§ 8. Development and yield. The income tax was made retroactive to include incomes accruing from March 1, 1913, to the end of the year, and continued to apply to December 31, 1915,   and the personal income tax yielded approximately $28,000,000 in the ten months of 1913, $41,000,000 in 1914, and $68,000,000 in 1915. In September, 1916, the law was changed by doubling the normal rate and increasing the surtax rates to a maximum of 13 per cent. This law also was applied retroactively to incomes accruing from January 1, 1916,  and continued in force during the calendar year 1916, yielding more than $173,000,000.

After our entry into the war was passed the act of October 3, 1917, called the "War Revenue Act, reducing the normal exemption from $3000 to $1000 ($4000 to $2000 in case of married persons living together), imposing under the name of an "additional normal tax" a new surtax of 2 per cent on all incomes of more than $3000 for single persons and $4000 for married persons, increasing the surtax maximum rate to 63 per cent and reducing to $5000 (taxable income) the point at which it began. The number of returns (that is, taxable persons) was thereby increased to nearly three and one half millions, and the yield of the calendar year 1917 was more than $675,000,000.

The war tax legislation of February 24, 1919, attempted to meet the financial needs of the government when they were at the maximum. The principal changes in the individual income-tax law were in the normal and the additional normal rates, both being trebled to apply retroactively to incomes in the calendar year 1918, and the increase of the surtax by rearranging the classes and applying the maximum rate of 65 per cent to all incomes of more than $1,000,000 (half the amount previously paying the maximum). Under this act there were nearly four and one half million taxable persons, and the yield for the calendar year 1918 was $1,128,000,000. The act provided for the reduction of the normal rates (regular and "additional") each from 6 to 4 per cent for the calendar years 1919 and 1920.

§ 9. Corporate income and excess profits. Along with the federal taxation of individuals under the income tax has since 1913 been closely linked a new and special form of taxation of corporations. Important legislative changes in the one have been nearly always accompanied by equally important changes in the other.

Before the adoption of the sixteenth amendment, the need for new revenue in the Taft adminstration led to the enactment, August 5, 1909, of an "excise tax" on corporations, measured by net profits within the taxing period. This yielded in the four years that it was in force an average of about $32,000,000 annually.

This excise-tax feature was abandoned in 1913, or it may be better to say that it was incorporated into the income-tax law of that year, by which net corporate profits ("incomes") were made subject to a normal rate of 1 per cent, as were those of individuals. This yielded between 1914 and 1916, between $30,000,000 and $60,000,000 a year. In 1916 this normal rate was increased to 2 per cent, at which the yield increased to $180,000,000 in the fiscal year 1917. At the same time a tax of 12 1/2 per cent was laid upon net incomes derived from the manufacture of munitions (a business then most prosperous through enormous sales to the Allies) ; and the capital stock of certain large classes of corporations was subjected to a tax of 50 cents (soon doubled) on each $1000 par value in excess of $99,000. These various taxes on corporations in the aggregate were capable of yielding nearly a quarter billion dollars. But this was only the beginning of corporation taxation. While continuing the normal income rates on corporations, the law of March 3, 1917, laid the first excess profits tax (8 per cent on corporate profits exceeding 8 per cent of actual capital invested); but this law was superseded by the War Revenue Act of October 3, 1917, which levied war excess profits taxes upon incomes alike of individuals, partnerships, and corporations. The details are too complicated for discussion here, but a few features may be noted. A distinction was drawn between incomes derived chiefly from personal or professional service (taxed at a flat rate of 8 per cent, after the exemptions) and incomes derived primarily from invested capital (taxed at progressive rates in accordance with the percentage that profits bore to "invested capital" value). In the case of the latter the lowest rate, 20 per cent of profits, was applied on "net income" not in excess of 15 per cent of the invested capital; and the highest rate, 60 per cent on "net income" in excess of 33 per cent of invested capital. The amount of income exempted was $3000 for corporations and $6000 for partnerships and individuals, and also, in all cases, an amount of new income equal to a specified percentage of the invested capital during the "pre-war period," defined as the years 1911, 1912, and 1913. The yield from this tax was enormous, the total from corporate incomes and excess profits (mostly the latter) in the calendar year 1917 being nearly $3,000,000,000 and in 1918 more than $4,000,000,000. § 10. Defective theory of corporate income taxation. There is apparent in all this legislation the attempt to treat corporations and individuals on the same principles, especially in applying to both of them alike exemptions and progressive rates. There is much confusion of thought here, for (1) "income taxes on individuals" and (2) "income and excess profits taxes on corporations" are very different in their nature and their sources. The term "net income" as applied to individuals is charged with psychological meaning. The whole modern theory and justification of progressive rates as applied to income taxation assumes that the income on which the rates are imposed is a total of the various income items (real and monetary) of an individual. His net income within the year is available for spending and enjoyment, or to add to his capital as a net addition. If this net income total is small, it should not be taxed at all, for that would take away part of what is conceded to be necessary for the minimum of comfort. Hence, exemptions are granted not only to the poorer citizen, but to all citizens, for even the richer taxpayer should not be taxed on that portion of his income necessary to existence or minimum comfort. Hence, also, progressive rates on larger incomes, since the sacrifice, the psychic cost, of giving up the marginal portion of incomes is assumed to become progressively less to the individual as his income increases. The second reason for progressive taxes, namely, the social benefit of leveling somewhat the larger fortunes, is likewise applicable only to individuals, or at most to large corporations owned by one or by few men.

In truth, the concept of income is not applicable at all to corporations without confusion of thought. Only individuals have net incomes, enjoyable or available for reinvestment. Corporations have receipts and expenditures, have net profits (or losses), at the end of the year, the equitable title to which belongs to various individuals, as evidenced by the securities they hold. But a moderately small corporation may have virtually but one owner, and he very rich, whereas an extremely large corporation may have many partial owners, most of them with very modest incomes. Exemptions and progressive rates, varying in accordance with the total of the profits ("income") of corporations, have therefore no relationship in principle to those in the case of individuals.

Nor can taxation of corporate profits at progressive rates in accordance with the ratio of profits to invested capital be justified on the same grounds as progressive income taxation. "Invested capital" is a term that in practical business has a wide range of meanings, and the excess profits tax, when first imposed, caught the corporations with the most varied book values of capitalization. In general, the more recklessly they have been financed and the larger the amount of watered stock they had issued, the smaller the rate of profits on which they were taxable, and vice versa. The imperative necessities of war finance may relatively justify any measure of taxation that produces the results immediately desired; but the fundamental defects soon produce grave abuses and widespread protests, and will compel revision of our federal corporate taxation. The income tax is here as a permanent feature of our tax system. Eventually it should be reconstructed on the sound principle that only individuals have incomes. In various ways increments in capital value and undistributed profits of partnerships and corporations might be periodically assessed as income to the individual owners, thus verging into one simple whole the many diverse elements in our present complex of income and excess-profits taxation.