by Delos O. Kinsman, 1903
The financial obligations of the state governments increased markedly in the period after the Civil War, owing in part to the expansion of the country's industrial plant and in part to the growing need for educational and other welfare services for a growing population, and the states were hard pressed to find new sources of revenue. State income taxes were often tried but were widely resisted and usually unsuccessful. The economist Delos Kinsman studied the plans of all the states that had implemented such a tax with a view to comparing them and determining their salient features. His study, the summary chapter of which appears here, included some observations on the general efficacy of an income tax.
We shall now give a brief résumé before presenting our conclusion. We cannot charge the commonwealths with slighting the income tax. Of the forty-five states, sixteen have made legislative provision for it, either in a general or special form; of about one hundred constitutions passed by the states, thirteen, representing eight states, have made special provision for its use; and of some forty state tax commissions which have been appointed by the different states, seven have treated it in their reports.
The use of the income tax proper began about 1840 and has continued to the present time. Its history has been marked by three periods of special activity: one from about 1840 to 1850, during which decade six states introduced the tax; another from 1860 to 1870, during which decade seven introduced it; and a third, from about 1895 to the present, which has been marked by a revival of the movement. Of the sixteen states that have employed it, six are still using it - Massachusetts, Virginia, North Carolina, South Carolina, Louisiana, and Tennessee.
Massachusetts has had the longest experience with the tax, extending from 1643 to the present time. South Carolina's experience began in 1701 and, with the exception of about thirty years, has extended to the present. Pennsylvania levied the tax from 1841 to 1871; Maryland, from 1842 to 1850; Virginia, from 1843 to the present; Alabama, from 1843 to about 1886; Florida, from 1845 to 1855; North Carolina, from 1849 to the present time. With but one exception the states introducing the tax between 1860 and 1870 employed it for only very short periods. Missouri employed the tax from 1861 to 1866; Texas, from 1863 to 1868; Georgia, from 1863 to 1866; West Virginia, during 1863; Louisiana, the one exception, from 1865 to the present time; Kentucky, from 1867 to 1872; Delaware, from 1869 to 1872. Tennessee tried the tax in 1883, but then, like Kentucky, only to a very limited extent.
Two causes have led to the introduction of the income tax: the demand for greater justice in the distribution of the burdens of taxation, and the need of increased revenue. A third cause, a desire to regulate the business from which the income is derived, has operated in a few instances. The need of revenue was the dominant force leading to the introduction of the tax in the period between 1840 and 1850, and also in that between 1860 and 1870. In the first period this need was due to the enormous state debts resulting from extensive internal improvements; in the second period, to the heavy expenses incurred by the Civil War. It must be recognized, however, that the democratic influences which were felt in almost every department of political life about 1840 had not a little influence on the movement during the earlier period. During the present period the demand for justice appears to be the dominant force, although in South Carolina ... the financial need is having weight.
The states employing the tax have spared neither time nor ingenuity in attempting so to frame the laws as to make the tax effective. Every possible method has been tried. The tax has been levied as a general income tax upon all forms of income and as a special income tax upon one or more forms of income; without regard to the source of the income and modified according to the source; as an apportioned tax, and as a percentage tax. The rate has been made proportional, progressive, and partly proportional and partly progressive. The exemption has been a fixed sum applied to all income and a sum varying with the form of income and with particular classes of individuals. The administration of the law has been under the direct supervision of the central government, and it has been left to the option of the local units. The tax has been employed strictly as a war measure, as a peace measure, and as both.
Of all the states using the tax, six have levied it as a general income tax, affecting all forms of income - rent, interest, wages, and profits. These states are Massachusetts, South Carolina, Virginia, Alabama, North Carolina, and Texas. The scope of the tax in Massachusetts, however, has varied with the different local interpretations placed upon the law. The remaining ten states have each taxed some one or more of the four forms of income. All of them, except Georgia, Tennessee, and Kentucky, have taxed incomes from personal services, salaries being especially mentioned; seven of them, all except Florida, Tennessee, and Kentucky, have taxed profits. Five, Delaware, West Virginia, Kentucky, Tennessee, and Missouri, have taxed interest. The rate of the tax has usually been proportional, although six of the states have made use of the progressive rate.
An exemption has been very generally allowed, varying both in the different states and at different times in the same state. When a fixed sum has been allowed, it has been usually from $300 to $2,500, $500 and $1,000 being the most common amounts. The exemption at present allowed in South Carolina is $2,500. Many of the states have provided for special exemptions, such as the expenses of the business from which the income is derived and the incomes of particular classes of individuals, such as ministers of the gospel, state judges, and certain classes of laborers.
The administration of the tax has been much the same in all the states. It has been assessed, as a rule, by the local assessors and collected by the local tax collectors. The laws have required that the tax should be levied by self-assessment, almost invariably under severe penalties for failure to comply.
