1. Inheritance-tax laws. § 2. Fiscal and social aspects. § 3. Income taxes; general nature. § 4. Income taxation by the states. § 5. Obstacles to federal income taxation. § 6. Federal taxation of individual incomes. § 7. Important features. § 8. Development and yield. § 9. Corporate income and excess profits. § 10. Defective theory of corporate income taxation. § 11. A system of taxation.

§ 1. Inheritance-tax laws. There remain to be considered at least two important forms of taxation that are essentially personal in their unit of assessment, in contrast with the foregoing, which are (or should be, if consistent) essentially impersonal.1 There are the inheritance and the income taxes. Property received by bequest or intestate inheritance for taxing purposes is usually viewed as essentially income accruing but once under peculiar conditions, and therefore taxable to the individual beneficiary. However, inheritance taxes still retain some traces of a legal origin in feudal times, when the estate reverted to the overlord until released upon the payment of certain dues, and the tax is collected in the course of the probating of wills under the direction of court officials.

Forty-three of the American states had inheritance tax laws in 1921 (all but South Carolina, Florida, Alabama, Mississippi, and New Mexico). These laws apply generally to property passing either by will or under the intestate laws of the state. The tax is for state purposes. These laws differ in many ways, but are nearly all alike in certain respects:

1 See ch. 18, §3, note, and § 5, on this distinction. The poll tax also is personal; see ch. 17, 5 9.

(1)   In applying to the separate legacies rather than to the estate as a whole.2

(2)   In taxing legacies to relatives in the direct line at a lower rate (or even exempting them entirely) than those to collateral relatives.3

(3)   In exempting legacies below a certain amount.4

(4)   In having rates progressing with the size of the legacy; (this feature is less general, but is prominent in most of the later laws).

The federal government has until lately made little use of an inheritance tax. The law passed in 1862 in the midst of the Civil War yielded little and was soon repealed. But in 1916 was enacted an "estate tax" (amended and increased in succeeding years) which is imposed upon every estate (as a whole, not on the several shares) on the excess over $50,000, at progressive rates from 1 to 25 per cent, the maximum being on estates exceeding ten million dollars.

§ 2. Fiscal and social aspects. The fiscal importance of inheritance taxes in the states has been comparatively not very great, but has rapidly grown. In 1903 the receipts from this source (in twenty-seven states) were more than $7,000,000; in 1913 they were (in thirty-five states) $26, 000,000, and are doubtless now much greater. In New York state alone the receipts range between ten and fifteen million dollars a year. The yield of the federal estates tax by fiscal years has been as follows:

1917                            $6,000,000

1918                            47,000,000

1919                            82,000,000

1920                           104,000,000

The spread of inheritance taxes and the higher and progressive rates applied are an expression in part of the need of additional revenues and in part of the growing popular concern regarding the concentration of wealth. Yet the actual legislation is something of a compromise between fiscal policy (to get revenues) and social policy (to reduce or to distribute the larger fortunes. In New York legacies of more than $1,000,000 are now taxable at 4 per cent to relatives in the direct line and to all others at 8 per cent. In Washington the tax to relatives in the direct line is from 1 to 5 per cent, according to the amount of the share, but to others it may go as high as 15 per cent. In Wisconsin, somewhat similarly, the tax may rise to 15 per cent on the excess above $500,000. These taxes are of considerable importance, not only fiscally, but as the means for reducing large inherited fortunes. For this latter purpose, however, it would be more consistent and effective to make the progressive rates apply to the distributive shares rather than to the estates as wholes.

2 In Utah the tax is 5 per cent on all estates over $10,000.

3 Exception, Utah.

4 Exceptions are Missouri, New Hampshire, Vermont, Virginia.

§ 3. Income taxes; general nature. All taxes, whether assessed upon the capital value of goods or not, come out of (reduce) the incomes now or later available for individuals. But there are various ways of attacking incomes, i. e., of apportioning the tax burden. Income taxation is that form in which the basis of the assessment and levy is the income of the taxpayer as it arises (not accumulated wealth, or capital, or business processes, or expenditures). Of the various conceptions of income,5 the one mainly employed in income taxation is monetary income arising in the course of business, supplemented occasionally (but not consistently) by some items of material income that are expected to come to the person.

There is not in the long run such a contrast between wealth taxation and income taxation in their ultimate burden and effect as is usually supposed. Indeed, wealth (or capital) taxation as applied to accumulated wealth is more far-reaching than income taxation, for it falls upon the present worth alike of monetary and of psychic incomes (e. g., the value of a house, whether it is let to a tenant or occupied by the owner). But, on the other hand, income taxation attacks directly the monetary incomes from labor, coming as wages, salaries, fees, and profits in business (unfunded as distinguished from funded incomes). This feature goes naturally with the fact that the income tax is essentially a personal tax, grouping the items of assessment about a person, whereas the "property" taxes are mainly (though not consistently) impersonal, making the piece of wealth the primary object of assessment. This summation of each person's income makes income taxation peculiarly suitable for progressive taxation with the social-welfare motive of equalizing the distribution of wealth. It is doubtless this technical assessment feature, rather than any essential advantage as a mode of taxation, that has led to its recent growth in popular favor.

5 See Vol. I, p. 26.

§ 4. Income taxation by the states. Income taxes have been used widely in European countries, but until 1913 very little in the United States. Numerous attempts have been made by the states to tax incomes, but with small results. Personal incomes, when sought by local assessors, proved to be most elusive. There were (in 1913) but seven states with anything resembling a personal income tax.6 These are Virginia, North Carolina, South Carolina, Mississippi, Oklahoma, Massachusetts, and Wisconsin. Of these states "Wisconsin has the most recent law, and one the widest in its application and the most important fiscally. The law applies a progressive rate to all incomes (with exemption of $700 from wages and salaries) and contains elaborate provisions for corporate taxation. The proceeds are distributed 10 per cent to the state, 20 per cent to the county, and 70 per cent to the municipality in which the tax is collected. In the six other states the tax is on incomes only exceeding a certain amount (North Carolina, $1000, the other states from $2000 to $3500 exemption); some apply to incomes from any source, but others do not apply to incomes from property otherwise taxed. The total receipts from these state income taxes in 1913 were but $314,000.

6 In addition, certain items of receipts of companies or incomes of individuals are arbitrarily defined as property for purposes of taxation in a few cases in about fifteen other states. See Wealth, Debt, and Taxation, Report of the Bureau of the Census, 1907, p. 622.

In 1919, four states, Alabama, New Mexico, North Dakota and New York adopted a general income tax. In New York the rate is 1 per cent on incomes up to $10,000, 2 per cent on the next $40,000, and 3 per cent on all over $50,000. The yield the first year was $20,000,000.