doubt that the federal government would resort, as an alternative, to either the corporation tax or the inheritance tax, or both. It was only with great difficulty that the danger of a federal inheritance tax was averted in 1909 by the vigorous objection on the part of the various states. But the other side of the prediction has already come true. We now have a national corporation tax, and we know that this was imposed in 1909 simply because of the political difficulties connected with the enactment of a national income tax.1 To any one, however, who realizes the difficulties and complexities of our state finance, the permanent retention by the national government of a corporation tax in its present shape, levied without regard to analogous state taxes, would seem in the highest degree undesirable. Sooner or later the entering wedge would be pushed farther in, until the corporations would ultimately be almost entirely removed, for revenue purposes, from the activity of the states.

A state income tax, if enacted, would take the place of the general property tax or of a part of it, so that aside from the greater administrative difficulties connected with an income tax as compared with a property tax, no serious increase of revenue could be expected from it; and in those states where the property tax has been relegated to the local divisions, it is unlikely that the localities would permit the state to retain much, if any, of an income tax that might be levied by it. There would, therefore, in all probability, be the same need of a state revenue from these other sources, like corporations and inheritance. If, however, as would almost inevitably be the case, the national government should take over one or both of these taxes, the finances of the states would be thrown into the utmost confusion. Thus, from the point of view of the state fiscal conditions themselves, it seems highly desirable that there should be a national income tax.

To recapitulate: The four reasons why the income tax should be federal rather than state in character are, first, the basis of the tax; second, the avoidance of double taxation;

third, the administrative difficulties; and fourth, the probable ensuing embarrassments to the state finances. Any one of these arguments would in itself be sufficient; taken together their cumulative force must be pronounced overwhelming. If there is to be an income tax in the United States, the chances of success are incomparably greater as a federal than

as a state tax.

The above exposition, however, overlooks one important point, namely, the question of fiscal necessity. The income. tax, as we have seen, is really not needed by the federal government, and although it is in itself not needed by the state governments, it would be needed to the extent that it might lead to the abolition of the general property tax, or at least of the tax on personal property. Moreover, in so far as the proceeds of the income tax might be utilized to satisfy, in part, at all events, the almost insatiable demands of our localities, and especially of our cities, its fiscal significance would be far from negligible.

How, then, are we to escape from these two horns of the dilemma? According to the arguments advanced above, the income tax should be a federal tax. According to the considerations just mentioned, the income tax is needed as a source of state or local revenue. What is the way out of the difficulty?

The solution is really not complicated. Why is it not possible to secure all the ends of general suitability by having the tax administered by the national government under direct national supervision, and to secure all the ends of adequacy and fiscal necessity by having the proceeds apportioned, to a large extent at least, to the various states, perhaps to be further apportioned by the states in part or whole to the localities? This seems to be the real solution: Let the national government assess the tax, and let the state and local governments share in the proceeds of the tax.

The same argument applies to the corporation tax and to the inheritance tax, for in all three taxes the difficulties of conflicting tax jurisdictions are becoming, as we have seen,

daily more pronounced. Let the federal government collect the income tax, the corporation tax, and the inheritance tax; and thus, at one blow, eliminate all the difficulties connected with the escape of the taxpayer from the tax jurisdiction. If the federal government then needs, for any special exigency, a part of one or more of these taxes, let it keep that part, and let it distribute the remainder among the various states, according to rules and criteria that can without difficulty be elaborated. Even if the national government were to keep a part of the proceeds for normal purposes, the states would not suffer; for the far greater administrative success of federal assessment would lead to such an enhanced yield, that the revenue accruing to the separate states from a portion of the tax, under the new system, would surely be larger than the proceeds of the whole of the tax under the old system. From the fiscal point of view, as well as from every other, the states have really nothing to lose.1