The revenue derived from the income tax has been insignificantly small. For instance, Alabama, in 1882, during the period of her most successful experience, received an income tax of only $22,116 out of a state tax of over $600,000. In 1899, North Carolina's income tax amounted to only $4,399 out of a total tax of $723,307. Virginia, in 1899, received only $54,565 from this source, while her state tax amounted to $2,132,368. South Carolina, in 1898, while levying a state tax of about $1 million, received only $5,190 from her tax upon incomes.
The attitude of the state courts toward the income tax has been one of sympathy. In the few cases upon the subject brought before them, they have upheld the tax. Had all forces been as active in support of the system as the state courts, the tax would undoubtedly have been a success.
Of the thirteen state constitutions providing for the taxation of incomes, Texas has adopted three; one in 1845, a second in 1869, and a third, still in force, in 1876. Louisiana has also adopted three constitutions making special provision for the tax; one in 1845, another in 1852, and a third in 1868. The constitutions of 1879 and of 1898 failed to make such a provision. Virginia has provided for the tax since 1851, the constitution of that year and also that of 1870, still in force, expressly allowing the tax. The next state to provide for the tax in her constitution was North Carolina in 1868. Tennessee, in her constitution of 1870, still in force, incorporated a similar provision. California did likewise in her constitution of 1879, now in operation. Kentucky followed in 1891, and South Carolina, the last of the states to make such provision, in 1895.
Of these thirteen constitutions, seven placed no limitations whatever upon the taxation of incomes - the three constitutions of Texas, the Louisiana constitutions of 1845 and of 1852, the California constitution of 1879, and the Kentucky constitution of 1891. The constitution of Virginia adopted in 1851 provided that in no case should property be taxed when a tax was levied upon the income from it. The constitution of 1870 went to the opposite extreme; although limiting the income tax to the amount in excess of $600, it expressly required the taxation of the capital invested in the business yielding the income. The Louisiana constitution of 1868, in operation until 1879, required the tax to be levied "pro rata on the amount of income or business done"; the North Carolina constitution of 1868 prohibited the taxation of income from property otherwise taxed; and the Tennessee constitution of 1870 confined it to the taxation of income from stocks and bonds not taxed ad valorem. The present constitution of South Carolina, adopted in 1895, provides that the tax must be graduated.
The states have appointed in all some forty tax commissions, which have given the various tax systems the most careful study, sparing neither time nor pains in their attempt to obtain the most satisfactory system. Eight commissions have treated the income tax in their reports; but only two, the Massachusetts commissions of 1875 and of 1893, have recommended its employment. The principal reason given in each case was that without such a tax some justly subject to taxation would escape. Each report encountered serious opposition; in the commission of 1893 it took the form of a minority report. The chief reasons given by the opposition for their position were that an income tax results in double taxation and that it is impossible justly to administer it. Three minority reports, however, have favored the tax, one by Professor R. T. Ely, a member of the Maryland tax commission of 1886; another by Mr. Wright, a member of the Pennsylvania commission of 1889; and a third by Mr. McNeill, a member of the Massachusetts commission of 1897. The reasons advanced are largely theoretical.
On the other hand, besides the minority report of the Massachusetts commission of 1893, three commissions have expressed their disapproval of the tax; the Maine commission of 1890, the New York commission of 1892, and the Massachusetts commission of 1897. The reason given by the Maine and Massachusetts commissions was that the tax is incapable of practical application; that given by the New York commission was that it is inquisitorial and against the republican spirit. The Texas commission of 1899, to whom the subject of the income tax was referred by the legislature, failed to treat it in their report, probably because it met their disapproval. It is significant that the commissions of Massachusetts, where the tax has been longest tried, have finally recommended its repeal.
The experience of the states with the income tax warrants the conclusion that the tax, as employed by them, has been unquestionably a failure. It has satisfied neither the demands for justice nor the need of revenue. The question arises: Is this failure due to qualities inherent in the nature of the tax, or is it the result of conditions which may be removed? One of the fundamental principles of taxation is that the subjects of a state ought to contribute to the support of the government in proportion to their respective abilities, and it is generally agreed that these abilities are best measured by income. Therefore, theoretically at least, an income tax is unquestionably the fairest system yet proposed. Throughout the history of the tax in the several states the opposition has never seriously attacked it from a theoretical standpoint.
If the failure is to be attributed to the application of the principle, either the laws have failed to embody this principle properly or the administration has been ineffective. While much of the legislation in the states relative to the income tax has been very unsatisfactory, often not appealing to the taxpayers' sense of justice and furnishing excuses for the concealment of property, nevertheless, laws have been passed repeatedly which, if properly administered, would have distributed the burdens with unusual justice. But these laws have failed quite as completely as those with provisions less satisfactory. The failure of the tax, therefore, cannot have been due to the ill success of the laws in embodying the principle.
A careful study of the history of the tax leads one to the conclusion that the failure has been due to the administration of the laws. This conclusion is borne out by both the admissions of the advocates and the assertions of the opponents of the tax, and is corroborated by the reports of tax commissions. The causes operating to produce this failure in administration appear to have been four: the laws themselves have been defective in the provisions for their own administration; the officials have been lax in the enforcement of the laws; the taxpayers have been persistent in evading them; and the nature of some incomes has made them especially difficult to reach.
