Part 34

The law provides that incomes shall be subject to a tax of one per cent. on the amount by which they exceed the prescribed minimum limit of exemption. This is designated as the "normal income tax." There is, then, an "additional tax" of one per cent, on the amount by which any income exceeds $20,000. The rate is increased to two per cent. on the amount above $50,000, to three per cent. above $75,000, to four per cent. above $100,000, to five per cent. above $250,000, and to six per cent. above $500,000. Therefore, under the normal and additional tax combined, the first $20,000 of income, exclusive of the minimum exemption, will be taxed one per cent.; the next $30,000, two per cent.; the next $25,000, three per cent.; the next $25,000, four per cent.; the next $150,000, five per cent.; the next $250,000, six per cent.; and all income above that point seven per cent. This is a rigorous application of the progressive principle.

The minimum exemption, at the same time, is comparatively high,--$4,000 for a married person and $3,000 for everybody else. The higher exemption in case of the married is conditional upon husband and wife living together, and applies only to their aggregate income; that is to say, it can not be deducted from the income of each. It may be noted, in this connection, that in England the exemption allowed under the income tax is £160 or $800; in Prussia it is 900 marks, or $225; and in the State of Wisconsin it is $800 for individuals and $1,200 for a husband and wife, with a further allowance for children or dependent members of the family.

The sharply progressive rates and the comparatively high exemption have given rise to the criticism that this is a rich man's income tax and disregards the principle that all persons should contribute to the expenses of the government in proportion to their several abilities. It is often said that an income tax ought to reach all incomes with the exception of those which are close to or below the minimum necessary for subsistence, and that if people generally were called upon to contribute directly to the government they would take greater interest in public affairs and show more concern over any wasteful or unwise expenditure of public money. In reply it is contended that the limitation of the tax to the wealthy or well-to-do classes is justified because these classes do not pay their fair share of the indirect national taxes, or of local property taxes. These debatable questions lie outside the scope of the present article. It is evident, however, that the income tax should not be criticized as if it were a single tax or formed the only source of revenue for the Federal government. From the fiscal standpoint it occupies a subordinate position in the national finances, being expected to yield about $125,000,000 annually out of a total estimated tax revenue of $680,000,000.

The normal tax of one per cent, is to be levied upon the income of corporations. In effect this provision of the law merely continues the corporation or "excise" tax which was already in existence. But that tax now becomes an integral part of the income tax, covering the income which accrues to the stockholder and is distributable in the form of dividends. On the theory that this income is reached at the source by the tax upon the net earnings of the corporation the dividends as such are exempt. They are not to be included, so far as concerns the normal tax, in the taxable incomes of the individual stockholders and the law does not provide that the tax paid by the corporation shall be deducted from the dividend.

It is perhaps a question whether under these conditions income which consists of dividends should be considered as subject to the normal tax or as exempt. It may be contended that a tax upon the net earnings of corporations is virtually a tax on the stockholder's income, and in theory this is true. But so long as the tax is not actually withheld from the dividends, or the dividends are not reduced in consequence of the tax, the stockholder's current income is not affected. The imposition of the tax might indeed affect his prospective income and might depreciate the value of his stocks. It is hardly likely, however, that such effects will be perceptible, at least as regards the stocks of railroads and other large corporations. If, however, it be considered that income consisting of dividends pays the tax, it follows that the stockholder's income is taxed no matter how small it may be. No minimum is left exempt. On the other hand, if it be considered that all dividends are virtually exempt, the stockholder would seem to be unduly favored under this form of taxation in comparison with people whose incomes are derived from other sources. Doubtless in future the investor will look upon dividends as a form of income not subject to the normal income tax.

In the levy of the normal income tax there is to be a limited application of the method of assessment and collection at the source of the income. This method is applied very completely in the taxation of income in Great Britain. It may be well to recall summarily the essential features of the British system. The tax is levied upon the property or industrial enterprise which yields or produces the income. But the person occupying the property or conducting the enterprise, and paying the assessment in the first instance, is authorized and required to deduct the tax from the income as it is distributed among the persons entitled to share in it either as proprietors, landlords, creditors, or employees. Under the English system, an industrial corporation, for instance, pays the income tax upon its gross earnings and then deducts it from the dividends, interest, salaries, and rents as these payments are made. The householder pays an assessment levied upon the annual value of his dwelling (less an allowance for repairs and insurance) and then if he occupies the premises as tenant deducts the tax from his rent. The income from agriculture is reached by a similar assessment upon the farmer, based upon the annual or rental value of the farm and with the same right of deduction from the rent if he is a tenant farmer.

