or corporation is required to make a 
return covering payments on which the tax has been 
deducted and giving the name and address, if known, 
of the persons to whom such payments were made. 
As regards the scope and application of this require- 
ment, the law is not altogether clear or explicit. It 
seems best, therefore, to cite again the exact language 
of the statute: 


All persons, firms, companies, co-partnerships, corporations, 
joint-stock companies or associations, and insurance companies, 
except as hereinafter provided, in whatever capacity acting, having 
the control, receipt, disposal, or payment of fixed or determinable 
annual or periodical gains, profits, and income of another person, 
subject to tax, shall in behalf of such person deduct and withhold 
from the payment an amount equivalent to the normal income tax 
upon the same and make and render a return, as aforesaid, but 
separate and distinct, of the portion of the income of each person 
from which the normal tax has been thus withheld, and containing 
also the name and address of such person or stating that the name 
and address or the address, as the case may be, are unknown: . . . 
Provided, That ... no return of income not exceeding $3,000 shall 
be required. 

The introduction of the last proviso (that no return 
should be made of payments of income not exceeding 
$3,000) was probably thought necessary in order to be 
consistent with the general rule that the tax shall be 
withheld and deducted only from payments exceeding 
that amount; but to that general rule there is one 
important exception, as already noted, covering interest 
payments made by corporations. The tax on such 
payments is to be deducted in all cases without regard 
to the amounts. There is no corresponding exception 
to the rule as to returns. The language of the statute, 
strictly interpreted, would seem to mean that the cor- 
porations, altho required to deduct the tax from all 
payments of interest, are not required to make a return 
of the names and addresses of persons to whom annual 
interest payments are made in amounts not exceeding 

It is, in fact, hardly possible in advance of the official 
interpretation and actual enforcement of the law to 
say how far this requirement of a return of payments 
of income taxed at the source extends or to whom it 
will apply. But as regards the deduction of the tax 
and the returns to be made in connection with the pay- 


ment of the interest on corporation bonds, Treasury 
regulations have already been published, indicating 
the procedure to be followed. The case of registered 
bonds presents no especial difficulty, the officers of the 
corporation being in a position to make the required 
return giving the name of the bondholder and the 
amount of interest paid to him. But the procedure 
that would be followed in connection with the large 
amount of interest paid out on coupon bonds was not 
so obvious. In this case the corporation issuing the 
bonds and ultimately paying the interest has, as a 
rule, no knowledge who the bondholders are or how 
much interest they individually receive. The only 
person who can give this information is the person who 
cashes the coupons for the bondholder in the first 
instance. Usually coupons are redeemed through 
the banks; and the Treasury regulations above referred 
to provide that the coupons when presented to banks 
or other agencies for redemption or collection must be 
accompanied by a certificate of ownership signed by 
the owner of the bonds. In this case, presumably, 
the bank will collect from the corporation the interest 
less the tax and the corporation will pay the tax to the 
government. The failure to supply such a certificate 
places upon the bank accepting the coupons the 
obligation of retaining the tax and, at the same time, 
attaching to the coupons its own certificate giving the 
name and address of the owner of the coupons or of 
the person presenting them. Here the intention seems 
to be that the bank shall deduct and withhold the tax, 
collect the interest in full from the corporation, and 
ultimately pay the tax to the government. The 
corporations are to deliver all certificates to the tax 
collector on or before the 20th of the month following 
that in which they were received. 


Regarding the assessment of the additional tax not 
much need be said in the way of explanation. It is, 
in theory at least, a comparatively simple matter. 
There is no attempt here to make any application of 
the principle of collection at the source. The tax is 
all levied directly upon the recipients of the individual 
incomes and the assessment is based upon the tax-payer's 
declaration, which for the purposes of this tax must 
cover the " entire net income from all sources, corporate 
or otherwise." The tax is thus largely distinct from 
the normal income tax as regards both the method of 
assessment and the rates. It is, however, to be admin- 
istered through the same machinery, and no doubt to 
some extent the information obtained as to the sources 
of income in connection with the assessment of the 
normal tax will prove useful as a check upon the returns 
of income required for assessment of the additional 
tax. Every person whose income exceeds $20,000 will 
be subject to both taxes, the normal and the additional, 
but presumably will be required to make only one 
declaration. For the purposes of the additional tax 
he will be required to declare his income from all 
sources, and therefore any relief from the obligation 
of making a complete revelation of income which may 
be secured to him through the application of the prin- 
ciple of assessment at the source in connection with 
the normal tax will be entirely sacrificed. 


The administration of a direct personal income tax — 
using that term to describe a tax levied directly on 
individual incomes — is a comparatively simple matter, 
however ineffective it may prove to be in reaching the 


income subject to it. Under this method of taxation 
it is easy to exempt a minimum, to apply progression 
in the rates, or to make any other adjustments that may 
be deemed equitable with reference either to the size or 
character of the income or to the circumstances of the 
tax-payer. But as soon as we depart from this simple 
method and resort to taxation at the source, we encoun- 
ter difficulties in varying the rates, allowing exemptions, 
or making any similar adjustments. In the English 
income tax, these difficulties are squarely met and 
surmounted. As previously explained, that tax is in 
the first instance levied indiscriminately on all acces- 
sible sources of income and the adjustments are effected 
by refunding the tax collected at the source so far as 
may be necessary. No provision is made for fore- 
stalling the deduction of the tax, and no returns are 
required of the names and addresses of persons to 
whom payments of income are made. The exemption, 
however, is small ($800) and the abatements extend 
only to incomes below $3,500. Above that point the 
entire income is taxable. 

A tax which provides for the exemption of $3,000 or 
$4,000 from every individual income places a formid- 
able barrier in the way of a thoro-going application 
of assessment at the source. It is evident that with a 
universal exemption as high as this, a very large amount 
of tax withheld and collected at the source would 
ultimately have to be refunded. The law as enacted 
indicates an intention to secure in part the advantage 
of assessment at the source and at the same time avoid 
in part the attendant disadvantage of having to refund 
the tax. The measure might be characterized as one 
which as regards the " normal tax " applies the prin- 
ciple of assessment at the source to corporate income 
completely and to other income in spots. The " addi- 


tional tax " is simply the direct personal tax. The 
normal tax will doubtless be successful in reaching the 
large amount of income earned or created by enter- 
prises conducted under the corporate form of organiza- 
tion, much of which would probably escape assessment 
under a direct personal income tax. But beyond this 
it is questionable whether the method of assessment 
at the source as here applied will be of sufficient advan- 
tage to justify the administrative complications which 
it involves. 

It seems useless, however, as well as unwise, to 
venture any predictions as to how successful the tax 
will be in reaching the income subject to it or how well 
it will work in actual practice. We can afford to wait 
and see. Much depends upon the way in which the 
law is administered. After it has been in operation 
for a year or two, after its novel features have been 
tested by actual experience and those provisions which 
are complicated or obscure have been interpreted by 
administrative rulings or possibly by court decisions, 
we shall have a better understanding of the merits 
or defects of the measure than is at present possible. 
The law will doubtless require amendment in many 
particulars even if it does not need to be radically 
revised. That the income tax in some form will be 
perpetuated as a permanent part of our system of 
national finance may safely be predicted. Properly 
adjusted and wisely administered it should greatly 
strengthen the financial resources of the government, 
make possible a closer adjustment of revenue to expen- 
diture, and secure a more equitable distribution of the 
burden of taxation. 

Joseph A. Hill. 
Washington, D. C.