ar w 3774-1 ^^ sT^iS 'S. }}H§ S^ iij», it .'I % ■^^•«wer to levy an income tax be restored to the federal government. The power to levy such a tax was conferred upon the national government by the constitutional convention and this power was consistently upheld by the supreme court in five unanimous decisions until 1895, wlhen upon a pure technicality as to the meaning of a direct tax, the government was bereft of even the power to levy a tax, which in the crucial test of the civil war had, in the words of Elihu Root, been "vital to the preser- vation of national existence." In answer to this contention the negative have said that there is no immediate financial necessity for an income tax and that the present financial system, fortified by economy of expenditure, will prove suf- ficient to meet any exigencies that may arise. But the affirmative maintains that as no seer is wise enough to peer into the future and determine what demands may be made upon the government ; the only safe and statesmanlike policy is to-restore the power to levy an income tax to congress and then to leave the question as to its use to the wise discretion of our national legislators. The power to levy an income tax is thus not only a necessary power, as we have alrady shown, but it is likewise a practicable power. The mere fact tliat every European power of any importance levies this tax successfully should be in itself sufficient proof of its practicability. Those who oppose an income tax in the United States on the ground of its impracticability, betray a lack of confidence in the efficiency of our government as contrasted with the other governments of the world. Let us examine the arguments advanced to prove that this govern- ment cannot levy an income tax successfully. It is said that it is inquisi- torial, that it is open to evasion and that consequently it falls only upon the honesit tax-payer. It is true that these evils were to be found in the income tax of half a century ago, when the governments had to rely upon the method of personal assessment, and when the administra- tion of the tax of course depended upon the honesty of the individual tax -payer. These objections are groundless under the latest develop- ment of the tax. Today the bulk of an income tax may be collected by taxing incomes at their source, before they reach their ultimate individual possessors. Thus incomes derived from investments in cor- porations are taxed in the forms of dividends and interest before they are paid over to the sitockholders or bondholders. The salaries of all employees of the federal government, of all corporations, and of other business enterprises are taxed before they are paid over to the em- ployees. In this way the principle of stoppage at the source can be 14 THE INCOME TAX. extended throughout our entire industrial and business life. Under this system' there is no inquisiitorialness because the individual tax- payer never comes into contact with the tax collector. There is but slight chance of evasion, for the corporations would have no reason to defraud the government out of a tax that did) not affect them. In England whereas under the old system of personal assessment there was great cause for complaint, now that 3-4 of the tax is collected by, stoppage at the source, we find that there is very little complaint, and in the words of the latest report of the internal revenue commission, the tax is now collected with a "minimum of friction and a maximum of results.'' The fact that business in the United States is more widely carried on in the corporate form than in any other country and that the corporations have been brought under the direct supervision of the federal government through the instrumentality of the new corporation tax, makes the system of stoppage at the source peculiarly adaptable to this country. That these statements are reliable is shown by the fact that the income tax law of 1894 as well as the Bailey law of 1909 involve extensive provision for the collection of the tax by this method. Lawson Purdy of New York city has estimated that 4-=; of a federal income tax could be collected in this manner. Thus the great bulk (of the tax could be collected in this country as in England with cer- tainty, ease and simplicity. The real test of the pudding is in the eating. The real test of the income tax is in its actual use, as fortunately we have had con- siderable experience with this form of taxation, notably in the decade covering the civil war and extending from 1862 to 1872. Before the actual success of this measure can be justly determined the form of the tax itself and the conditions under which it was passed must be con- sidered. In the first place the law itself was crude and imperfect — passed as it was hurriedly in a great emergency and without any past experience in the use of the tax. Furthermore, because of the fact that the country was in the throes of one of the most destructive and sanguinairy struggles ever known, business and industry Were shatter- ed. Says the New York Tribune of -May 2, 1863 : "The fabric of -New York mercantile prosperity lies in ruins, beneaith which 10,000 fortunes lie buried." The result was that any system^ of taxation could only be collected with the greatest difficulty. Even such a loyal and well-to-do citizen as James Russell Lowell wrote to Miss Norton that "The 'hor- ror of my tax bill has so affected my imagination that I see myself beg- ging entrance to the poor house." And yet, in spite of the crudeness of the law and the unfavorable conditions attending its trial, its success is attested by the fact that $347,000,000 was Collected from this tax. As Frederick C. Howe, the eminent authority on internal taxation puts it, "the income tax proved one of the most satisfactory from' a purely fiscal point of view of the many expedients hit upon by THE INCOAIE TAjX. 15. congress." But was this tax unduly inquisitorial, and was it subject to any more evasion than the other forms of taxation? The testimony of Prof. A. L. Perry of Williams College, given at the time that the itax was ac- tually being tried, is of great importance. He wrote: "The income tax at present in force in the United States has been subject to less complaint than the manufacture tax and other forms of direct taxa- tion." A contemporary issue of "The Nation" under date of Novem- ber 25, 1869, throws further lig-ht on this point. "The collectors," it says, "do not report any unusual unwillingness to pay it; perhaps fewer attempts are made to evade it than any other, and the corruption and abuses which mark its collection have thus far been much inferior, both in numbers and quantity, to those of the custom house or other branches of the internal revenue." Important as is this evidence in proving that the civil war mcome tax as compared with the other taxes of that period was successful, mere yet remains further evidence that should be final upon this point. In 1866 Congress established a special revenue commission to make a. careful study of the financial system and to make recommendations in consequence of that study. The prominent member of the commission was D. A. Wells, whose writings on taxation are well known. After having gone carefully over the ground, the commission came to the conclusion that "the income tax would probably be sustained in less detriment to the country than any other formi of taxation." But not only did the commission thus favor the income tax in preference to other forms of taxation, but it went a step further and made specific recommendationg to congress for its guidance in future legislation. "The proper revenue policy for the future is, in brief, the abolition or speedy reduction of all taxes which tend to check the development, and the retention of all those which, like the income tax, fall chiefly on real- ized wealth." Surely these conclusions favoring the income tax, which were arrived at after the most careful investigation of the ac- tual working of the tax by a commission of experts, should remove any doubts that may yet ranain as to the success of the income tax during the civil war. If the income tax of die sixties, crude and imperfect in form, and tried in the stress of civil strife, was levied with a maximum of results and minimum) of evils, how much more successfully cotdd it be levied to- day under normal conditions ! How much more successfully could it be levied today when, by means of the system of stoppage at the source, tht great bulk of the tax could be collected so as to avoid the evils of personal assessment, with its inquisitorialness and evasions! Because therefore, the power to levy an income tax is a necessary flower of our federal government, and, as I have shown, because it places in tJhe hands of the government a practicable and efficient means of taxation. i6 THE INCOME TAX. we are in favor of restoring to congress the power to levy an income tax not to be apportioned according ito population. SECOND NEGATIVE SPEECH. S. E. Keeler, 'lo, of Yale. Mr. Chairmicm, Ladies and Gentlemen: It has been contended by the affirmative that our present tax system is woefully defective, and that therefore we must have a federal income tax. Is this sound logic? No matter how bad our present taxes might be, does it follow that the income tax is a good tax and should therefore be adopted, — adopted, mark you,. by the federal gov- ernment ? The preceding negative speaker showed that our present tax system is not in such sore need of reformation as the affirmative would have you belieA'e ; that without the radical change which they propose, the federal government is fully capable of solving all its fiscal prob- lems; that the federal government now has sources of taxation at its immediate disposal which will enable it to accomplish everything the affirmative seeks to accomplish with the federal income tax. In a word, be insisted that such a new tax is unnecessary; indeed, that any new federal tax is unnecessary. We might confidently rest our case upon this single clear-cut issue. We intend, however, to approach the subject from still another point of view. Not only do we deny that the present system is the poor sick thing they assert, but we con- tend that