diminished by about one half. During the four years of the operation of the revised rate, the average number of taxables returned was 267,210, of which number nearly 60 per cent paid taxes in excess of $20.

As a crowning enactment of this long period of experimentation, the limit of exemption was increased in 1870 to $2000, with the avowed intention of relieving all save comparatively large incomes from its operation. At the same time the rate was reduced to 2 per cent, at which point it remained until 1872, when the tax expired by limitation.

From the experience of these years it is not possible to draw any absolute conclusions as to the availability of the income tax for federal purposes, inasmuch as the measure of a tax lies largely in its fitness to conditions and the times; and the defects of the duty during this period were largely administrative in character, traceable to the inefficiency of its administration. The entire service was experimental, the men untrained, and the machinery imperfect; and, had the tax been ever so well suited to our political and social conditions, its productivity would have suffered greatly from this cause.

47. The Income Tax of 1894. On account of a deficiency in the revenues and in order to facilitate revision of the tariff, another federal income tax was established in 1894. Dr. Howe gives the following account of this tax,1 which was speedily declared to be unconstitutional:

The provisions of the measure relating to incomes were modeled upon the later war legislation. They provided that the tax should be first assessed on or before the first Monday in March, 1895, computed on the incomes received during the year 1894. The duration of the measure was limited to five years. All persons having an income in excess of $3500 were required to make a verified return to the collector, as were all persons acting in a fiduciary capacity; and in estimating the income of any person for this purpose there was to be included: (1) all

1 Taxation in the United States, 233-236. Reprinted with consent of author and publishers.

interest received upon stocks, bonds, and other securities, save such bonds of the United States as were exempt from federal taxation; (2) all profits realized within the year from sales of real estate purchased within two years previous to the close of the year from which income is estimated; (3) interest received or accrued upon evidences of indebtedness, whether paid or not, if good and collectible; (4) the amount of all premium on bonds, stocks, etc.; (5) the amount of sales of live stock, sugar, cotton, wool, butter, cheese, pork, beef, mutton, or other meats, hay and grain, or other vegetable, or other productions, being the produce of the estate, less the amount expended in the raising or purchase of such produce, as well as any part consumed directly by the family; (6) money, and the value of all personal property acquired by gift or inheritance; (7) all other gains, profits, and income from any source whatsoever, except so much as has been already taxed through the disbursing officer of the government or of a private corporation. In computing such returns, however, the following deductions were also permitted in addition to the minimum exemption of $4000: (1) the necessary expenses actually incurred in carrying on any business, occupation, or profession; (2) all interest due or paid within the year on existing indebtedness; (3) all national, state, county, school, and municipal taxes; (4) losses actually sustained during the year incurred in trade, or arising from fires, storms, or shipwreck, and not compensated for by insurance or otherwise; (5) debts ascertained to be worthless. No deductions were permitted for expenditures for improvements. In case the taxable neglected or refused to make such return, the collector was authorized to make up a list from the best information available, and to add thereto 50 per cent as a penalty, and in case of fraudulent return, 100 per cent. Appeal therefrom was permitted to the collector of the district, and from him to the Commissioner of Internal Revenue.

The principle of stoppage at the source was more widely. extended in this measure than ever before; and all banks, trust companies, saving institutions; fire, marine, life, and other insurance companies; railroads; canal, turnpike, telephone, telegraph, express, electric lighting, gas, water, street railway companies; as well as all other corporations or associations doing

business for profit in the United States, no matter how created or organized '(but not including partnerships), were directed to deduct the tax of 2 per cent upon all profits and net incomes before the payment of the same to stockholders or additions made to surplus. And net profits for the purpose of estimating the tax were to include any amounts paid to stockholders, or carried to the account of any fund, or used for improvements or other investments.1 The same principle was applied to federal salaries in excess of $4000, as well as any salaries paid by corporations to their employees in excess of that sum.

The Act departed from earlier legislation in yet another and very important particular; for it forbade under heavy penalties the divulgement by the officers of the revenue of the incomes, losses, or returns of any taxable, whether a private corporation or an individual.

All returns were to be listed upon blanks provided for the purpose on or before the first Monday in March, and were to be paid before the first day of July of each year.

