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but the normal tax would not have been paid even once upon any other form of income if his total income had not exceeded the amount of the abatement. That is, corporate dividends are discriminated against. This may be considered a special corporation tax in addition to the regular income tax.

Somewhat related to this is the fact that, under the new law, holding company dividends will be taxed twice, first as the dividend of the subsidiary company, and second as the dividend of the holding company. According to a decision under the recent corporation excise tax law, mere holding companies were not taxable because they were not engaged in business. Under the present income tax law, their receiving or being entitled to income or undivided profits, is the test of whether or not they are taxable, and not their being engaged in business. In the words of the new statute: "the fact that any such corporation, joint-stock company, or association is a mere holding company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business shall be prima facie evidence of fraudulent purpose to escape such tax." The Secretary of the Treasury is designated as the one to construe the term "reasonable.”

The exemption of insurance "dividends" about which the insurance companies made such a stir while the bill was pending, was left in an ambiguous condition in the law. The ambiguity arises from the double meaning of the word "dividend." It might be said its origin is due to the intentionally misleading use made of the term by the companies in their attempts to write insurance. An insurance "dividend" is not the usual profit made upon ordinary corporate stock, but the return of an overcharge caused by too great a premium payment. In so far as expenses of insurance are reduced by the interest received upon premiums, and in so far as this return of overcharge represents such earnings, it may be considered a dividend in the usual sense of the word. But insurance "dividends" are usually taken from a fund in which have been mingled moneys from several sources: interest upon premiums or reserves, savings from loading, and savings from lower than the calculated mortality. Or it may be considered that all of this fund arises from overcharges.

The law expressly excludes "dividends" from the deductions permitted insurance companies, but says that rebates on premiums,

United States Supreme Court decision in the case of McCoach v. Minehill and Schuylkill Haven R. R. Co. (228 U. S. 295).

whether returned to the policy holder or retained by the company and treated as abatements of premiums, may be deducted from gross income in computing the taxable net income of the company. This latter permitted deduction is the result of a Senate amendment. It will probably result in a slightly different system of insurance accounting which will provide for the keeping of the different kinds of savings in separate funds instead of merging them in one. The interpretation of the term "insurance dividend" under the corporation tax law is now in the courts. Under that law, the ruling of the commissioner allowed no deductions for such dividends nor for rebates in lieu thereof.

Increase in property values is another matter that will doubtless give considerable difficulty. This kind of income can be handled more easily when it accrues to corporations or firms with proper accounting systems than when it goes to proprietors without such systems. Under the rulings for the administration of the corporation tax, profits on real estate and other physical assets, whether sold or not, were treated as income when such gains were taken cognizance of by the corporation's book entries. If it were possible to prescribe standard forms of accounting for all corporations as successfully as has been done by the Interstate Commerce Commission with reference to the railroads, very little difficulty might be encountered from this source, as far as corporations are concerned.

But in other cases, if such profits are to be treated as income, as they should be from an economic standpoint, the difficulties of administration will often be very great. In fact, only approximations will be possible in many cases, for it will necessitate not only the assessment of what are usually known as incomes, but also the periodical assessment of property values as well. It is doubtful if such a task will be undertaken, especially in the beginning.

The application of the tax to all non-resident citizens, to resident aliens, and to incomes from property, business and professions carried on in this country by persons residing elsewhere, is inconsistent and will result in some unjust double taxation besides considerable evasion which will be more or less justifiable and also in an unfortunate lack of international comity. In this matter, however, the United States is merely following the bad examples set by other countries. This is analogous to the lack of interstate comity within the United States, the difficulty in overcoming which has been one of the most serious drawbacks to domestic tax reform.

But, inasmuch as international relations are not so close or extensive as domestic ones, the difficulty will not be so serious in its effects as that caused by the lack of interstate comity.

It may be stated in this connection that the Commissioner of Internal Revenue has ruled that non-resident aliens who own bonds of American corporations may claim exemption from the tax upon the interest coupons of such bonds by filing certificates of ownership. However, foreign correspondents have already pointed out* how this will aid foreign tax dodgers in so far as this class of income is reinvested here. If this can finally be returned to the foreign country as principal or capital rather than as interest or income, it may escape entirely; but if not so treated, and if it is intercepted upon its return, the payment of the tax will merely be delayed. Nevertheless, this ruling does open up & possible way of evasion to both American and foreign investors through a process of clearing or exchange of securities. It has been pointed out also that the swearing off of the American tax may mean the swearing on of a European tax which the coupon holder has been able to evade to date by maintaining secrecy as to his ownership. In such cases, owners will probably choose the lesser evil.

