the income is ascertained and taxed. So this classification may be regarded as having been devised with a view to adjusting the process of assessment to the kind of income to be assessed. The result is a complicated system. Simplicity has been sacrificed in order to secure this adaptation of the means to the end.

In all this diversity, however, one underlying principle has been introduced and applied so far as practicable. It is the principle of assessing the sources of income. This constitutes the distinguishing feature of the English income tax. So far as practicable the income is assessed where it arises and the tax is collected by stoppage at the source. Thus the tax on the landlord's income is assessed to and collected from the tenant, who then deducts it from the rent. In like manner the creditor's income is reached by an assessment upon the gross income or profits of the debtor, who deducts the tax from his interest payments. The right to deduct the tax from rent or interest is conferred by statute, and any contract intended to abrogate it is void. The stockholder's income is reached by assessing the tax upon profits of the corporation, and thus producing a corresponding diminution in the dividends which he receives. The five schedules constitute a classification which has been prepared with a view to reaching the sources of income so far as possible. The diversity in the nature of the sources necessitates considerable diversity in the process and machinery by which this principle of assessment is applied.

There are two important advantages which the English method of assessing income at the source possesses over an assessment upon individual incomes. In the first place the taxpayer is, as a rule, relieved from the necessity of disclosing for the purpose of taxation the exact amount of his income. He is required, to be sure, to disclose the gross amount which passes into his hands from certain specified sources; but he need not distinguish what proportion of this is his income, to be expended as he pleases, and what proportion he is required to pay over to other people; nor need he reveal how much income he receives from other sources. It is only when he wishes to claim the exemption or abatements which the law allows on individual incomes which come within certain specified limits that he is obliged to

give a complete and exact statement of his income. Leaving such cases out of account, it will be found that under this system of taxation a resident of England will be called upon to declare the rental value of the house which he occupies or the farm which he cultivates; he will likewise be required to declare the amount of income yielded by any business, trade, or occupation in which he may be engaged, and the amount received without deduction of the tax from any foreign investments; but he need not state how much of the sum so declared is absorbed by payments of interest on personal debts or borrowed capital or by payments of rent; and he need not reveal how much income he derives from the stock or bonds of domestic corporations, or from securities of the British government, or from lands or houses owned by him and leased to tenants. Consequently his aggregate net income may be a good deal more or it may be a good deal less than the sum which he is required to declare.

The other advantage which the system possesses is found in the ease and certainty with which it reaches the income subject to taxation. It is obvious that the opportunities for evasion will be greatly diminished, or entirely removed, if the income can be taxed before it comes into the hands of the person who is entitled to enjoy it; or, if there is still sufficient opportunity for evasion, the inducement to take advantage of it may be lacking so far as the person who is held responsible for the tax and required to make a return of the income is concerned. Under this system of assessment there is, in fact, a large amount of income in regard to which evasion is impossible. This is the case with the income paid out of the revenues of the state which imposes the tax. In the English system the tax on public annuities and on dividends or interest on the public debt is simply deducted from these payments as they are made. In the same way the tax is withheld from the salaries and pensions paid in the public service. Hardly less certain is an assessment on the profits of corporations in reaching the incomes of the stockholders and bondholders.1

1 As Dr. Hill explains in a later chapter not reproduced here, corporations are required to deduct the tax from the dividends and interest paid to holders of their securities. Thus of the total yield of Schedule D about one half, representing the taxes paid by corporations, is collected by methods that make evasion impossible. — ED.

It is not possible, however, to apply this principle of assessment at the source of all kinds of income. In the first place the source may be inaccessible to the government imposing the tax. This is the case with the income from investments or possessions in foreign countries or in other states. But while this income cannot be reached at its source, the attempt is made, under the English system, to reach some part of it on its way from source to destination by requiring any banker or agent in Great Britain who may be intrusted with the payment of interest or dividends on foreign securities to account for and pay the tax on the sums passing through his hands in this way. Again there is considerable income which may be said to remain where it arises, the source not being distinguishable from the destination. The "first possessor" of it is also "the ultimate proprietor." This is generally true of the incomes obtained by the exercise of a trade, the practice of a profession, and the private, as distinguished from the corporate, management of business in general. It is also true of the income derived from the capital employed by the owner in his own profession or business; and of the income represented by the rental value of land or houses in those cases in which the owner is also the occupier.

