investigation; it exposes the taxpayer to little inquisitorial procedure; and it is comparatively easy to collect. It is well suited to a community where the administration is proverbially weak, where the differences of wealth are not too great, and where public sentiment is unfavorable to a rigid application of personal taxation. But, as we have learned, especially from a study of the French conditions, it has serious shortcomings. Unless the presumptions are exceedingly simple, the discretion afforded to the officials is liable to abuse. In addition, the more complicated the society becomes, the more deceptive are the criteria of income, until in the highest grades of income they are almost entirely bereft of significance. Thus, while the presumptive income tax is, at best, only a very rough and ready method of apportioning burdens according to ability to pay, it becomes more and more inadequate, until it finally reaches the point of creating practical injustice as between individuals and classes. While, therefore, presumptions or external criteria may be utilized to a certain extent in order to check the returns and to help us over some of the difficulties of the exact ascertainment of individual income, the time has gone by when a system of income taxation can be erected on this basis alone.

The lump-sum income tax avoids the theoretical weakness of the presumptive income tax, and in several countries has formed its logical successor. But the administrative difficul

ties connected with the ascertainment of the entire income of the individual in a lump-sum are exceedingly great, and the system as a consequence requires for its successful operation not only a high degree of administrative efficiency, but wide and inquisitorial powers conferred upon the officials. In only one country of the world can the lump-sum income tax be said to be successful, namely, in Germany; and we have studied the peculiar conditions which explain its success there conditions which reflect both favorably and unfavor ably upon the social and political life, and which it would be difficult to reproduce, for good or for evil, in other countries. In the two other states of importance where the lump-sum

income tax has been tried, namely, Austria and Switzerland, it has proved to be a failure; and it is Austria and Switzerland, rather than Germany, whose conditions are analogous to those of the United States. For in Austria, as in the United States, public sentiment is not so much inclined to personal taxes as in Germany; and in Switzerland, like the United States, the prevalence of democracy has engendered an attitude of the ordinary citizen to the government very different from that which obtains in Prussia.

Two other significant facts must not be lost from sight. The English tax was originally levied according to the lumpsum idea, until the introduction of the stoppage-at-source method doubled the revenue. The universal testimony of all British administrators, as we know, is to the effect that their system is incomparably superior to the German, which they had tried and discarded; and that it would be a deplorable mistake to revert to the lump-sum method. Furthermore, it will be recollected that the French Chamber, after an exhaust ive discussion of the lump-sum idea, decided that it was unworkable in a democracy and especially inapplicable to French conditions. Finally, the experience of the United States during the Civil War, with what was in essence a lump-sum income tax, only serves to emphasize the lesson. A lump-sum income tax would strain American administrative methods to the breaking point; it would probably be ineffective as a producer of revenue; and it would surely be impotent to secure the relative justice which is the primary desideratum of an income tax. The lump-sum idea might indeed be utilized in a subordinate way, as is the case both in the English super-tax and in the French complementary tax; but, as the chief element of the system in an American income tax, it would be to the highest degree undesirable.

There remains, then, only the stoppage-at-source or schedule income tax. The advantages of this method have been fully stated in our account of the English conditions. It also affords the reason why the Italian income tax is more successful than the Austrian or the Swiss. Even in Italy, it will

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be remembered, only about four-tenths of the revenue is derived through the stoppage-at-source method; but since, in these schedules, almost the entire amount of taxable income is collected, while in the other schedules the tax is very much of a farce, it is no exaggeration to say that in all probability not more than a quarter of the real income of the country is secured by the stoppage-at-source method. Even this small percentage, however, serves to make the Italian tax more successful than the Swiss or Austrian tax. On the other hand, according to the careful calculations that have been made by the French government, the accuracy of which in this respect has not been seriously disputed, at least threefourths of the large revenues that are to be expected from the French income tax would be raised according to the stoppage-at-source idea.