The law doubtless contained many imperfections, and in many places was so worded as to cause irritation to the payer, and to open wide the door for evasion, fraud, and false swearing. It reposed great powers, moreover, in a politically appointed service. These imperfections were particularly noticeable in the deductions allowed. For instance, as to what are "necessary expenses incurred in carrying on business," "losses actually sustained during the year," "debts ascertained to be worthless," there lay a possibility of wide divergence of opinion. The provision that corporations should deduct the tax from the salaries of their employees was absolute, notwithstanding the fact that they might have been entitled to deductions which would bring their incomes below $4000. Corporations were likewise compelled to pay the tax upon their net earnings, irrespective of whether the recipient of the dividends had an income of $4 or $40,000. Moreover, the collector was granted the widest latitude and most unusual powers. He was empowered to pass

1 The Act specifically exempted all organizations of a religious, charitable, or educational character, fraternal or beneficial orders, building and loan associations, and savings banks and insurance companies of a strictly mutual character. Nor did it apply to states, counties, or municipalities.

upon interest due and payable; to increase the return of the individual subject, however, to appeal; and to make up a taxable's income from the best information available. These but indicate some of the difficulties which would have beset the administration of the measure, as well as the individual honestly desirous of making a fair return. Had we a trained service, these objections would lose much of their seriousness; but, with collectors appointed for partisan service rather than merit, there is reason to believe that this power would have become a means of unjust discrimination. It certainly offered great opportunities for corrupt collusion with taxpayers.

48. The constitutionality of the law of 1894 was promptly attacked, and the Supreme Court, after two hearings, declared the act invalid before it went into operation. At the first hearing the court decided 1 that the tax imposed upon the income of real estate was unconstitutional because such a tax was a direct tax within the meaning of the Constitution, and should have been levied by the rule of apportionment which the Constitution prescribes for direct taxes.2 It also declared that the tax could not be imposed upon the income from state or municipal bonds, since the national government cannot tax the power of the state or local governments to borrow money. At the second hearing the whole act was overthrown on the ground that a tax on the income from personal property is direct as well as a tax on the income from real property; and that the failure to provide for the apportionment of the tax on the income from real and personal property invalidated the entire law. Upon this point the court said:

The power to lay direct taxes apportioned among the several states in proportion to their representation in the popular branch of Congress, a representation based on population as ascertained

1 157 U. S., 429.

2 The Constitution says: "Representatives and direct taxes shall be apportioned among the several states which may be included within this Union, according to their respective numbers." Art. I, § 2. 8 158 U. S., 601.

by the census, was plenary and absolute; but to lay direct taxes without apportionment was forbidden. The power to lay duties, imposts, and excises was subject to the qualification that the imposition must be uniform throughout the United States.

Our previous decision was confined to the consideration of the validity of the tax on the income from real estate, and on the income from municipal bonds. The question thus limited was whether such taxation was direct or not, in the meaning of the Constitution; and the court went no farther, as to the tax on the income from real estate, than to hold that it fell within the same class as the source whence the income was derived, that is, that a tax upon the realty and a tax upon the receipts therefrom were alike direct; while as to the income from municipal bonds, that could not be taxed because of want of power to tax the source, and no reference was made to the nature of the tax as being direct or indirect.

We are now permitted to broaden the field of inquiry, and to determine to which of the two great classes a tax upon a person's entire income, whether derived from rents, or products, or otherwise, of real estate, or from bonds, stocks, or other forms of personal property, belongs; and we are unable to conclude that the enforced subtraction from the yield of all the owner's real or personal property, in the manner described, is so different from a tax upon the property itself, that it is not a direct, but an indirect tax, in the meaning of the Constitution.

We know of no reason for holding otherwise than that the words "direct taxes," on the one hand, and "duties, imposts, and excises," on the other, were used in the Constitution in their natural and obvious sense. Nor, in arriving at what these terms embrace, do we perceive any ground for enlarging them beyond, or narrowing them within, their natural and obvious import at the time the Constitution was framed and ratified.

And, passing from the text, we regard the conclusion reached as inevitable, when the circumstances which surrounded the convention and controlled its action and the views of those who framed and those who adopted the Constitution are considered.

We do not care to retravel ground already traversed; but some observations may be added.