After the adverse decision of 1895, sentiment in favor of the income tax as a source of Federal revenue seemed to gain ground.

1 Pollock vs. Farmers' Loan and Trust Co., 157 U. S. 429. This opinion was rendered in April, 1895; the second was rendered in May, 158 U. S. 601.

Many statesmen, among them President Roosevelt, declared in favor of income tax legislation, and believed that a law could be so formulated as to be sanctioned by the court. Laws had been upheld already which imposed taxes on the income of some corporations, and upon inheritances.

In its platform of 1908 the Democratic party declared in favor of a constitutional amendment, permitting the Federal government to levy an income tax. President Taft expressed the belief that an amendment was not necessary, yet did not encourage the adoption of the income tax during his term of office. The Republican leaders seemed no more enthusiastic, and in order to calm the agitation for income taxes arrangement was made to submit an amendment to the states. As a result the following Sixteenth Amendment was ratified by the requisite three fourths of the states in 1913: " Congress shall have power to lay and collect taxes on income from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."

Tax Adopted in 1913. - With this amendment in force, on October 3, 1913, the President signed "An Act to reduce tariff duties and to provide revenue for the government and for other purposes." As in 1894, the income tax law was a part of a tariff bill. This comprises the second part of what is generally known as the Underwood-Simmons Tariff Act. The law is not a detailed piece of legislation, but rather a framework which was to be filled in by rulings of the Treasury Department. No attempt will be made to go into the details in this volume, as many detailed and technical treatises are available.

Court Decision. - In spite of the amendment, the constitutionality of the law was contested in the courts. It was contended that the progressive feature, which classified according to wealth, was unwarranted, unjust, and unreasonable; that the collection at source involved the taking of property without due process, as well as the taking of private property for public use without just compensation; and that the retroactive feature of the law - it taxed incomes received since the preceding March - was unconstitutional.

Chief Justice White rendered the decision of the court and upheld the law in every respect.1 He gave a lengthy discussion of the nature of direct and indirect taxes under the meaning of the Constitution, and of the place of the income tax in this classification. In regard to the points in question the court held that the retroactive feature did not vitiate the law, neither did it violate the due process of law provision of the Fifth Amendment. Tax uniformity required by the Constitution was geographical, and equal protection of the law was not denied by a classification of things and persons.

The provisions for collecting the income tax at the source did not deny due process of law by reason of duties imposed upon corporations without compensation in connection with the payment of the tax. Where differences existed between citizens, Congress did not transcend the limit of its taxing power by taxing them differently. Other cases involving the law have come before the court, and the decisions have generally served to strengthen the income tax.

Incomes Taxed; Rates. - The law is inclusive in the persons who are taxable. Every citizen of the United States, whether residing at home or abroad, is subject to the tax. All persons residing in the United States, including minors, are subject to its provisions, as also are all persons residing without the United States who receive an income from property owned, or business or profession carried on, within the United States.

The tax is divided into two parts - the normal tax and the additional tax. The normal tax is a proportional tax of 1 per cent upon the entire taxable income, while the

1 Brushaber vs. Union Pacific Railroad, 240 U. S. 1.

additional tax introduces the progressive feature. The additional tax schedule is as follows:

1%

on net

income over

$ 20,000

but not

exceeding

$ 50,000

2%

" "

" "

50,000

" "

"

75,000

3%

" "

" "

75,000

" "

"

100,000

4%

" "

" "

100,000

" "

"

250,000

5%

" "

" "

250,000

" "

"

500,000

6%

" "

" "

500,000

     

The law defined as taxable all profits and income derived from salaries or compensation for personal services, or from professions, business, or trade. Incomes from interest, rents, dividends, securities, or the transaction of any lawful business carried on for gain or profit, and incomes derived from any source are included.

Deductions and Exemptions. - From gross income certain deductions are allowed. Among these are necessary business expenses, but not family, living, or personal expenses; interest on indebtedness payable within the year, and all taxes except those levied for local benefits. Actual losses sustained not covered by insurance, a reasonable depreciation, and worthless debts which have been charged off are also allowed. Deduction is also permitted of income which has been taxed at the source, and of the dividends of companies whose net earnings are taxable.

The exemptions allowed by the law are liberal. An exemption of $3,000 is given to a single person, and $4,000 is allowed to a man and wife living together. All property acquired through gifts, bequests, or descents, and all interest on obligations of the United States or its possessions, are exempt from the tax, as is also the interest on the obligations of the minor political divisions. The compensations paid by all political units, except the United States government itself, are also exempt from the tax. Receipts from life insurance policies, moreover, are not taxed.

Method of Collection. - Use is made both of collection at the source, and of declaration of income. Any person or company which pays to another person or company an amount in excess of the legal exemption, is required to deduct the normal tax and pay it to the proper official. When an income is subject to the normal tax alone, and the entire amount is received from a person or company which has paid the tax at the source, no return of such income is required. Returns of all other taxable incomes are required to be made by the recipient of the income. Penalties are provided for failure to make returns, for making fraudulent returns, and for failure to pay the tax.