In the United States the arguments in favor of the stoppage-at-source income tax are far stronger than in Europe, because of the peculiar conditions of American life. In the first place, nowhere is corporate activity so developed, and in no country of the world does the ordinary business of the community assume to so overwhelming an extent the corporate form. Not only is a large part of the intangible wealth of individuals composed of corporate securities, but a very appreciable part of business profits consists of corporate profits. In the second place, in no other important country are investments to so great an extent domestic in character. The one great difficulty in England, as we have learned, is that connected with foreign securities. And in France, where the same difficulty exists, we have learned that the projected control of these foreign investments through the French bankers and agents forms the one difficult and complicated point in the scheme. In the United States, on the other hand, the situation is the reverse. Instead of our capitalists seeking investments abroad, it is the foreign capitalist who purchases American securities. We are, therefore, fortunately exempt from the chief embarrassment which confronts Europe; and there is every likelihood that this situation will

not be changed for some time to come. The arguments that speak in favor of a stoppage-at-source income tax abroad hence apply with redoubled force here. The stoppage-atsource scheme lessens, to an enormous extent, the strain on the administration; it works, so far as it is applicable, almost automatically; and, where enforced, it secures to the last penny the income that is rightfully due. Can there really be any doubt as to the preference to be given to the stoppageat-source income tax over either the lump-sum or the presumptive income tax under American conditions?

If, then, the income tax must take the form of the stoppage-at-source tax, the question arises, how can such a tax be worked out in detail, so as to conform to American conditions?

The first element in the scheme would be the taxation of incomes through corporations. Corporations could be utilized for this purpose in a threefold way: In the first place, the tax could be imposed on corporate incomes as such. The machinery for such a tax is already in operation in the federal corporation tax. One necessary and fundamental change, however, would be the abolition of the privilege of deducting interest on bonded indebtedness. The tax on corporate income should, of course, be one on the real profits or gains of the corporation, and the tax on such profits would, if assessed at the same rate, yield just about double what is now secured from the federal corporation tax.

In addition to the tax on corporate incomes, there should be a tax on the individual incomes secured from corporations. The simplest method of accomplishing this result would obviously be to have the tax charged to, and paid by, the corporation, to be thereupon deducted from the sums due the security-holder. The objection will, of course, at once be made that this is double taxation; that it is not legitimate to tax the corporation and again to tax the holder of the security. This objection, however, is valid only in part. It is not valid at all, so far as the holders of corporate bonds are

concerned. A tax on the corporation as such may indeed diminish the profits of the owner, - that is, may reduce the rate of dividends on the stock. But since the interest on bonds is a fixed and not a contingent remainder, a tax on corporate profits would have no effect on it, except, indeed, in the very unlikely event that the rate of taxation should be so confiscatory as to leave nothing available for fixed charges, or so high as seriously to impair the underlying security of the bondholders. As such contingencies are, however, not to be expected, it may be laid down as a general proposition that a tax on the corporation is not a tax on the bondholder. If, therefore, we desire to reach the income of the bondholders, an additional tax must be assessed on the corporation, with the obligation to subtract it from the interest. The privilege granted to railroad corporations during the Civil War to assume this tax themselves ought not to be allowed, for the result of such action would be to make the tax on the bondholder really payable by the stockholder.1

What, however, shall we say as to the tax on the stockholder? If a tax on the corporate income is a tax on the stockholder, then this additional tax would indeed be double taxation. Even here, however, the situation is not quite so simple. It is by no means a fact that the entire income of a corporation, after paying fixed charges consisting of interest on bonds, is distributed in dividends. Some of the profits may be put into a surplus account; another part may be devoted to investments in other corporations; and so on. Ultimately, of course, the earnings will reach the stockholder, but in any given year this may be far from being the case. To say, therefore, that because a corporation advances the income tax for its stockholders, it should be exempt from a tax on corporate income, would be inadmissible. At best, the corporation should be allowed to deduct from its tax only so much

Many bonds now issued by corporations contain a stipulation that the interest shall be payable without deduction for any taxes which the corporation may be required to retain or deduct. This difficulty can, however, be met in all probability by appropriate legislation.