shall be chargeable as income; and losses on sales of real estate purchased within the year for which income is estimated shall be deducted from the income of such year." 1 In estimating the annual income, deductions were allowed for all taxes, salaries, income from dividends, or interests on securities where the tax was paid by the company, and the amount paid by any person for the rent of the homestead occupied, as well as the rental value of any homestead occupied. A provision was inserted including in the annual income "the income or gains derived from the purchase and sale of stocks or property, and the increased value of live stock, whether sold or on hand, and the amount of sugar, wool, butter, cheese, pork, beef, mutton, or other meats, hay and grain or other vegetable, or other productions of the estate of such persons sold." Allowance was made for "usual or ordinary repairs, not exceeding the average for the preceding five years," but it was provided that "no deduction shall be made for any amount paid out for new buildings, permanent improvements or betterments made to increase the value of any property or estate."2 A consul of a foreign country, not a citizen of the United States, was exempt from income tax, provided that reciprocal privileges were conferred by the foreign governments.3

Finally, the rates of the tax on gross receipts were increased so that steamboat and canal companies paid two and one-half per cent; toll roads, ferries, and bridges, three per cent. But it was expressly provided that the tax might be added to the rate of fare. Express companies paid three per cent; insurance companies one and one-half per cent; telegraph companies five per cent; theatrical and similar enterprises two per cent; lotteries five per cent; advertisements three per cent. All such enterprises were required to return the gross receipts annually. In case of neglect or refusal, ten per cent was to be added, and for any attempt at evasion a penalty of one thousand dollars was to be imposed. Such was the law of 1864, which served as the model upon 8 Sec. 178.

1 Sec. 116.

2 Sec. 117.

which all subsequent acts were based. Before the law was put in operation, however, it was amended in several particulars by a law of the following year, which increased the rates to five per cent on the excess over $600 dollars up to $5000, and ten per cent on the excess over $5000.1 A slight change was also made in section 117 whereby the old clause as to the inclusion in income of the "increased value of live stock," etc., was altered so as to read "the amount of live stock," etc. The administrative sections of the law were improved in several particulars. The assistant assessor was empowered to require every list or return to be verified by the oath or affirmation of the party, and to increase the amount if he had reason to believe it understated. Furthermore, in case of refusal to make a return, or of a false or fraudulent return, the assessor or assistant assessor was to make the return "according to the best information he can obtain by the examination of such person and his books and accounts, or any other evidence." In the case of wilful neglect or refusal, twenty-five per cent was to be added; in the case of false or fraudulent returns one hundred per cent. Any one convicted of fraud, moreover, might be fined $1000 or imprisoned for not more than a year, or be subjected to both punishments. If any return should be increased by the assistant assessor, the individual might "exhibit his books and accounts and be permitted to prove and declare under oath or affirmation the amount of annual income liable to be assessed." Such evidence, however, was not to be "considered as conclusive of the facts." Appeal might be taken to the assessor of the district, and finally to the commissioner of internal revenue.2 These administrative changes aroused practically no discussion at all, and the same may be said of the joint resolution of July 4, 1864, which imposed an additional special income tax payable in October, 1864, to defray the expenditure for the war bounties, at the rate of five per cent on all incomes over $600 received in 1863.

1 Act of March 3, 1865, c. lxxviii, sec. I.

2 Sec. 118.

In his report of December, 1864, Fessenden, who had now become secretary of the treasury, upheld the doctrine of graduated taxation as contained in the law. He declared himself, however, opposed to the exemption. "The Secretary would further suggest," he said, "whether the income tax should not be collected upon all, without exemption. As the law is, it opens the door to innumerable frauds, and in a young and growing country the vast majority of incomes are small, while all participate alike in the blessings of good government. The adoption of a scale, augmenting the rate of taxation upon incomes as they rise in amount, although unequal in one sense, cannot be considered oppressive or unjust, inasmuch as the ability to pay increases in much more than arithmetical proportion as the amount of income exceeds the limit of reasonable necessity." 1