the particular nostrum' which they prescribe is neither the only medicine nor the right medicine for its supposed ailments. There are remedies, sirs, worse thian the diseases for which they are pre- scribed ; and such a mistaken medicine for our alleged financial and social ills, is the federal income tax. We know other cures, — if a cure were needed, — ^any one of which is superior to the federal income tax. Take, for example, the inheritance tax, a favorite with economists because it is so easy to collect and so productive, or the tax on the unearned increment of land values, or the innumerable kinds of stamp taxes so productive in foreign countries. It shall be my task, how- ever, not to extol these alternative remedies — that is no essential part of the negative case, but to point o^ut the numerous and fundamental defects of the proposed remedy, — ^to prove that a federal income tax is undesirable. We take issue with the affirmative when they contend that the income tax is a just tax. Possibly an ideal legislature might form- ulate an income tax law that would work with perfect fairness in a country inhabited solely by perfect people. But no such legislature and no such people exist anywhere. Nor are we apt ever to find them until we reach that kingdom in which there are no taxes. In THE INCOME TAX. 17 'ftiis debate we are concerned not with legislatures as they might be ■and with liuTnan nature as it ought to be but with stern realities. We are concerned not with an ideal tax system such as Providence might devise, but with the particular sort of system that the affirmative can prove it likely that Congress will devise. Noted economists have declared that theoretically, an income tax is just, but in actual opera- tion, it works great injustice. We hold with them that in its actual •operation an income tax, especially in the United States, is grossly and inevitably unjust, and therefore undesirable, because it discrimin- ates unjustly among individuals, among classes of persons, and among (different sections of the country. I. Equal incomes by no means denote equal ability to pay. A married man should pay less than a bachelor, the father of many ■children should pay less than a man with few or no children, — rakhough their incomes are the same. Not in strict justice should a •young man at the beginning of his productive career pay as much as an old man who^ has withdrawn from active life and who consumes his income unproductively. Again, a conscientious tax-payer makes full and Tionest return for his income, while the dishonest one will 'evade his burden in a score of ways. In brief, very imperfect account 'can be taken of the personal condition and character of individual 'tax-payers. This objection is not limited to certain varieties of in- •come taxes. It is true of all income taxes. Next, an income tax is unjust to certain classes of people. The professional classes, whose income is in part a repayment for time rand money expended in education and apprenticeship, should pay less than those receiving incomes from land and invested capital. Certain (classes of occupations which bring a high return during a few years of productivity must pay for the unproductive years. There should also ibe a distinction between the rent, for instance^ thait comes from prop- •erty that is increasing in value, and the annual proceeds of a mine ■.which is -gradually being exhausted and hence declining in capital vailue. "No income tax can distinguish between income that is squan- dered in riotous living, and income that is put back into productive channels; therefore, every income tax puts a premium on consump- tion, on wealth-destruction, and imposes a penalty on production, or wealthircreation. All attempts to make a distinction between earned and unearned income have been purely arbitrary and have failed dis- mally. Tor more than two generations the English Parliament has vaiirily 'sought to distinguish approximately between earned and ■urrearned income. Lloyd George, the ardent defender of the English income tax, frankly declares that "a fairly graduated income tax is •impossible -without a com|pleite overturning of the economic life of ihe coimtny." To be just to all classes would involve such a com- jtlex and cumbersome scale of duties and exerhptions as to create i8 THE INCO'ME TAX. innumerable practical obstacles. It would require an administrative machinery the like of which in wisdom and economic skill no man has ever seen or is ever likely to see. If this be true, is not an income tax, is not every possible income tax, class legislation of the most erratic and pernicious sort, since it must weigh most heavily upon the very classes and the very individuals that have the best claim upon society for services rendered? If, more- over, the incomes below a certain amount are to be wholly exempted from taxation, whether it be $i,ooo, or as in 1894, $4,000, is not this arbitr-^ry limit in itself the crassest sort of class legislation, incom- patible with a free government — a. government of equal protection f OT all ? Further, an income tax means unjust sectionalism. It has been esftimated that New York and Pennsylvania would pay one-half the tax, while all the states would decide how it is to be expended. Thus the revenue derived fromi New York and Pennsylvania might be expended to build post-offices in Montana or Texas. This injustice IS not limited to certain varieties of income taxes; it is true of all income taxes. 2. My next point is that an income tax is undesirable because there can be no clear definition of income. Just what is income? ■ Economists in the whole hisitory of the science, have failed tO' agree as to what constitutes income ; and no two laws include under tax- able income exactly the same things. An enumeraton of all revenues to be regarded as taxable income and a clear-cut answer ito all the questions that will arise in applying the law cannot be given in the law itself no matter how detailed it may be. For this reason there must be elaborate administrative instructions to assiessors. These are apt to change from one administration to another. Again, in one section of the country an assessor would regard this as taxable income and exempt that; while in an adjoining district another assessor would interpret the law/ differently. Thus there would be as many interpre- tations of the law as there are interpreters oif the law. This inade- quacy of the law to explain itsdf is seen in the present corporation tax. The Secretary of the Treasury found it necessary to issue a 2,000 word explanation of a single feiture of the law, whereupon the Attorney-General hid down an entirely different interpretation. This inability uniformly or fairly to define income is a feature not limited to certain varieties of income taxes, — it is true of every income tax. 3. The income tax is undesirable because to adminster it involves undue disclosing of business methods. It requires that every person liable to it must make to government officials an exhibi- tion of his financial condition. As a result of the new corporation tax law, ten cases are now before the Supreme Court to test the very THE INCOME TAX. 19 , right of the government to require undue publicity of business details. Since to declare the source and the disposition of his income reveals to business rivals his financial condition, no man willingly makes it, and so the successful admlinistration of this tax requires the use of arbitrary power to disclose the amount of income. To be effective the tax must be beyond evasion. To prevent evasion arbitrary and inquisitorial methods must be used. To use such arbitrary power is an evil, and not to use it means wholesale evasion. This ■ undue dis- closure of business secrets is an objection not limited to certain varieties of income taxes; it is true of every income tax. 4. A federal income tax is un;'.esirable because it is a de- cided step toward further centraiizaition of power. Our present tax system- — federal, state and local, — ^must be regarded as a whole, of which the federal taxes are only a part. Tliis system has stood the test of time which is an important feature of any tax s)stem, for Prof. Ely goes so far as to say ''an old tax is a good tax while a new tax is a bad tax.'' At all events, our present system works smoothly. It leaves well-defined and suitable fields to each division of the govemmenit. To the nation it gives the broad and fruitful field of indirect, taxation, while direct taxes have long been regarded as properly belonging Ho the state ancll local goveirnmien'ts. And as the states cannot be deprived of the right to levy income taxes, the proposed change would lead to multiple taxation. The state, that by wise laws and institutions, encourages and protects business enter- prise should alone directly tax its proceeds, and not the distant federal government. To change this arrangement is to increase enormously the federal power and to bring the federal government in relation to the most vital concerns of the individual. All disputes arising from the administration of a federal income tax would have to be tried in federal courts, which would result in a tremendous amount of judicial centralization. As Speaker Byrd of the Virginia Legislature puts it "a hand from Washington will be stretched out and placed upon every- man's business, the eye of a federal inspector will be in every man's counting-house." Indeed it would be difficult to conceive of a better means of accomplishing the last step in the decay of state government. Such centralization is one of the most undesirable defects of a federal income tax. c>vt <^cCt;^ TIItc propositioiTiof the.aiSj aiiati'yc is that this tax is undesirable be- cause income cannot be clearly defined or taxed ; undesirable because it requires inquisitorial methods to reveal methods ; undesirable because it leads to centralization of power ; undesirable because it is unjust to individuals, unjust to classes of people, and unjust to sections of the country. 