As regards these descriptions of income, then, it is not possible to distinguish for the purpose of taxation between source and destination. The assessment will have to be made upon the person who receives and enjoys the income and who will consequently profit by any evasion of the tax. But while in these cases the person on whom the tax is assessed is not without the inducement to evade it, he may, nevertheless, lack the opportunity. Whether evasion is possible and easy or not will depend upon circumstances and particularly upon the character of the income. The assessment of houses and lands in the locality where they are situated, or of the income which they represent, is always a comparatively simple matter, affording little chance for evasion whether the tax be levied upon the owner or the tenant; and under the English system the assessment of the farmer's income is equally simple, because for the purpose of taxation the income is assumed to be equivalent to a

certain proportion (one third as the law now stands) of the annual or rental value of the farm, so that ordinarily it is not necessary to undertake to ascertain the profits which the farmer actually obtains.1 Then, too, many of the moderate or smaller incomes earned in a trade, profession, or business can be estimated with so close an approach to accuracy that there is practically little chance for concealment.

On the other hand, there are many cases in which an accurate or adequate assessment is hardly possible without the assistance of information furnished by the person who possesses the income on which the tax is to be levied. Here both the inducement and the opportunity to evade some part of the tax are present and are, as it were, coincident, the person who has the opportunity being the person who profits by the evasion. There is, in fact, considerable income which will hardly be discovered and taxed unless the recipient of it is honest enough to reveal it. This applies to the returns from foreign investments, where the tax has not been deducted by any agent, and must, therefore, be collected, if it is collected at all, from the investors themselves. In other cases the existence of the income may be obvious enough, but its amount cannot be accurately or perhaps even approximately estimated unless the assessors can avail themselves of the taxpayer's knowledge of his own affairs. This is, to a considerable extent, true of the larger professional and business incomes.

The opportunity for evasion, then, which is, perhaps, the strongest objection that can be urged against the direct taxation of income, has not been entirely eliminated under the English system, but its scope has been very much restricted. Probably more than four fifths of the tax collected is assessed in such a way or under such conditions that evasion is, broadly speaking, out of the question. This estimate includes all the tax assessed in Schedules A, B, C, and E, and more than half of that in Schedule D. But as for the remainder, it is assessed under conditions which do not wholly preclude the possibility and likelihood of more or less evasion, the income being of such a

1 Since 1887 the farmer has had the option, however, of being assessed upon the profits actually received from his farm; but he does not generally avail himself of this alternative, perhaps because it is not often for his advantage to do so.

nature that the assessors are, to some extent, dependent upon the declarations which are required of interested taxpayers. Consequently, as regards this portion of the tax, the problems and difficulties which are involved in securing reliable declarations and making an adequate assessment are very much the same as those which arise in connection with the other and more usual form of income tax, which is assessed upon the aggregate net incomes of the individual taxpayers; and it will be found, in fact, that the process and machinery of assessment employed in Schedule D would be equally applicable to a tax which was wholly assessed upon the individual owners of the taxable property or income.

45. The Income Tax in the American Commonwealths. Various American states have experimented with general or partial income taxes, and their experience has been summarized by Dr. D. O. Kinsman as follows:1

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 2 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

1 The Income Tax in the Commonwealths of the United States, 110 et seq. In Publications of the American Economic Association, Third Series, Vol. IV (1903). Reprinted with consent of the author and the Economic Association.

66

2 In the seventeenth and eighteenth centuries most of the colonies levied, for longer or shorter times, a partial income tax on faculty," trades, professions, or occupations. This was designed to supplement the tax on property, but was of little financial significance. In some cases, as in Massachusetts and South Carolina, it survived until the nineteenth century, and developed into an income tax. For the early history of colonial and state income taxes, see Kinsman, Income Tax, 1-16; Seligman, The Income Tax in American Colonies and States, in Political Science Quarterly, June, 1895. — ED.