The Secretary, however, did not deceive himself as to the practical operation of the law. "From the results of experience, as well as from all the information received, the Secretary is well convinced that much revenue fails to be collected through an imperfect execution of the law, and more through a fraudulent evasion of its provisions." He was, however, not without hope for the future. "Time and effort will, it is hoped, remedy these evils in a great degree, and the confident expectations of those who framed it be realized. In the meantime, no effort should be spared to perfect it, as far as possible, and no experiment to increase its efficiency, of which there is a reasonable hope of success, should be left untried." In his report of the same period, the commissioner of internal revenue discussed the improvement in the fiscal results. During the year ending July, 1864, the income tax proper yielded over twenty-three millions, or, with the addition of the tax on salaries and on dividends and interest, almost thirty-five millions. The commissioner considered "that the income tax collected during the last fiscal year represents pretty fairly what a levy of three per cent should yield." Referring to the prospects for the coming year, he 1 Report of the Secretary of the Treasury for 1864. Washington, 1864, p. 15.

conceded that " many persons will escape assessment who could not escape payment through banks, railroad corporations and paymasters. But the duties on income will in general be assessed more exactly and collected more closely than heretofore. The assessors are armed with powers for investigation and discovery which have not hitherto been conferred, and they have become more thoroughly acquainted with their obligations under the law than at any prior period."1 The commissioner called attention, however, to the difficulties connected with the assessment of farmers' incomes. "The best test of the yearly income derived from real estate is its rental value. A rule requiring such income to be assessed on that value would be conveniently practicable, and would obviate the necessity of the vexatious inquisition now required in ascertaining the comparative value of live stock at different periods of the year, the amount of butter, beef, mutton, pork, cheese, wool, hay, grain and other products sold or on hand. Estimates of these must needs be very unequal and returns incomplete, so that the burden of the tax is unequally distributed." Furthermore, he said, "I am unable to see why a man who consumes his income should not be taxed for it as well as one who saves it, nor why one who lives in his own house should not be taxed on its rental value, as much as if he let it to another and put the rent in his purse. If it be deemed right to allow an occupant of his own homestead such a portion of his rental value unassessed as would suffice to pay the rent of a moderate dwelling, the excess of the annual value of such homestead above that sum might, with justice, be taxed."2 An allowance of three or four hundred dollars, he thought, would suffice for this purpose.

These views of the commissioner were confirmed by the report of the Special Revenue Commission in 1865, which was composed of David A. Wells, Stephen Colwell, and S. S. Hayes. The commission recommended that" in assessing the income tax no allowance whatever be made for house rent, or at

1 Report of the Commissioner of Internal Revenue for 1864. Washington, 1865, p. 5. 2 Op. cit., p. 13.

least that the income allowed to be deducted for rental should not in any case be allowed to exceed $300. As the law now stands, rentals of an excessive and unreasonable amount are also deducted." The gain to the revenue in the state of New York alone, from the repeal of that part of the act authorizing the deduction of rentals would, in the opinion of the revenue officials, amount to over two millions of dollars per annum.1 Congress, however, refused to follow their advice.

§4. The Aftermath of the War

With the close of the war the question arose as to the permanence of the income tax. For the time being, indeed, the revenue was still sorely needed, so that there could be no question of immediate change. On April 25, 1866, Morrill reported a bill from the committee on ways and means, and on May 7 explained the proposal. The committee, he said, "have prepared some modifications of the income law, but have not reached the conclusion, while the industrial employ. ments must remain to a considerable extent heavily burdened, that it can yet be wholly dispensed with."2 Morrill called attention to the fact that, according to the terms of the original law, the act was to expire in 1870, "and thus a temporary character was put upon its face." That it had been a fiscal success, he thought, could not be doubted. After referring to the large revenues derived from the tax, and to the special income tax levied in 1864, he said: "I point to these facts not only as a broad evidence of their patriotism and wealth, but as a proud evidence of their strict integrity of character. Strong as the temptation might be for evasive returns, sore as they might be in consequence of the swift pursuit and the continuous exactions of the tax gatherer, they even paid more in 1863 upon the second call than on the first. Their country was in need, and even the greed for gain could not tempt

1 House Executive Documents, First Session, 39th Congress, no. 17, vol. vii. 2 Congressional Globe, 39th Congress, First Session. Washington, 1866, p. 2437.