From the standpoint of the government, the main advantage of this mode of assessment as compared with a tax levied directly upon the recipients of the income is the greater certainty with which it reaches the income subject to taxation. The opportunities for evasion by concealment of income are reduced to a minimum, partly because the sources of income are, in general, not easily concealed and partly because, to a considerable extent, the persons upon whom the tax is assessed are not interested in avoiding the tax. The advantages, however, are not all on the side of the government. The tax possesses certain advantages from the standpoint of the taxpayer, also, assuming him to be an honest taxpayer who is not seeking opportunities to evade taxation. One advantage is that he is relieved in almost every case from the necessity of revealing to the tax officials the whole of his personal income. The tax does not pry into his personal affairs. Another advantage is that the tax is paid out of current income, being deducted from the income as it is received. It is therefore distributed over the year and adjusted to the flow of income as it comes in. A tax thus collected is less burdensome in its incidence than a tax paid in one lump sum several months after the expiration of the year to which it related and after the income on which it is levied has been all received and perhaps all expended.

The English system of assessing an income tax at the source, however, has its disadvantages. It is admirably suited for a tax levied at a uniform rate on all income or on all income above a small minimum. But it is not well suited for the application of progressive taxation or for the introduction of gradations or distinctions based upon the size or character of the individual incomes. Nevertheless, the English income tax, besides exempting a minimum, provides for graded reductions or abatements in favor of the possessors of small incomes above the minimum, and for a reduced rate on "unearned" income within certain limits. All this, however, makes necessary a declaration or complete statement of income from the persons claiming the benefit of those provisions, and also necessitates refunding a large amount of the tax collected at the source. Moreover, the progressive principle has recently been applied by imposing a "super-tax" on incomes in excess of £5,000, which also requires a declaration, the tax being necessarily assessed upon the possessor of the income and not at the source. The super-tax, it may be observed, occupies a position in the English system similar to that of the additional tax in the United States, serving to increase the tax upon the larger incomes in accordance with the principle of progression.

Considering the various provisos and exceptions in connection with the general rule of the act, the scope of the application of the method of collecting the tax at the source may perhaps be safely stated thus: the normal tax is to be deducted (1) from all interest payments made by corporations on bonds and the like, without regard to the amount; (2) from all other interest payments when the amount is more than $3,000 in any one year; (3) from all payments of rents, salaries, or wages amounting in any one case to over $3,000 annually; (4) from all other payments of over $3,000 (excepting dividends) which may be comprised under the designations "premiums, compensations, remuneration, emoluments, or other fixed or determinable gains, profits, or income."

The principle of assessing income at its source, as applied in this act, does not relieve the individual from the necessity of making a full revelation to the tax officials of his personal income from all sources. Though this statement needs to be qualified in one or two particulars, the law provides in general that every person subject to the tax and having an income of $3,000 or over shall make a true and accurate return under oath or affirmation "setting forth specifically the gross amount of income from all separate sources and from the total thereof deducting the aggregate items or expenses and allowance" authorized by the law. Although income from which the tax has been withheld is not included in the net personal and taxable income of the taxpayer, it must, nevertheless, be accounted for and included in his declaration as a part of his gross income, forming one of the specified items which are to be deducted from the gross income in arriving at the income subject to taxation.

As already intimated, the general requirement of the full and complete statement of income is subject to certain exceptions. One relates to the income from dividends, the law providing that "persons liable to the normal tax only ... shall not be required to make return of the income derived from dividends on the capital stock or from the net earnings of corporations, joint-stock companies or associations, and insurance companies taxable upon their net income." It will be noted that this proviso is restricted to persons who are "liable for the normal tax only," _i.e._, persons having net incomes under $20,000. It would seem, therefore, that the taxpayer claiming and securing this privilege must in some way, without revealing the amount received from dividends, satisfy the tax assessors that his total net income, including the dividends (amount not stated), does not exceed $20,000. Of course a form of statement can easily be devised to cover the situation. But whether the law will be administered in such a way that this provision affords some relief from the general obligation of making a detailed and complete statement of income remains to be seen.