The adoption of the stoppage-at-the-source system of collection is in harmony with the best experience in income tax administration both here and elsewhere. This is more practicable in the United States than in countries where the corporate form of organization is less extensive. The tax will probably be least successful, as has been true elsewhere, in its application to business and professional incomes upon which it cannot be collected at the source. Selfassessment always puts a premium upon evasion which the great majority never resist.

Even as the new law stands it provides for too little collection at the source and too much self-assessing. Collection at the source and graduation of rate are not in harmony with each other; hence for the additional tax, self-assessment is more or less inevitable. But inasmuch as most incomes subject to the higher rates will probably come from corporate sources, it will be possible to check the correctness of such returns to a considerable extent. But it will be impossible for individuals to include in their returns, for purposes of the additional tax as they are supposed to do, their shares of undivided corporate profits unless the corporations 'See London correspondence of the New York Times Annalist, Nov. 24, 1913, p. 665; and Paris correspondence, Dec. 1, 1913, p. 685.

furnish their stockholders with such information. This requirement will be still further complicated in case such profits arise from corporations that choose to make their returns for their fiscal years rather than for calendar years for which the individual is required to make his return.

But for the normal tax, also, many classes of incomes will be self-assessed. All parts of incomes derived from corporations or other sources, where the amount from each source falls below $3,000, will be reached only by self-assessment, with the single exception of interest on corporate bonds. The same is true of the incomes in excess of $3,000 that are not fixed, regular, and certain as to amount or time of accrual. Professional and business incomes will constitute a large portion of this class. Thus persons with large aggregate incomes arising in small or moderate amounts from several different sources, or with incomes which are irregular, or with incomes from business or professions which are under their own direction, will have much opportunity for evasion not only through failure to make complete returns, but also through improper claims for deductions. It will require very careful, industrious, and expert administration to see that such evasions are prevented from the beginning and not allowed to grow and destroy the efficiency of the entire system.

The high abatement will relieve most farmers from making returns, but if it were lowered to what it may be in the future, the assessment of their incomes under the present law would be very difficult and unsatisfactory because of the inadequacy of farming accounts. In such an event, it would be better to assess land upon its rental value, which is a sort of average income, as is the practice in England, than upon the income of each particular year. This objection holds for agricultural incomes which exceed the abatement of the present tax, though it is probable that the receivers of such large incomes have better systems of accounting than do most small farmers.

Up to the present time, perhaps no administrative feature of the new law has caused more inconvenience and consequent criticism than the requirement that interest coupons payable to bearer, when presented for collection, shall be accompanied by attached certificates of ownership with or without claim for exemption. Banks could have cashed these coupons at once as formerly with entire safety to themselves by withholding the normal tax, forwarding it to the collector of internal revenue, and paying the

difference to the presenter of the coupons. But this would have involved considerable clerical work and a later refunding of the tax in cases where the presenters fell within the limits of the abatement; hence, the banks did not see fit to cash the coupons upon presentment.

It is clear, however, that some such statement of ownership to accompany such coupons is necessary if the tax is to be effective and if the abatement is to be granted as contemplated by the law. Otherwise a receiver of $100,000 interest in such form could have his coupons presented by forty of his friends in lots of $2,500 each and evade the tax. The law might have prevented the inconvenience by providing for no abatement on such incomes or by providing that corporations should pay the tax upon them, but such provisions would have been discriminatory and probably would have caused as much protest as the present inconvenience. If the threatened effort to secure a change in the law should be successful, permitting personal returns of taxes upon such incomes to be substituted for collection at the source, it would turn the law into a farce. If, on the other hand, the present system is continued, it is probable that there will be some changes in business methods to reduce inconveniences. Either interest coupons payable to bearer will be replaced by registered coupons to some extent, or more convenient methods of collecting and accounting will be adopted. Friction and inconvenience should be reduced to a minimum as business and people generally become more familiar with the requirements of the law and as the rulings of the Commissioner of Internal Revenue assist in its adjustment to business requirements.5

In England, the income tax is used to adjust the revenues to the needs of the government. For this purpose the rate can be changed from year to year. This cannot be done with tariff rates without seriously disturbing business. A country which depends mostly on customs for revenues alternates between periods of deficits and periods of surpluses, both of which bring serious evils. The United States will not be in a position to make advantageous use of this balancing feature until it adopts proper budgetary control of receipts and expenditures.

An additional feature to commend an income tax is its value in case of emergencies. When a nation engages in a great foreign

'Since this paragraph was first written, several rulings on this point have been issued by the commissioner.

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