20 ' THE INCOME TAX. THIRD AFFIRMATIVE SPEECH. E. R. Burke, 2L, of Harvard. Mr. Chairman, Ladies and Gentlemen : The affirmative maintain that the power to impose and collect thiy- practicable tax should be restored to congress so that the arm of tbe- naition be not impotent in time of emergency. But there are exigen- cies other than war in Which the federal government can use to advan- tage this tax upon accumulated wealth. We propose to show that such a time is at hand, and that the fundamental principle of justice- in taxation even now requires a readjustment of our tax system to- bring about somie semblance of equality. What will be the effect of a-. federal income tax upon -the different parts of our present system of taxation, general -property, corporation, impost and excise duties? Few are the defenders of the general property tax, in use by state and local bodies, in so far as it relates to the taxation of person- alty. It is not enough to say that it fails to produce the revenue de- sired. Its results are outrageously unjust in that the tax reaches the- total personalty of the man of small means, since his wealth is in tangible form, and lets escape the intangible property 01 the wealthy holder. By the Census Report for 1902, we find) that less than twenty per cent of the personal property of the country was assessed. The- New York State Tax Commission in a recent report voices the senti- ment expressed by other commissions throughout the states where it says that thfe richer a man grows the less of a tax he pays in propor- tion to his personal property. Although the working of this tax is- most unjust and all arttemipts to improve it have failed, yet the people- are unwilling to throw it aside because they firmly believe that such property ought not to be exempt. Tli'e tax, which we support, will' reach the income from this property, and will lead to the abolishment of the present unjust personal property taxes, a result which speedily followed the adoption of the English income tax. Our opponents will tell you that if the states have made a failure- of the attempt to reach personal property we can hope for no success at reaching, what is more intangible still, the income from personal property. That argument is fallacious because it ignores the real' reason for failure of the tax we are discussing and of the state income- tax as well. To evade a local tax the holder of the property sought to- be reached need only move into the next town or at most into aa adjoining state. When states and smaller administrative bodies try- toi tax this national property the attempt is sure to fail. The federal government will succeed because the property cannot escape without leaving the country altogether. Here, then is the first beneficial result,, the abolition of the inadequate and unjust personal property taxes. Let us go a step farther, and examine the corporation tax now being collected by the federal government. This is a tax upon the- THE INCOME TAX. 21 privilege of doing business in the corporate form, but it is measured by the income of the corporation. Here we have an attempt to reach a part of the property that now so largely escapes taxation. But there is one monstrous defect in the corporation tax. It professes to reach the net earnings of these businesses. We are all familiar enough with corporation finance to know that their net earnings is the sum of divi- dends on stock and interest on bonds. Take for example, the steam rail- ways of the country. Here we find about five billion dollars .worth of dividend-paying stock and nearly nine billion dollars of interest-bear- ing bonds. To tax one of these items and neglect the other would be, as Professor Seligman says, "obviously suicidal." Yet that is exactly what our present tax is doing — ^it reaches the dividends on the five billions of stock, but it does not touch the interest on the nine bil- lions of bonds. Do you think this a mere oversight by the f ramers of the act ? It was drafted by some of the ablest lawyers in the country, and we have the statement of President Taft himiself that tbey wanted to reach the bondholder as well as the stockholder, because they knew that both are beneficiaries of the corporation. Then why this injustice, you ask ? Becaus'fe of the limitation on the taxing power of congress, which the negative desire to continue. By the supreme court deci- sions a (tax on the bonds would be considered a tax on the individual bondholder's income, it would have to be apportioned, which means that it will not be levied at all. Under the present interpretation of the constitution there can be but one remedy, and that is to give con- gress the power to tax incomes without apportionment. This is the second great step toward justice in taxation that will be secured. There awaits our consideration a still more important phase of the subject. Today the national government draws its support almost exclusively from customs and excise duties, three hundred millions annually from the former and almost as much from^ the latter. These are taxes on consumption. Property, and the income from property, as such, pay no portion. Out of his daily wage the man of slender income, whenever he purchases for himself and family the necessities of life, contributes to the support of the government. Obviously this is a tax not proportioned to a man's ability to pay, but measured entirely by his needs. "It is a tax not on wealth, but on want, not on dollars, but on men." If it were true that the necessities of the poor and their incomeg bear the same relation to the necessities and the- incomes of the rich, then the tax would be just. But we know that seven-eighths of these taxes are paid by those whose incomes are exhausted in the payment, while the remaining one-eighth makes no impression at all upon the millions which flow into the pockets of the more fortunate as the return upon their invested wealth. We do not attack wealth, but we do cliallenge the injustice of a system of taxa- tion which exempts wealth from its proportionate share of the burden 22 THE INCOME TAX. and places it upon those least able to bear. Such are the natural' resources of the country, and so abundant has been our prosperity- that we are apt to overlook the results of this oppression. Chairman Ellis of the Boston School Board reports that a thousand children go- to school in Boston every morning hungry for the necessities of life. In Chicago there are five thousand suffering ones, with like condi- tions in every city throughout this land of plenty. All this time the- government is collecting its millions and hundreds of millions from the necessities of life, and for every dollar that goes into the nation's- treasury seven find their way to the pockeits of the protected indus- tries. We are told that seventy per cent of the tax collected, four hun- dred and fifty millions a year, is in the nature of a war tax, largely that property may be secure. Yet the negative would have you believe that there is no need, no justke, in our contention thait congress be- given the power to equalize this burden by collecting a few cents on the dollar from' the income of this proteoted property. In the struggle to> shift the burden of taxation the poor man has always gone tO' the wall. We urge the income tax as a supplement to the tax on consumption, as- an equalizer in our present system^. THIRD NEGATIVE SPEECH. Lindell T. Bates, 'lo, of Yale. Mr. Chairman, Ladies and Gentlemen: The gentlemen from Harvard argue that an income tax is a just tax and yet they neglect to answer a single one of the many points involving gross injustice which our second speaker showed were in- herent in any income tax. ihe moon is the closest planet to the earth, but the moon is an awfully long way off ! If this is as close to justice as even the friends of the income tax say it can come — let us not have it ! Two distinct and fundamental cases against a federal income tax have already been presented by my colleagues : one, that it is unnecessary either as a permanent feature of our tax system or as an emergency measure; the other, that it is undesirable because of its tendency toward fiscal and judical centralization, because it is inquisitorial, because of its arbitrary character, and its gross in- justice. I shall add to these objections the further count that a federal income tax in the United States will be unsuccessful in practice. Practicability is the supreme test of a tax. I mean by practic- ability the extent to which it accomplished its avowed purposes. Now the practicability of a tax is measured mainly by the percentage of evasion and by the sumi yielded- as revenue. .The cost of collection is also a factor. An unevadable tax is sound, while a measure which is largely circumvented should never be added to the laws of a proo-res- THE INCOME TAX. 23 ;sive nation. The amount of evasion is determined by the character of the enforcing offficials, the opportunity and incentive for fraud, -and by the clearness and definiteness of the law. It can hardly be said that America's greatest pride is the in- ■ corruptibility of her public servants; the recent sugar frauds amply demonstrate this point; but no matter if all the officials resembled Cato in virtue, the general public yields too readily to temptation, :and tax-dodging is not regarded as a particularly heinous offense. In considering the practicability of the income tax in the United States, this attitude must not be overlooked. Nor should there re- main unnoticed the fact that in important economic and political respects we differ from the foreign nations to which reference has been made by the affirmative. Ours is a large country, neither wholly industrial like England, nor mlainly agricultural like Australia. Un- like Prussia we are not accustomed to governmental paternalism and we resent police interference. Politically, without dual form of gov- •ernment, we resemble only Australia, Germany, Canada and Switzer- land; and we ask the affirmative to name a single such dual govern- ment in which the central government has ever imposed an income tax. In Germany, to be sure, they have an income tax ; but it is "levied exclusively by the states, not by the Empire. In Canada, the income tax is imposed only by a few local governmients, never by the Dominion. In Switzerland, only the Cantons levy an income tax, not the Confederation. And in