Another exception to the general requirement of a complete declaration of income covers the case of the taxpayer whose entire income has been assessed and the tax on it deducted at the source. The law relieves such persons from the obligation of making any declaration of income; although it is not certain that this privilege can be secured without foregoing or sacrificing the benefits of any abatements to which the individual taxpayer might be entitled on account of business expenses, interest payments, losses, etc. It seems probable that where the income is all assessed at the source the taxpayer may obtain the benefit of the minimum exemption without making a declaration of income.

It appears, therefore, that assessment at the source does not, under this law, operate in such a way as to afford the taxpayer any substantial relief from the necessity of making a revelation of his income to tax officials. Whatever basis there may be for the common criticism or complaint that an income tax is inquisitorial remains under the operation of this law to nearly the same extent that it would if the tax were levied wholly and directly upon the recipients of the income, with no resort to taxation at the source.

Regarding the assessment of the additional tax not much need be said in the way of explanation. It is, in theory at least, a comparatively simple matter. There is no attempt here to make any application of the principle of collection at the source. The tax is all levied directly upon the recipients of the individual incomes, and the assessment is based upon the taxpayer's declaration, which for the purposes of this tax must cover the "entire net income from all sources, corporate or otherwise." The tax is thus largely distinct from the normal income tax as regards both the method of assessment and the rates. It is, however, to be administered through the same machinery, and no doubt to some extent the information obtained as to the sources of income in connection with the assessment of the normal tax will prove useful as a check upon the returns of income required for assessment of the additional tax. Every person whose income exceeds $20,000 will be subject to both taxes, the normal and the additional, but presumably will be required to make only one declaration. For the purposes of the additional tax he will be required to declare his income from all sources, and therefore any relief from the obligation of making a complete revelation of income which may be secured to him through the application of the principle of assessment at the source in connection with the normal tax will be entirely sacrificed.

The administration of a direct personal income tax--using that term to describe a tax levied directly on individual incomes--is a comparatively simple matter, however ineffective it may prove to be in reaching the income subject to it. Under this method of taxation it is easy to exempt a minimum, to apply progression in the rates, or to make any other adjustments that may be deemed equitable with reference either to the size or character of the income or to the circumstances of the taxpayer. But as soon as we depart from this simple method and resort to taxation at the source, we encounter difficulties in varying the rates, allowing exemptions, or making any similar adjustments. In the English income tax, these difficulties are squarely met and surmounted. As previously explained, that tax is in the first instance levied indiscriminately on all accessible sources of income and the adjustments are effected by refunding the tax collected at the source so far as may be necessary. No provision is made for forestalling the deduction of the tax, and no returns are required of the names and addresses of persons to whom payments of incomes are made. The exemption, however, is small ($800), and the abatements extend only to incomes below $3,500. Above that point the entire income is taxable.

A tax which provides for the exemption of $3,000 or $4,000 from every individual income places a formidable barrier in the way of a thoroughgoing application of assessment at the source. It is evident that with a universal exemption as high as this, a very large amount of tax withheld and collected at the source would ultimately have to be refunded. The law as enacted indicates an intention to secure in part the advantage of assessment at the source and at the same time avoid in part the attendant disadvantage of having to refund the tax. The measure might be characterized as one which as regards the "normal tax" applies the principle of assessment at the source to corporate income completely and to other income in spots. The "additional tax" is simply the direct personal tax. The normal tax will doubtless be successful in reaching the large amount of income earned or created by enterprises conducted under the corporate form of organization, much of which would probably escape assessment under a direct personal income tax. But beyond this it is questionable whether the method of assessment at the source as here applied will be of sufficient advantage to justify the administrative complications which it involves.

It seems useless, however, as well as unwise, to venture any predictions as to how successful the tax will be in reaching the income subject to it or how well it will work in actual practise. The law will doubtless require amendment in many particulars, even if it does not need to be radically revised. That the income tax in some form will be perpetuated as a permanent part of our system of national finance may safely be predicted. Properly adjusted and wisely administered, it should greatly strengthen the financial resources of the Government, make possible a closer adjustment of revenue to expenditure, and secure a more equitable distribution of the burden of taxation.