The income tax laws thus far, failing to recognize the weakness of the average taxpayer, have allowed him to return his own income. Some argue that to employ any other method would be undemocratic and that public sentiment would never submit to it. However, although the public has always opposed any inquisitorial system, the opposition has been often due rather to the fear that it may attain the end sought than that it is counter to the spirit of democracy. Often the taxpayer has something he wishes to conceal and calls on the "spirit of democracy" to help him out. We have yet to learn of a plausible argument in support of the assertion that the income tax is more inquisitorial than other forms of direct taxation.
The income tax has succeeded in nations quite as democratic as the United States. Other methods than self-assessment have been employed successfully, both by foreign nations and to a limited extent by some of our own states. The use of the method of self-assessment has been due, not to public demands but largely to the indifference of legislators. However, it is not to be condemned except that it furnishes the means by which the taxpayer, if he wishes to do so, may escape the tax.
The laxness of the officials in the enforcement of the laws doubtless also has had much to do with the failure of the income tax. Although the laws have usually required the assessors to demand from each taxpayer a full statement of his income and to enforce their demand by a severe penalty, they have not only failed to do this but, in listing the individual's property, have also entirely neglected his income or assessed it so low as to make the tax derived therefrom unimportant. Before we can hope for a successful taxation of incomes, officials must be faithful in the performance of their duty.
The taxpayer also has contributed much to the failure of the income tax. Not only has he taken advantage of every opportunity to escape it but he has also exercised his ingenuity to contrive means of evading it. The taxpayer with an elastic conscience and a good opportunity has usually succeeded in escaping the tax upon such property as could be concealed.
The nature of income is such as to make concealment comparatively easy. Much income is received in such form as to make it quite impossible for anyone except the recipient to know its amount, or at least to make more than a mere estimate, and even the recipient, in many instances, would find it quite impossible to be accurate.
Some of these evils undoubtedly could be corrected. Another method of assessment could be employed; the officials could be compelled to perform their duty; many of the difficulties met with in the determination of income could be removed; even the conscience of the taxpayer could be improved: but so long as the four remain as they are, it is useless to hope for a successful income tax. Indeed, so long as we permit taxpayers possessing dormant consciences to employ the method of self-assessment, failure is almost certain. We must abandon the one or develop the other. Some believe that a heavy fine, rigidly enforced, for failure to return income would make the tax effective; but while this would doubtless result in great improvement, it would not insure success.
Not a little in the way of changing the attitude of the taxpayer toward the income tax may be done by a more careful framing of the laws so that they will better appeal to his sense of justice. Even more may be done by judicious state expenditures, demonstrating that the payment of taxes is not a waste of money. If this almost universal tendency to escape taxation when possible could be eradicated, the difficulties of enforcing an income tax would disappear. But as this tendency is too deep-seated to make its removal possible, we must turn to a consideration of the other alternative, a change in the mode of assessment.
The English income tax has been satisfactory only where assessment at the source has been employed; where it has been necessary to rely on self-assessment, as it has been in one or two classes, the tax has been a failure. The state of Pennsylvania also has employed the method of assessing income at its source with marked success. Of it one writer says,
It is the fairest and most economical means of raising value which the state possesses. In 1886 it contributed 53.3 percent of the total revenue from all sources. By reason of it, it became possible in 1867 to release real estate from taxation for state purposes.
The extent to which this method of assessment could be applied to general incomes in this country is uncertain. The Massachusetts tax commission of 1897 considered it practically impossible.
With our present industrial organization, much income is derived from sources not accessible and consequently determinable only by the method of self-assessment. Indeed, it would often be very difficult for the taxpayer himself to determine the exact amount of his income; especially is this true of the agricultural classes and, indeed, of a large portion of the business and professional classes. In England, industry is carried on in such a way that three-fourths of the income can be taxed with no question or demand of the individual taxpayer; this would be impossible in our states. While the method of assessment at the source can be applied to a few forms of income, and insofar as it is possible to do so the income tax would be successful, still we must also say that with our present system of industry the method could not be applied by our states to a large part of the income received and that therefore a general state income tax must be a failure.
As the result of our study we conclude that the state income tax has been a failure, due to the failure of administration, which, in turn, may be attributed to four causes: the method of self-assessment, the indifference of state officials, the persistent effort of the taxpayers to evade the tax, and the nature of the income. The tax cannot be successful so long as taxpayers desirous of evading taxation are given the right of self-assessment. Since all attempts to change the method of self-assessment have failed and the nature of industry in the states is at present such as to make impossible the assessment of a general income tax at the source, we are forced to the conclusion that, even though no constitutional questions should arise, failure will continue to accompany the tax until our industrial system takes on such form as to make possible the use of some method other than self-assessment.
SourcePublications of the American Economic Association: The Income Tax in the Commonwealths of the United States, New York, November 1903, pp. 110-121.