Australia, not the Commonwealth, but the several states have the tax. If we are to draw any lesson from the experience of countries whose political organization closely re- . sembles our own it is this : The income tax, if levied at all, should be levied by the states or local goverranents and not by federal govern- ment. As for our own experience with a federal income tax, the friends 'of such a tax are fond of saying that the Civil War income tax failed mainly because it was hastily drawn. When the tax was first imposed this may have been the case. But the fact that during the ten years following numerous amendmients did not strengthen it is presumptive ■evidence that this could not be done. Again, the income tax law of 1894 was as carefully constructed as Congressional ingenuity would .admit. Yet, says Ely, it also was open to endless evasions no matter which way the courts interpreted its clauses. No matter how carefully an income tax law is framed, instructions for the computation of net income can never be complete. And so there will be considerable ■evasions through lack of uniformity in interpretation and in en- forcement. There is a further cause of evasion. There are two ways of assess- ing and collecting the taxes, — -self-assessment and the so-called stop- page at the source. The income of professional men would have to 24 THE INCOME TAX. be self-assessed, while a tax upon dividends of corporations could be stopped at the source, that is to say, assessed and collected from the corporation itself before distribution to stockholders. Under the latter plan, where the tax is collected from disinterested parties, there is some check upon evasion, without, however, entirel) ehminating it. But under self-assessment there is a large opportunity for all manner of misrepresentation. It may be said with confidence then, that a large amount of self-assessment means gross evasions. Applying this law of universal experience to the United States, we hold that any federal income tax which might be imposed by Congress would have to make either a large use of self-assessment or if it at- tempted to escape this evil it would represent a mere duplication of taxes- already imposed. Let us see then, what sort of income can now be reached by taxation without the change proposed by the affirmative. In the Pollock case the Supreme Court indicated that a duty on business equivalent to a certain per cent of the income, but not taxing the income itself, would not violate the requirement of the Constitution as to apportionment. In the Spanish War this field of taxation was tested, and its constitutionality sustained in the Spreckels case. An excise duty had been imposed upon the business of sugar and petrole- um refineries, and was the entering wedge. In 1909, President Taft urged that this type of tax be extended to the business of all corpora- tions. This resulted in the corporation business tax equivalent to i per cent of the net earnings over $5000. Until the Supreme Court de- clares the opposite, this tax is an excise measure. And in the light -of past decisions its constitutionality is assu'red. This law indirectly reaches certain incomes without in any sense being an income tax, and with regard to those incomes there is manifestly no need of an additional grant of power to Congress. What are these incomes already reached in an indirect manner? John Moody in his Manual leads us to the conclusion that about 80 per cent of the wealth of the nation is in the hands of the corporations; the income of this wealth is reached by the 1909 tax, indirectly tiut none the less effectively. Therefore, an income tax law could at best reach only the income of the remaining 20 per cent of national wealth. The only incomes not already indirectly reached by the corporation tax are 3. part of state and municipal bonds, the interest on corporate bonds, the salaries of government and corporation employees, and the returns from trades and professions. But state and municipal bonds according to the weight of legal authority cannot constitutionally b^ taxed even under the proposed change. According to. Professor Ely, the interest on corporation bonds could not be taxed at the source, owing to Federal decisions. The salaries of government employees could, it is true, be taxed at the source. But under an income tax, the vast majority of federal em- THE INCOME TAX. 25 ployees would fall below the exemption limit, and also such a tax would simply amount to a meaningless reduction of salaries which would probably have to be raised later on. The wages and salaries of corporation employees could also be collected from the employers, but here a,gain, nearly all employees would fall below the exemp- tion limit, and the amount of stoppage at the source would be limited to a few higher officials. The most important group of incomes not now indirectly reached, namely — the incomes from incorporated busi- ness and professions, could only be reached by self-assessment. There is no way of ascertaining the income of a small business man, or of a professional man, such as a doctor, unless we ask the individual him- self. Hence that part of a general income tax w'hich reaches incomes not already indirectly reached will have a vast preponderance of self- assessment and according to the rule of experience will be subject to gross evasions. The negative frankly admits that the present cor- poration tax seems to resemble a sieve and we submit that a general income tax will be even worse; as a source of income largely self- assessed and so even more evaded, would be added. For this reason, also, then, the income tax fails to meet the first test of success — namely, the degree of evasion. The second test of success is the ratio of the amount collected un- der an income tax to the amount now collected. The 1909 tax at 1 per cent is estimated to yield twenty-five million dollars ; so an income tax of the same rate on the income of the 20 per cent of wealth not yet reached would yield at most about six and one-quarter million dollars more. Even at the high rate of 3 per cent it could not produce a miuch greater sum than eighteen and three-quarter millions above the corporation tax at the same rate. In other words, the economy of 100 millions demanded by President Taft will go about six times farther. As a means of deriving increased revenue, then, the income tax would also be a failure. The final factor in determining the success of an income tax is its cost compared to the cost of the present internal revenue and cor- poration taxes. The average cost of collecting the general income tax is 2 per cent when there is self-assessment as well as stoppage at the source. But where there is stoppage at the source alone, as in our corporation tax, the cost is one-fifth of one per cent. In other words a general income tax would cost ten times as much to collect as the present corporation tax. From the point of view of cost, therefore, the income tax is less advantageous than certain taxes, especially the corporation tax in the present system. 26 THE INCOME TAX. FIRST NEGATIVE REBUTTAL. F. R. Serri, 'ii, of Yale. Mr. Chairmcm, Ladies and Gentlemen: We have shown you that the new historical evidence presented to the Supreme court in 1895 proved that this power had never been granted to Congress. The gentlemen argue, not for a restoration, but for the granting of a new power. The affimative conterid.tlmt a federal income tax is necessary in times of emergency. We have shown that the government has met recent emergencies without an income tax. During, the Spanish war, an increase in the internal revenue duties raised receipts by 100 mdl- lion. The stamp taxes brou,ght in 44 million. Furthermore we can always resort to public credit in times of need. It is only just that the crushing burdens of war or any undertaking should be spread over a longer period. If the present generation bears the blood and money cost of war, why should not posterity carry the burden of dollars and cents. When we advocate the issue of bonds in times of urgent need, instead of heavy burdens of taxation, we have behind us the experience of every civilized nation. In times of war, then, an expansion of the present system is sufEcient. Justice is the chief contention of the affirmative. But when they argue for an income tax merely in times of emergency, how can they consistently argue for it on the grounds of justice? Do they demand a justice which is tO' be realized only in times of war and which presumably will end at the termination of the war? Also, if they admit their iiiconsistency and now advocate it as a permanent part of the revenue system, then the income tax loses a large part of its elasticity or emergency value. In every European nation, whxh has an income tax, it has become a fixed, permanent and non-elastic source. In England alone it has preserved the appearance of elas- ticity. But the general tendency, which has been accelerated by the desire of justice, has been to gradually raise the rate, which means that year by year it has been losing some of its expansive powers or emer,gency possibility. The English Banker's Magazine, Feb., 1910, says that the rate of ist, 2nd, of the new income tax in England is dangerously high and reaches near the point of greatest normal elas- ticity of the income tax. In. other words, emergency and justice are incompatible. Now is our present federal system as unjust as the affirmative as- serts? The taxes are those on articles of consumiption, it is true. "The tarifl- bears too heavily upon the consumers," they maintain. We do' not wish to discuss the relative merits of protection and free trade but we cannot let pass unchallenged the assertion that the tariff weighs heavily on the poor consumers. Certainly a system cf taxa- tion which generation after generation tends to raise the price of ar- THE L\COME TAX. 27 tides of general consumption, must necessarily raise wages. We disa,gree when they say that the internal revenue duties are burdensome. These duties are not taxes on necessities, but on the lux- uries and indulgences of the poor and rich alike. They may be regard- ed as the voluntary contribution from the surplus fund of society. However, we