or less openly sympathized with by the Democrats, was wholly ineffectual. No feature of the tariff bill was ever in smaller danger of being successfully opposed than were the income tax sections; for revenue considerations were the pretext for their introduction, not the cause.

§3. An Analysis of the Law

The new law was copied, with a few important exceptions, almost word for word from the old legislation of the Civil War period. We shall therefore only summarize its chief provisions.

The tax was to begin on January 1, 1895, and to continue for five years. The rate was two per cent on the excess over $4000. It was levied upon all "gains, profits and incomes derived from any kind of property, rents, interest, dividends, or salaries, or from any profession, trade, employment or vocation." The period on which the tax was computed was the preceding calendar year. The tax applied to the entire income of all citizens of the United States, whether resident or non-resident, and to all persons residing within the United States; and it also applied to so much of the income of persons residing abroad as was derived from property or business within the United States.2

A long section was devoted to explaining what was to be considered income. The only points that need mention here are the following: Income was deemed to include interest on all securities except such federal bonds as were expressly exempted from taxation by the law of their issue. Profits realized from the sale of real estate were defined to be income only when the real estate had been purchased within two years previous. The amount of sales of all vegetable and animal produce grown or produced by the taxpayer himself was considered income, but the expenses of production were deducted, and the amount consumed directly by the family was not included. All personal property acquired by gift

1 Act of August 28, 1894, secs. 27-37.

2 Sec. 27.

or inheritance was declared to be income. In computing income, the necessary expenses actually incurred in carrying on the occupation were deducted. A similar deduction was made for interest on indebtedness, for losses actually sustained, and for worthless debts. But no deduction was permitted for permanent improvements or betterments to real estate. Although taxes might be deducted, the term was held not to include the amount paid for special assessments. In cases where the tax had already been paid by other parties, the individual was not compelled to include that income in his return. This would apply to the salaries of all officials of the United States government, where the government itself was directed to withhold the tax; to the income received in the shape of dividends on corporate stock, where the stock company or association was required to pay the tax in the first instance; and to "any salary upon which the employer is required by law to withhold or pay the tax." It was also provided that salaries due to state, county, or municipal officers should be exempt.2

In addition to this tax on individuals the law included a tax on corporations, companies, or associations doing business for profit in the United States, but not including partnerships. This tax was assessed at the same rate, but without any abatements. It was levied on the net profits or income above operating and business expenses, which latter were so defined as to comprise not only ordinary expenses and losses but also interest on bonded or other indebtedness. The income was deemed to include all amounts carried to the account of any fund, or used for construction, enlargement of plant, or any other expenditure or investment paid from the net annual profits. The corporate income tax did not apply to states, counties, or municipalities; nor to charitable, religious, or educational associations; nor to fraternal beneficiary orders; nor to building or loan associations; nor to mutual insurance companies; nor to savings-banks or societies under certain conditions.

1 Sec. 28. But see infra, p. 527.

2 Sec. 33.

8 Sec. 32.

We come now to the administrative features. All persons of lawful age with an income over $3500 were required to make to the collector or deputy collector a return in such form and manner as might be directed by the commissioner of internal revenue, with the approval of the secretary of the treasury. The collector or deputy collector was to require the return to be verified by oath or affirmation. If he had reason to believe that the return had been understated, he might increase the amount. In case no return or a wilfully fraudulent return was made, he was to make the list to the best of his information, adding fifty per cent in the one case and one hundred per cent in the other.1 Appeal might be taken from the deputy collector to the collector of the district. If still dissatisfied, a taxpayer might, after due notice, submit the case, with all the papers, to the commissioner of internal revenue, whose decision was final. No penalty was to be inflicted upon any one for making a false return or refusing to make a return, except after reasonable notice of the time and place where the charge might be heard. A further section provided that in case a person refused to return his list or made a fraudulent return, the collector might inspect his books and compel the individual, or any one else in charge of the books, to give testimony or answer interrogatories.2

Every corporation or business association was required to make a full return of its gross profits, expenses, net profits, amounts paid for interest, annuities and dividends, amounts paid in salaries of less than $4000, and amounts, with name and address of each official, paid in salaries of more than $4000.3 Whenever the collector or deputy collector thought that a correct return had not been made, he might file an affidavit of such belief with the commissioner of internal revenue, who might then, after notice and hearing, issue a request to have the books inspected. If the corporation refused such request, the collector was to make his own esti2 Sec. 34, amending sec. 3173 of the Revised Statutes.

1 Sec. 29. 8 Sec. 35.

mate of income, and add fifty per cent thereto.1 The government was required to withhold the tax from the amount of all salaries over $4000.2

The tax was due on July 1 of each year, and was levied on the income for the year that ended on the preceding December 31. The penalty for delay in payment was five per cent on the amount unpaid, together with interest at the rate of twelve per cent. This did not apply to the estates of deceased, deranged, or insolvent persons.

In order to insure the greatest possible secrecy, it was provided that no official of the government was to divulge any fact contained in the income return or to allow any detail to be seen or examined by any person not authorized by law. It was further declared to be unlawful for any one to print or publish in any manner not provided by law any income return or part thereof. The penalty was a fine not exceeding $1000, or imprisonment not exceeding one year. But in case the publication was due to any public official, the offence entailed dismissal from office, with the incapacity thereafter to occupy any position under the government.3

Let us now proceed to analyze the provisions which have been recounted in all their baldness.

The first point that arrests our attention is the definition of income. The law differed from those of the Civil War period in that it did not expressly exclude from income the rental value of the residence occupied by the owner. The legislator of the Civil War period, it will be remembered, assumed that income would comprise the rental value of the homestead occupied. A special provision was therefore inserted in the law, excluding this in terms. This was done for the reason that, since a deduction was permitted from income for the amount of rent paid for a dwelling by a tenant, there would otherwise be a gross injustice. But, as was pointed out

1 Sec. 36.

2 Sec. 33.

8 Sec. 34.

The deduction for amount of rent paid, it will be remembered, was not found in the law of 1862, but in the amendment of 1863. The exclusion of rental value from income was first found in the law of 1864.

repeatedly at the time, the deduction of rent paid was unnecessary. The same equality might have been preserved by including in income the rental value of the property occupied by the owner, and in other cases allowing no deduction for rent paid. In the new law no one was permitted to deduct from income the amount of rent actually paid — which in itself was correct enough. But as nothing was said about including in income the rental value of the dwelling occupied, it is very doubtful whether it would have been included. This was manifestly an injustice.

On other points the explanation of what is to be considered income was copied from the earlier laws. Some of the provisions were quite arbitrary. Such was the requirement that the profits from the sale of real estate should be considered income only when the real estate has been purchased within two years before. Under the law of 1862, which contained no reference to this point, it will be remembered, it was held that profits from the sale of real estate were to be considered income, irrespective of the time when the property had been purchased. The law of 1864 specifically provided that they were to be considered income only if the property had been bought in the same year. Later on, in 1867, the limit was fixed at two years. It is this clause which was followed in the law of 1894. Why the precise period of two years should have been chosen is not clear.

A similar criticism may be urged against the provision that income was to include the sale of all vegetable and animal products, excluding any part consumed by the family. It was frequently pointed out during the earlier period that this deduction was illogical, since an artisan who had to spend his money for provisions was allowed no deduction. If the farmer sold all his produce, and then bought food, he could deduct nothing; but if he reserved from his sales an equivalent amount of food, the deduction was permitted. However, since very few farmers would have been taxed by the law at all, this provision made little difference.

A more important point is the definition of corporate in