In a discussion of methods used to finance war, those used by the various countries to provide funds for the recent world conflict command the interest of students of fiscal problems. A brief review of some of the more important attempts to secure revenue in the principal combating countries is all that can be undertaken here. Neither is there space for any extended criticism of these measures.

Revenue Act of 1916. - The United States, in reality, began her provision for war revenue before a state of war actually existed. The Revenue Act of 1916 was largely a preparedness measure, as was also in some respects the Revenue Act of 1914. The revenue provisions of the law of 1916 dealt particularly with income taxes, inheritance taxes, a tax on the manufacture of munitions, and some miscellaneous taxes. The changes in the income tax were noted in the chapter on Income Taxes.1 The inheritance tax was introduced as a Federal measure for the first time since 1902. The tax was imposed upon the transfer of the entire net estate, less certain allowances, rather than upon the amount of each share, and made no differentiation between collateral and direct heirs. The rate was progressive from 1 to 10 per cent, and the gradations ranged from $50,000 to $5,000,000. A tax of 121/2 per cent was placed upon the net profits of manufacturers of munitions. Under the title of miscellaneous taxes the duties were increased upon a number of commodities, such as liquors and tobacco, and some changes were made in the treatment of corporations, amusement houses, and brokers.

This law was amended in some ways before it was made the basis for the War Revenue Act, signed October 3,1917 - the one real revenue Act of the war. The Act contained thir-teen provisions, most of them dealing with various classes

1 See p. 303.

of taxes. The provisions of this law did not repeal previous legislation, but, with a few exceptions, supplemented it for the purpose of securing a war revenue. The most important item in the Act were titles I and II, which dealt with income taxes and excess profits taxes, respectively.

Income Tax of 1917.1 - Drastic changes were made in the taxation of incomes. To the normal rate of 2 per cent, under the 1916 law, there was added another normal rate of 2 per cent for war purposes. The exemptions, moreover, were reduced from $3,000 and $4,000 to $1,000 and $2,000. This placed a normal tax of 4 per cent on all incomes of more than $3,000 or $4,000. The Act imposed a surtax to be added to the additional taxes imposed by the former laws. The number of grades was large, and the rates steeply progressive, from 1 per cent on the amount of income between $5,000 and $7,500, to 50 per cent on the amount of income over $1,000,000. Most incomes were thus subject to four taxes. The income of more than $1,000,000 of an unmarried person was subject to the normal tax of 2 per cent on all income above $3,000, and the war normal of 2 per cent on all over $1,000. To this was added the additional taxes up to 13 per cent on the various grades of income, followed by the war surplus taxes up to 50 per cent on the amount of income over $1,000,000. This made a total income tax which approached, but of course fell somewhat short of, 67 per cent -an extreme which was approximated in no other country.

Excess Profits Tax. - The use of taxes upon excess profits was practically an innovation in our fiscal policy. The embryo of this might be found, however, in the tax on the profits of munition manufacturers, which began to take definite form in the March, 1917, Revenue Act. The tax was evidently designed to take, for the benefit of the government, a part of the profits created by the war. The rule provided for arriving at excess profits was to deduct the average rate of profits earned upon the capital invested in the three pre-war years (1911-1913), provided

1 For changes made in 1921 see note p. 483.

this rate was between 7 and 9 per cent. Whatever the previous return, however, the minimum deduction in any case was 7 per cent, and the maximum 9 per cent. The tax applied to corporations, partnerships, and individuals, the only distinction being that the maximum exemption allowed to corporations was somewhat smaller than that allowed to individuals and partnerships. The rates were progressive, according to the following schedule:

Per

Cent Profit

Rate of Tax

Between

7 to 9 and 15.

............................. 20 " "

"

15 " 20.

................25 " "

"

20 " 25.

................35 " "

"

25 " 33.

.................45 " "

Over

33..............

................60 " "

Inheritance Tax and Other Provisions. - Another important modification of the previous law was the increase in the inheritance tax rates. The 1916 schedule of rates had been modified earlier in the year to range from 11/2 to 15 per cent. By the revenue law under discussion, additional rates were imposed upon the same grades from 1/2 of 1 per cent on the lowest grade to 10 per cent on the highest - the amount by which a bequest exceeded $10,000,000. The maximum inheritance tax which could be collected, therefore, would be 25 per cent.

Other provisions of the Act, which can only be indicated here, were concerned with increasing tax rates upon goods which were already taxed, and with tapping new sources of revenue. The taxes upon distilled spirits, beer, and tobacco were raised materially. The search for new sources of revenue resulted in the placing of tax levies in many new and unexpected fields. Freight, express, and passenger transportation, and telegraph and telephone messages, were made taxable. The manufacturers of a large class of semiluxuries, such as automobiles, musical instruments, jewelry, sporting goods, and many other articles, were required to pay a tax on their product. A 10 per cent tax, to be paid by the purchaser, was placed upon tickets of admission, and also upon the dues, initiation, and membership fees of various clubs. Postal rates were modified so as to bring a greater return, and a long list of legal papers were made subject to stamp taxes.

Revenue Act of 1918. - Just as some of the measures enacted before the opening of hostilities should be classed as war legislation, so the revenue measure which was passed within a few weeks after the signing of the armistice was in large part a war revenue bill. It was largely formulated before hostilities ceased, and the need for huge expenditures did not stop with the signing of the armistice. The previous revenue bill was closely followed, and only a few of the more important changes can be noticed. The law of 1918 modified the income tax schedule as to normal rates, which were to be 6 per cent on the first $4,000 income above the exemption, and 12 per cent on the remainder. The exemptions remained the same as in the preceding law, except that $200 was now allowed for each dependent instead of for each dependent child. In each succeeding year after the 1919 income tax payment, the normal rates are to be 4 and 8 per cent, respectively, while the surtax rates remain the same. The graduation was slightly modified and strengthened, so that the maximum surtax is 65 per cent.

Under the law of 1918 the income of an unmarried person of over $1,000,000 for the calendar year of 1918 would be subject to the 6 per cent normal tax on $4,000, and the 12 per cent normal tax on $995,000. In addition to these normal taxes there were the surtaxes on the different grades up to 65 per cent on the amount over $1,-000,000. This made the total tax approach the limit of 77 per cent. Since there was an exemption, and only a 6 per cent normal tax on $4,000, and since all the grades were not subject to the 65 per cent surtax, the total tax would be much less than 77 per cent of the entire income.

The excess profits tax was somewhat clarified and modified under this new legislation, and, due to the pressure from the states, the rates on inheritances were lowered.

The reductions are in the lower grades, for the rate on the amount of inheritance over $10,000,000 is still 25 per cent. Taxes were extended to a number of consumption goods, either with the hope of securing revenue or of discouraging the purchase of goods.1

Corporation Taxes. - Under each of these revenue Acts the tax upon the net income of corporations was increased. The 1916 law placed it at 2 per cent, while the Act of 1917 imposed an additional tax of 4 per cent, making a total tax of 6 per cent. The Act of 1919 went still farther and made the rate 12 per cent for the calendar year of 1918, and 10 per cent for each succeeding year. Many details exist in the law as to exemptions, deductions, evasions, calculation of income, and administrative procedure.