must not re^gard the system of indirect federal tax- ation by itself ; — the affirmative have ignored one essential considera- tion — that the state taxes are taxes on business, on accumulated wealth. New York state, for instance, receives about 30 million and this comes from three sources, inheritance tax, liquor license and corpora- tion taxes. But they tell you that personal property escapes. Well then, if this escapes which is more tangible than income, how will you tax the income? If you cannot find the source, how will you reach the income? But they say that business is national in scope and the states have not the power. Then let the nation tax inter-state busi- ness and the states intra-state business. The state failed with in- come taxes, not because of lack of power, but because of the numer- ous opportunities for fraud and evasion. And will a tax payer be more honest to the federal government than to the state? Bonds, which they believfe now escape taxation, cannot, however be taxed by stopipage at the source. Prof. Ely says, p. 636 — ''It is important to note that taxes on the interest payments upon corporate bonds could not in the U. S. owing to decisions of the Supreme court, be col- lected at the source or from the corporation." Therefore self-assess- ment would have to be used which they themselves admit means failure. We maintain that if it is necessary to give greater justice, that it is possible with a readjustment of the present system. The tariff can be changed to bear mpre heavily upon luxuries; the internal revenue taxes should be changed from specific to ad valorem, so that high grade tobacco, for instance, would pay more than low grade. Again, the new corporation tax will tax accumulated wealth. Thirty-six of the states are already using the inheritance tax, which is a direct tax only on the very wealthy. If this is not sufficient, the federal govern- ment could use it or it could adopt any of the other taxes mentioned by the negative. A tax on inter-state business would bring not only revenue but further control. Therefore, because the present system is sufficient in ordinary times, can be expanded in times of emergency and can be made fully ■compensatory, we maintain that a federal income tax is unnecessary. 28 THE INCOME TAX. FIRST AFFIRMATIVE REBUTTAL. H. B. Ehrmann, '12, of Harvard. Mr. Chairman, Ladies and Gentlemen : The gentlemen o^ the negative have spent the most considerable portion of their time pointing out a thousand and one mcnor difliculties in the working out of an income tax, in spite of the fact that our sec- ond speaker showed conclusively that by the certain method of stop- page at the source, three-fourths of the entire tax could De collected without a single one of the difficulties which the negative has so ably advanced this evening. Moreover, the remaining one-fourth consists largely of incomes from professions, and such a tax has not been de- clared unconstitutional. That means that the negative has centred its entire attack upon a tax which our government already has the power to impose. Furthermore, we are told that in a time oi great emergency, plen- ty of money could be raised by increasing the tax upon whiskey and tobacco. Now, even laying aside the fact that in 1866 a crude and im- perfect income tax raised more revenue than the highly developed whiskey and tobacco taxes combined, it is a recognized fact that such an excise tax possiesses little elasticity. Even the gentlemen of the negative realize this, for they themselves have told you that any in- crease of the whiskey and tobacco tax would mean less consumption of those commodities. Then, moral gentlemen that they ^x, they pro- ceeded to tell you that it would be a good thing if less whiskey and tobacco were consumed. Now if an increase of any tax means a cor- lesponding decrease in the consumption of the taxed commodity, how in the name of taxation can such a tax be a good tax for an emergency? Our last speaker has shown you that the present system of taxa- tion is unjust; the gentlemen of the negative have attempted to sweep it all aside by the mere statement that a tariff does not necessarily "bear unjustly upon the poor. Now the question of a tariff is too vast a problem to be dragged into a debate on the income tax, so we must treat it as summarily as the gentlemen of the negative have done. As admitted an authority as John Stuart Mill will speak for us : "The only indirect taxes which yield a large revenue are those which fall on articles of universal or very general consumption, — a flagrant in- justice to the poorer class of contributors, unless compensated by the existence of other taxes from which, as from an income tax, they are altogether exempt." finally we are told that our government is too , extravagant any- now, and it would be a good thing to force it to be more economical. Now if our government already has such unbounded resources as the gentlemen of the negative have pointed out, we fail to see how we ■could curb extravagajce by refusing the additional power of imposing ■an income tax. But we of the negative realize that our government THE INCOME TAX. 29 is extravagant and far be it from us to deny that economy is a good thing. But do the gentlemen of the negative think that our govern- ment just happened to be extravagant or do they think that the sound of their voices ringing through the Congressional halls will force ittobe njore economical ? A representative government is extravagant because the people are careless as to how their representatives spend their mon- ey, and the people are careless because they do not feel that it is their money which is being sj>ent. And the people do not realize that it is their money that is being spent because practically all federal tax- es are collected in an indirect manner. In the words of Mr. David A. Wells, the negative's own authority, "With a system of indirect taxa- tion, as a tariff on imports, a government can undertake the most un- necessary and extravagant measures without popular disap- proval." This, then, is the cause for extravagance. What is the remedy? John Stuart Mill, in speaking of a system of taxation which comes home to the individual, says : "Under it every one knows how much he really pays ; and if he votes for a war or any expensive national lux- ury, he does so with his eyes open to what it costs him. Taxation would be much more perceived than at present, and there would be a security, which now there is not, for economy in the public expendi- ture." But that was written over fifty years ago. Perhaps the psycholo- gy of human nature has changed since then. Mark the words of Dr. Frederick C. Howe, a contemporary expert on taxation. "Indi- rect taxation and extravagance have gone hand in hand. When goverment touches the pocket of the citizen directly, however, it in- duces a patriotic inspection of party stewardship and a more watchful observance of its actions." Ladies and gentlemen : when the negative tell you that our govern- ment is extravagant and ought to be more economical, they assign no cause and fail to suggest a remedy. We have shown you that the cause of our present extravagance lies in a system of universal indirect taxation, and that the remedy is not to go on raising money in the pres- ent manner, but to levy a tax which goes directly home to the indi- vidual, namely, a FEDERAL INCOME TAX. SECOND NEGATIVE REBUTTAL. S. E. Keeler, '10, of Yale. Mr. Chairman, Ladies and Gentlemen : The negative cannot emphasize too strongly at this point the fact that the affirmative has not shown any definite need for this tax. The essential need that calls a new tax into being should be a financial one, and we have shown that - such a need does not exist, that •our current system oi taxation is not only meeting satisfactorily all .30 THE INCOME TAX. demands put upon it at present, but is capable of expansion sufficient, as was shown in the case of the Spanish war, to meet all needs that arise in the future. The affirmative has made a great deal out of the argument that this income tax is to be of use in emergencies. In fact, they have said that this is its particular value. But at heart this ar-9iUment is specious, for if we use this tax only in emergencies, we shall never get enoug-h experience to know how to use it. Its particular value should net be not that it might be valuable in an emergency, but that it should be increasingly useful all the time. England has spent sixty years trying to apply it successfully, and even now Lloyd-George ■admits that it is far from perfect. We are further told that a great feature of this income tax is the ■social justice it would be sure to bring about. We do not deny the possibility of some benefit. But, on the other hand, the negative must ■remember that even if it is properly imposed, it will be only an inade- quate return to the poorer people of some of the money which has lieen accumulated in the fortunes of the rich. The real proof which our opponents must adduce if they are to be conclusive is that the income tax is absolutely the best tax to obtain this much needed social reform, not only a good remedy, remember, but the very best and the 'very safest. SECOND AFFIRMATIVE REBUTTAL. T. M. Gregory, '10, of Harvard. Mr. Chairman, Ladies and Gentlemen : The affirmative has attempted to reduce the need of an income tax to a mere matter of dollars and cents. They tell us that be- cause there is no present need for additional revenue, that therefore Congress should not be given this power. In taking this position they have ignored two important questions. In the first place we are not asking that an income tax be imposed at this time. What we are asking is that the power to levy an in- come tax be restored to the Federal Government and that its use be left to the discretion of Congress. Even granting that the tax is not demanded now for revenue, how can we be assured that it will not be needed in the future ? Are the gentlemen of Yale seers or proph- ets that they can thus divine the future? The only wise and states- manlike policy is to restore this power to Congress now and thus prepare ourselves in time for any emergency that may arise. For as former secretary