THE SECOND BALKAN WAR

GREECE AND SERVIA CRUSH THE AMBITIONS OF BULGARIA

A.D. 1913

PROF. STEPHEN P. DUGGAN

CAPT. A.H. TRAPMANN

The crushing defeat of Turkey by the Balkan States during the winter of 1912-13 had been accomplished mainly by Bulgaria. The Bulgarians were therefore eager to assert themselves as the chief Balkan State, the Power which was to take the place of Turkey as ruler of the "Near East." Naturally this roused the antagonism not only of Bulgaria's recent allies, Greece and Servia, but also of the other neighboring State, Roumania. Bulgaria hoped to meet and crush her two allies before Roumania could join them. Thus she deliberately precipitated a war which resulted in her utter defeat. From this contest Greece has emerged as the chief State of the eastern Mediterranean, a growing Power which at last bears some resemblance to the classic Greece of ancient times.

To understand this war, it should be realized that the Bulgars are really an Asiatic race, who broke into Europe as the Hungarians had done before them, and as the Turks did afterward. Hence their kinship with European races or manners is really slight, though they have something of Slavic or Russian blood. The Servians are near akin to the Russians. The Roumanians trace their ancestry proudly, if somewhat dubiously, back to the old Roman colonists of the days of Rome's world empire. The Greeks are really the most ancient dwellers in the region; and to their pride of race was now added a furious eagerness to prove their military power. This had been much scorned after their ineffective war against Turkey in 1897, and they had found no opportunity to give decisive proof of their strength during the war of 1912.

To Professor Duggan's account of the causes and results of the war, which appeared originally in the _Political Science Quarterly_, we append the picture of its most striking incidents by Captain Trapmann, who was with the Greek army through its brief but brilliant campaign.

PROF. STEPHEN P. DUGGAN

When the secret treaty of alliance of March, 1912, between Bulgaria and Servia against Turkey was signed, a division of the territory that might possibly fall to the allies was agreed upon. Neither Bulgaria nor Servia has ever published the treaty in full, but from the denunciations and recriminations indulged in by the parliaments of both, we know in general what the division was to be. The river Maritza, it was hoped, would become the western boundary of Turkey, and a line running from a point just east of Kumanova to the head of Lake Ochrida was to divide the conquered territory between Servia and Bulgaria. This would give Monastir, Prilip, Ochrida, and Veles to the Bulgarians--a great concession on the part of Servia. Certain other disputed towns were to be left to the arbitrament of the Czar of Russia. The chief aim to be attained by this division was that Servia should obtain a seaboard upon the Adriatic Sea, and Bulgaria upon the Aegean. Incidentally Bulgaria would obtain western Thrace and the greater part of Macedonia, and Servia would secure the greater part of Albania.

These calculations had been entirely upset by the course of events. Bulgaria's share had been considerably increased by the unexpected conquest of eastern Thrace, including Adrianople, whereas Servia's portion had been greatly diminished by the creation of an independent Albania out of her share. Moreover, M. Pashitch, the Servian prime minister, maintained that whereas by the preliminary treaty Bulgaria was to send detachments to assist the Servian armies operating in the Vardar valley, the reverse had been found necessary and Adrianople had only been taken with the help of 60,000 Servians and by means of the Servian siege guns. Equity demanded that the new conditions which had arisen and which had entirely altered the situation should be given consideration and that Bulgaria should not expect the preliminary agreement to be carried out. Now, from the outbreak of hostilities Bulgaria's foreign affairs, in which King Ferdinand was supposed to be supreme, were really controlled by the prime minister, Dr. Daneff. He proved to be the evil genius of his country; for his arrogant, unyielding attitude upon every disputed point, not only with the enemy, but with the allies and with the Powers, destroyed all kindly feeling for Bulgaria, and left her friendless in her hour of need. Dr. Daneff's answer to the Servian contention was that Bulgaria bore the brunt of the fight; that, had she not kept the main Turkish force occupied, Servia and Greece would have been crushed; that a treaty is a treaty, and that the additional gain of eastern Thrace in no way invalidated the old agreement.