This is by no means so new or revolutionary a suggestion as it may appear. It is found, in some form or other, in many countries, and in not a few of the American commonwealths. In England, for instance, the inheritance tax is assessed by the central government, and a part of the proceeds of what is known as the estate duty is allotted to the local government. Before this plan was adopted in 1888, Mr. Goschen had originally contemplated the scheme of allotting to the localities additions to the national income tax. The principle of apportionment is continued by the act of 1907. In France the revenue from all of the four leading direct taxes is apportioned between state and localities by the device of the centimes additionnels; and the same principle is applied in part in Italy. In Germany the proceeds

1 This suggestion as to a division of the proceeds between federal and state governments was first made by the present writer some ten or fifteen years ago, in testifying before a government commission on the corporation tax. The principle there declared applicable to the corporation tax was subsequently extended by him in various essays to the inheritance tax and the income tax. See especially "The Relations of State and Federal Finance," mentioned supra, p. 643, from which a part of the following paragraph is taken.

of certain indirect taxes are divided between the federal and the state governments, and one of the important features in the recent budgetary scheme of the late Chancellor von Bülow was to have a federally administered inheritance tax, a part of the revenue to go to the state. The project now pending for a national unearned-increment tax contemplates a division between the nation, the state, and the locality. In Canada it is well known that a large part of the provincial revenues is derived from the proceeds of taxes that are levied by the federal government. Other instances might readily be mentioned, as in the recent fiscal arrangements of the Australian commonwealth. In the United States, also, many of our separate commonwealths raise revenues which are apportioned to the local administrations. Even the federal government, in the one familiar instance of the distribution of the surplus, apportioned to the various states the proceeds of federally assessed taxes. The principle of apportionment

of revenues between central and local authorities is hence one that is entirely familiar to students of finance. It may be objected, indeed, that the constitutionality of the scheme is doubtful. Our opinion, expressed with all due diffidence, is that a constitutional method can be devised of accomplishing this result, especially if the federal government retain a portion of the revenue. But our additional opinion, expressed without any diffidence, is that if constitutional methods cannot be devised, the sooner a constitutional amendment is procured the better it will be. There is really no other avenue of escape from the difficulties that are looming up on all sides.

This method of federal administration and state and local apportionment will accomplish everything that is needed. It will conform to the principle of efficiency and of suitability, because the income tax, like the inheritance tax or the corporation tax, can best be administered by the federal government, and because in that way alone the gross inequalities of state assessment can be overcome. While, on the other hand, these important incidental gains will be achieved:

the separate states will secure the revenue which they need; the localities will no longer be open to the charge that personalty escapes assessment; and there will be a lessening of the resistance to the application of so-called unearnedincrement taxes to the real estate of our cities. Thus from a threefold point of view our states and localities will be enabled to continue in the path of tax reform upon which they have recently and so auspiciously entered. The important point is that some adjustment be reached whereby the legitimate demands of equality and uniformity may be satisfied without sacrificing the ends of efficiency and adequacy. The interests of the states must, at all costs, be safeguarded; but the difficulties inherent in a state administration of what has become national in character must be avoided. The plan outlined above will accomplish this end. In this way and in this way alone can we do justice to the underlying principles of fiscal and social reform. In this way and in this way alone can the relations of local, state, and federal finance be put on an enduring and a completely satisfactory basis. Let the income tax be a national tax; let the proceeds go, in part or in whole, to the separate commonwealths, to be utilized as the necessities or convenience of each state may prescribe.

§3. How Shall the Income Tax be Administered?

We come, then, to the final inquiry, namely, what kind of an income tax shall we have, and what are the administrative provisions most likely to make it a success?

In the introduction to this investigation we called attention to the three chief types of income tax: the presumptive, the lump-sum, and the stoppage-at-source tax. The rich experience of the various countries that we have passed in review enables us without difficulty to draw a conclusion as to the type best suited to American conditions.

The presumptive income tax - that is, the tax founded on presumptions or external indicia of income - manifestly possesses certain advantages. It requires but slight troublesome