oif state, Elihu Root, expressed it in a letter to the New York legislature, the income tax "miay be again as it has been, ■vital to the preservation of national existence." In the second place there is a moral aspect to this question which THE INCOME TAX. jr cannot be measured by the standard of dollars and cents. Rising above the materialistic attitude of the negative, we have demonstrated the necessity of an income tax to bring about justice in taxation in this country, — that the burden of taxation may be borne by those best able to bear it. It has been said that the argument for an income tax as an emer- gency measure is specious, for if it was used only in emergencies, we would not have sufficient experience with the tax to use it effective- ly. This is just where the superiority of the income tax is most evi- dent, since it may be levied at a low rate in normal times and at a higher rate in times, of emergency. England adjusts her tax in this manner with eminent success. Finally that weather-beaten argument of impracticability that has always been urged against every form of taxation, has been advanced here against the income tax. It is not at all surprising that the nega- tive has been able to expose before us several flaws in this tax, for as ex-senator John Sherman has well observed, "There is no objection that can be urged against the income tax that I cannot point to in every tax." I have already shown that by the method of stoppage-at-source, the great bulk of an income tax, that is, 4-5 of it according to Lawson Purdy, can be collected without evasion, inquisitorialness or any of the evils attributed to^ it. The negative by showing us on the excel- lent authority of John Moody, that 80 percent of the wealth of the country is in the hands of the corporations, only emphasizes the point that I have made before, namely, that the industrial conditions in the United States are peculiarly adaptable to the use of stoppage-at- source. Furthermore, . when they tell us of the great efficiency of the present corporation tax, they only prove that an important step has already been taken towards this method of collection. All that is, needed to complete it is to restore to the Federal Government the power to levy an income tax, in order that Congress may be able to reach by stoppa,ge-at-source, not only the income of corporations, but also the incomes of the investors, of the corporation and governmental employees, and of professional men. We ask, therefore, that because it will bring about justice in taxa- tion, because it is valuable as an emergency measure, and because it is a practicable system of taxation, that the power to levy an income tax be restored to Congress. THIRD NEGATR'E REBUTTAL. Lindell T. Bates, '10, of Yale. Mr. Chairman, Ladies and Gentlemen : The gentlemen from Harvard have offered two main reasons for 32 THE INCOME TAX. the adoption of an income tax. First, thait the income tax should be embodied in our fiscal system as a compensatory measure, and sec- ond, that we need the income tax to provide a sure and certain emer- gency tax. But the experience of England, as voiced by Uoyd George, is, that the income tax, when included in the fiscal system is not he! 1 back as a reserve, but i. made use of by the country to an increasing degree. An income tax loses its emergency feature by this process. If you apply the income tax largely in war time, where is the com- pensatory feature? Will the gentlemen of the affirmative urge social justice only in time of war? Hence the affirmative cannot advocate the income tax both as a compensatory tax and an emergency meas-- ure. If Harvard elects to rest her case upon the compensatory feat- ure, we beg to call your attention to the vast compensatory possibilities in a present tax system'. The tariff can be revised so as to hinder the looting of the public by high duties on necessities, and at the same time it can be so adjusted as to bear more heavily on luxuries. The tobacco and liquor taxes can be changed from specific to ad valorem. Besides, the greatest need for a change in tax systemi, . looking toward equilization of burden, is not in the federal system, but in the states. It is the dwelling and personal property taxes in the cities and land taxes, especially in the country, which are most in need of revision. The income tax will not compensate where compensation is really needed and to adjust federal taxes no radical move, such as that called for in adopting an income tax is needed. If the gentlemen from Harvard choose to rest their case on the emergency feature, we submit that the income tax is a poor emergency tax, and that we now possess facilities to meet any crises. The in- come tax yields no funds for a considerable time; the experience in the Civil War is a case in point. It would be of trifling assistance as it would not produce 20 per cent more than we now receive from the 1909 corporation tax. Furthermore, our present internal revenue resources possess a vast expansional margin. The stamp tax raised 100 millions in the war with Spain, and it was only applied slightly at that time. So much, then, for the necessity of a federal income tax. The affirmative next argued that an income tax is a desirable measure, yet they allow to stand unchallenged our arguments of fiscal and judicial centralization, of the injury to the small producers- by the exposure of his business standing, and of the discrimination be- tween individuals and sections of the country. What advantages have they placed on the other side of the balance? Merely that income- measures ability to pay — an attribute which it does not possess in: practice owin^- to differences in the conditions of the individual. Harvard's final point is that the corporation tax does not go far THE INCOME TAX. 33 enough in that the interest on bonds is not taxed. But the wealth upon which the bonds are based is taxed, hence a tax on the interest of the certificate of wealth would mean double taxation. Furthermore, Ely tells us that owing to federal decisions, bonds cannot be collected at the source. Hence there would be great evasion and the tax would be unsatisfactory on this account. The corporation tax was extend::! to all sources of income which can be taxed with any chance of suc- cess, and even at that it is grossly evaded. A general income tax, as a substitute, would be even more unworkable, as a large amount of self-assessment would be introduced. The gentlemen from Har- vard tell us that a general income tax has been practical abroad. But in Germany, for example, the authorities assess a man on the income he should have and not on the income he says he has. Such a system would be delightful in this country. The affirmative have neglected to answer the arguments of the shght extra revenue which would be yielded by an income tax. For a few million dollars we ought not to overthrow our Constitution. The negative rests its case upon the lack of any real necessity for an income tax, the unremovable effects which accompany it and finally upon the impracticability of substitution of income tax for the corpora- tion tax. THIRD AFFIRMATIVE REBUTTAL. E. R. Burke, 2L, of Harvard. Mr. Chairman, Ladies and Gentlemen : The closing speaker on the negative side has eliminated from the discussion all the minor objections that have been urged against our proposal, and now he opposes it for two reasons only. The tax cannot be made to work, and even if it could we have no need for it. In attempting to establish the first of those objections the negative have poinited out certain difficulties, and enlarged upon the defects of dif- ferent kinds of an income tax. But they have failed to prove, what of necessity they must in order to maintain their point, that in the very nature of the income tax lie such inherent difficultes that a wise con- gress could not in the course of years work out a practicable method of collection. Other countries are using the tax with success. Under adverse conditions it was productive of a large revenue during the Civil War. Today with wealth so largely concentrated in corporate form, and these corporations now brought under the supervision of congress, the principle of stoppage at the source can be applied with extraordinary effect and evasion reduced to a minimum. Finally, we have shown four reasons that make it absolutely necessary that we restore to the federal government this power which it held for so many years, and of which it was deprived by the deciding Missing Page The Harvard Debating Team against Princeton at Cambridge The Princeton Debating TeamJ against Harvard^ at Cambridge The Income Tax HARVARD VS. PRINCETON Question : "Resolved that the federal government should have the power to impose an income tax, not apportioned among the states .according to population." FIRST AFFIRMATIVE SPEECH. Philip S. Watters, 'lo, of Princeton. Mr. Chairman, Ladies and Gentlemen : We of the affirmative maintain to-night that the levying of a tax on the basis of income should be within the free power of the federal government, for use at its discretion. We shall first endeavor to point out that this is not a demand for a new federal power ; not an attack up- on the rights or revenues of the states in favor of the federal govern- ment, but a demand to restore the usability of a proper federal power which is of no use to the states and therefore need not be held by them exclusively. We shall then argue that the reasonable demand for this restoration should be satisfied because ( i ) of the inadequacy of our present system; (2) the inequity of our present system; and (3) the practical advantages to-day and safeguards against emergencies which such a restoration would place at the disposal of our government. When the Constitution of the United States was adopted, the powers of the federal government were carefully limited. In the vital matter of taxation, however, there was laid upon the national government no restriction in favor of the states. The stipulation was indeed made that direct taxes if levied by the federal government must be in proportion to the population of the states. But this was not to restrict the taxing power of the federal government; it was a matter of state rivalry and a slavery compromise. For the small states were determined that the large states should bear their full share of the national expenditures, and the non-slave states were determined that, if the representation of the southern states were swelled by their slave population, direct taxes should be levied upon the same basisi The stipulation was not at all designed to be a limitation upon the federal power. Mr. Root gave clear expression to this, when speaking of this question he said on February 28th, "I do not consider that this in any degree whatever will enlarge the taxing power of the federal government." At the great crisis of the Civil War our government was forced to use all possible mtethods of collecting revenue. At first a direct o6 THE INCOME TAX. tax was apportioned among the states according to their population; but this proved so unjust and inefficient that it was soon given up and subsequently tl.e money collected by it was actually refunded. An income tax \,as then levied regardless of state hnes. This was an in- valuable support to the government in its great need; it was used throughout the period of the war, and was abolished only when some years of peace had greatly reduced the need for revenue. In 1894 the government was confronted with a deficit in its rev- enue, and once more a law was passed for the collection of a tax on incomes. . The Supreme Court, frequently called upon in the past had uniformly decided that the income tax was not a direct tax and was an unrestricted federal power under the Constitution. It was the confident expectation of the bench and bar of the country that the federal power would again be upheld ; but the Supreme Court in the following year reversed itself, declaring by a five to four decision l":at parts of the income tax were direct taxes and therefore, capable of being levied only hy apportionment among the states on the basis of population, a method proved by experience to be impossible. This unexpected decision, given by a divided bench, on purely legal. grounds, has practically nullified the federal power to tax incomes. It has greatly embarrassed the administration ever since. Mr. Taft's administration, confronted by a deficit at the very start, proposed by amendment to the Constitution to undo the work of the Court and make the power to tax incomes once more an usable power. This amendment passed almost unanimously by Congress is how be- fore the states for ratification, and shows the need which is felt for this fedeial power. Moreover, we can judge of the importance of this power from the language used by the dissenting judges of the Su- preme Court of 1895 with regard to that decision. Mr. Justice Jack- son went so far as to say, " Considered in all its bearings, this decision h in my judgment the most disastrous blow ever struck at the constitutional powers of Congress." The Justice realized the great truth which our Supreme Court expressed with wonderful clearness in another case when it declared, "The whole power to tax is the c;ie great power on which the whole national fabric is based.'' It is p'ain that v.-c r.re not demanding a new federal power. I:i the r.:.:t place, the established federal power whose efficiency we ai::i to rcilore is one whose need as an exclusively state power C2n::ct be rcascnably maintained This is true from the very nature of the tax, for income is no respecter of state boundaries. A legal resident can be very conveniently transferred to a neighboring state, and the state income tax as readily eluded. A striking proof that the , states do not need this tax and cannot use it is the fact that oi our forty-six states only seventeen have attempted its use and of these all but four have abandoned it. If the tax were at all necessary more ' THE INCOME TAX. 37 states would have attempted its use; if it were even worth while as a ^tate tax, the thirteen spates would not have abandoned it. Now, if there were any really good reason for the exclusive possession of tliis power by the states, it would be incumbent upon us to show a great federal necessity for the tax ; but we wish to emphasize the reasonable- ness of our demand — that a recognized federal power which has been extremely useful but has unfortunately been made inefficient, which the states cannot use and whose exclusive use they do not need, should •cnce more be really usable at the discretion of our federal representa- tives. • Our first argument in support of this reasonable demand is the inadequacy of the present system of federal taxation. Federal revenue is raised today almost entirely by a tax on im- ports and a tax on manufacturers. In each case the amount of the tax is ordinarily included in the prices asked for the taxed commodity and the burden is thus borne by the consumer. There is therefore, except by continual extension of the tax to new articles, a very def- inite limit to the productiveness of our present system of taxation. For the rate cannot be raised beyond a certain point without a resulting decrease in the demand for the article and eventually a reduction in the actual total of revenue collected. Our established American sys- tem of protection for home industry places this limit today still lower than the demand requires. Prior to 1894 the income tax was avail- able as an efficient supplement to this comparatively inexpansive tax. With the growth of the complexity of civilized life, there has been .a very general increase in the expenditures of the governments of •enlightened nations throughout the world. Our federal government is no exception to this rule, and its expenditures have grown rapidly especially since the close of the Civil War. It would not have been surprising if there had been a corresponding growth in the federal taxing system as the government has been called upon to satisfy in- creasing demands ; but as a matter of fact no such expansion has tak- en place. On the contrary the power to tax incomes has actually "been crippled ; and the only compensation is a partial substitute in the shape of the recent questionable corporation tax which properly be- longs to the states and was already being used by them. It is^ not surprising then that the federal government faces today an annual deficit of $157,000,000, estimated for 1910-11 by Senator Cummins of the finartce committee. The decision of 1895, which unexpectedly restricted the federal income tax to an impossible method of collection, has made unusable the power on which our gov- ernment could formerly rely; and has left us without an adequate means of convenient supply to cope with our growing deficit. And, as we have already seen, the crippling of this federal power was not the result of a demand by the people, was-not because anyone thought ;8 THE INCOME TAX. the income tax unjust, not even because the states could possibly need its exclusive use ; but by a decision on a purely legal ground, from the interpretation of the term "direct tax." To meet the present inadequacy great efforts have been made to obtain economy. The amouiit of the deficit may be cut down by the present administration. The taxes on consumption may be extended to more articles. But President Taft himself, although he hopes the new corporation tax will be upheld and hopes to gain an increased revenue from the excise tax, is, like Governor Hughes of New York, in favor of a tax on incomes. To those who keep sounding the cry of economy as the cure of all evils the President replied on Febru- ary 23rd at Newark: "A reduction in the cost of proposed improve- ments is not an elimination of them but merely a postponement of them." What is the prospect for the future, starting from the present situation? In the first place, the more we attempt to meet increased needs by increased economy without extending our source of income, the more we endanger the efficiency of our government and the more we pile up obligations for the future. In the second place, there is no reason to suppose that the world-wide growth of governmental ex- penditures will cease ; on the contrary there is every reason to pre- dict its continuance and a further enlarging of governmental func- tions. In the third place very definite movements are, in the opinion of those competent to jtidge, menacing our present revenue supply. J*"or example, the free importation of sugar from the Philippines threatens to imjpair the greatest single source of custcuns duty. Ex- penditures are on the increase; present revenue is inadequate and uncertain of character. Iii the light of past experience, present deficiency, and of the strongest future indications, our present system of federal revenue is inadequate. Even those who argue for more economy are proposing new taxes ; others who see the need are figuring out how to squeeze more money f rom^ the consumers ; the situation is in brief that of a country which has since its final unification in 1865 grown to be a great na- tion with a government seeking to protect the interests oi citizens, states, and colonial possessions, advancing the arts of peace and pre- paring the defences of war. This nation has boundless resources upon which it should depend for its support. The great question after all is not how to pay a deficit, but how to enable the government for all time most conveniently and justly to make use of its resources. Any method which will further this end should be at its disposal. We do not propose a bill for a tax to meet a deficit. It is the broad principle which we argue. We have quoted the declaration of the Supreme Court that "the whole power to tax is the one great power on which the whole national fabric is THE INCOME TAX. 39 based." Here is a taxing power of which the states can make no use; a power which the nation has used with great efficiency; a power which would enable the government to make use of its resources; a power which is denied it today only because of the unexpected legal decision of 1895. We submit to you that from the narrow view of our nation's needs, but still more from the broader view of its proper rights, the federal government should have power to impose at its discretion a tax on the basis of income. FIRST NEGATIVE SPEECH. • H. H. Breland, '12, of Harvard. Mr. Chairman, Ladies and Gentlemen : "That the Federal government should not have power to impose an income tax not apportioned among the states according to population" is the proposition which we of the negative shall try to maintain. Upon the very threshold of our remarks this evening, let us spend a moment in an effort to ascertain just what the real issues in this discussion are. The Constitutional provision that direct taxes shall be apportioned among the states according to population, taken in connection with the decision of the United States Supreme Court that an income tax is a direct tax makes an amendment to the Consti- tution an aibsolute necessity if this proposed power is to be conferred upon Conigress. Without altering in, the slightest, then, the signifi- cance of this question, we may state it in more specific language as follows : "Resolved, Tliat the Federal Constitution should be so an^end- ed as to empower Congress to impose an income tax not apportioned among the. states according to population. Now if we can succeed in showing, first, that the Constitution snould not be amended until the power to be conferred by tjiat amend- ment should be immediately exercised, and, secondly, that the power to impose an income tax should not be immediately exercised, then we shall have completely sustained our contention that the proposed amendment should not be enacted and the proposed power not con- ferred. This we confidently believe we are going to do. Upon these two simple propositions we take our stand. Our first contention that the Constitution should not be amended until the power to be conferred by that amendment should be immedi- ately exercised is almost a self-evident truth. The Constitution is the fundamental, organic law of the land, the foundation upon which our whole governmental fabric rests. Where a nation erects a govern- ment upon such a fundamental law, that nation must of necessity pro- ceed on the assumption that this law is adequate to all its needs, both present and future, until conditions have actually arisen which demon- 40 THE INCOME TAX. strate its inadequacy. The presumption must be in favor of the Con- stitution and the only way in which to overcome that presumption is by showing that the government is face to face with an actual, present condition which the Constitution fails to meet. The argument that a power should be conferred upon Congress by constitutional amendment in view of certain contingencies that may arise in the future complete- ly reverses the fundamental presumption underlying our theory of government and degrades the Constitution to the pitiable position of having to demonstrate at every turn its own right to existence. The burden of proof must rest upon those who advocate a change in the fundamental law to show, not merely that such a change may be neces- sary in the future, but that it is an imperative necessity now. If the Constitution may be amended out of regard to possible conditions that may arise in the future, there is absolutely no power that may not be conferred upon Congress by the same logic for who knows what changes in our government may become necessary to meet condi- tions which the future will unfold? But should changes be made now because they may possibly be needed in the future? Reason answers, no. The negative lays it down that the only sound principle of Con- stitutional amendment is. Amend the Constitution when, and only when, the power to be conferred by that amendment should be immle- diately exercised. Unless a federal income tax should be imposed now, the power to impose such a tax should not be conferred upon Congress. But the ,gentleman from Princeton tells us that they are not pleadin,g for a new federal power but merely for the restoration to Congress of a power which the framers of our Constitution gave to that body but which the Supreme Court by its decision in 1895 that an income tax is a direct tax took away. This notion that the founders of our government thought an income tax not a direct tax and that, therefore, they gave to Congress this power in question in the general grant of taxing power rests upon a total misapprehenson of the facts. What are the facts ? There never was an income tax in the lifetime of any of the founders and no court was ever called upon to decide whether an income tax was a direct tax until 1880. In the Constitu- tional convention Mr. King rose and asked just what precisely was a direct tax but no one replied. In the Hylton case of 1796 — the case always relied upon to show that the fathers thought an income tax not a direct tax — Justice Patterson used the following language: "Whether direct taxes in the sense of the Constitution comprehend any other tax than a capitation tax and a tax on land is a questionable point." Justice Chase in the same case said: "I am inclined to think, but of this I do not give a judicial opinion, that the direct taxes com- prehended by the Constitution are only a capitation tax and a tax on land." Do these doubtful, hesitating expressions, not of judicial THE INCOME TAX. 41 but of private opinion, establish anything? As a matter of fact, ladies and .gentlemen, we can never know with absolute certainty just what taxes the framers of the Constitution did or did not mean to compre- hend within the term, "direct taxes." But however doubtful that may be, there is one thing we most assuredly do know. Those very founders, foreseeing that just such disputes over the meaning of the Constitution would from time to time arise and knowing that the permanency of our government demanded that such disputes be set- tled once for all, established a tribunal, the Supreme Court of the United States, and constituted it the ultimate arbiter in all questions of -Constitutional interpretation. That Court declares that in the meaning of the Constitution an income tax is a direct tax and that declaration is as integral a part of that instrument as any other. But you ask, "Are we to be bound by the Supreme Court ?" We reply "Are we to be bound by theConstitution?" for administratively speak- ing the Constitution is nothing more nor less than the interpretation which the Supreme Court places upon it. A principle of Constitu- tional amendment, then, that applies to any part of the Constitution must apply with equal force to the direct tax clause as interpreted by the Supreme Court.. That principle as we have seen is. Amend the Constitution when and only when the power to be conferred by that amendment should be immediately exercised. The argument of the gentleman from Princeton that this amendment should be enacted because it merely restores to Congress a power given them by the fathers is, then, not well founded. The conclusion we have reached that the power to impose an in- come tax should not be conferred upon Congress unless that tax should be imposed now is not invalidated by the mere possibility of a future war. The intitial expenses of such a war would have to be met as they have always been met, by the issue of bonds, for an income tax if we had one, could not be immediately responsive. In the Civil War only 1.6 per cent of the expense was borne by an income tax, while 65 per cent was met with loans. The Spanish-American War was financed without the slightest need of an income tax by a sale of bonds and a slight increase in the internal revenue taxes. The internal revenue alone,' in the last year of the Civil War yielded over three hundred million dollars and owing to the enormous increase in wealth and consumption, could be made to yield many times that amount now without being nearly so burdensome as it was then. Internal revenue falling as it does upon luxuries and not upon necessaries does not op- press the poor. Prof. Neumann, the distinguished German economist, has found by actual statistics that an increase in this tax has taken a larger per cent from the incomes of the rich than of the poor. Much of it falls upon tobacco and liquors and those who do not use these articles certainly can make no objections to the tax, while those who 42 THE INCOME TAX. do use them have demonstrated time and again their complete will.ng- ness to pay it on the ground that it's well worth the cost. Surely with these resources of bonds and internal revenue at the nation's command, there can be no justification for going to the ex- treme of changing the very foundation of the government to provide for a war that may never arise and that could be provided tor after it had arisen. Securing an amendment to the Constitution is not neces- sarily a long and difficult process. It can be done quickly if there is popular demand for it, and the people will demand it if the nation should become involved in a war of such long duration as to make resort to an incomie tax necessary. These considerations, we believe, completely sustain our first proposition that this amendment should not be enacted unless an in- come tax should ie imposed now. This leads us to our second proposition that an income tax should not be imposed now. We shall attempt to sustain this contention on the grounds that this tax is not necessary, is totally impracticable, and has within it grave dangers to our government. My colleagues will dwell upon its impracticability and its dangers, while I shall try to show that it is not necessary as a revenue measure. The gentleman from Princeton has urged the necessity of this tax because the deficit which the national treasury faces shows the inadequacy of our present system of federal revenue. But the fact that the treasury has faced a deficit is no cause for alarm; twenty- six per cent of the years of our history have been deficit years. What is a deficit of a hundred million dollars to a nation with exhaustless resources? In 1867, there was a deficit of over six hundred million dollars but the national treasury was soon replenished. But it is said that we had an income tax then. True we did, and it yielded the fabulous sum of $300,000,000 in ten years ! President Taft in a recent speech declares that the tariff had al- ready yielded $31,000,000 more than it had yielded for the same length of time last year, and he predicts a surplus in the treasury by July 1910. We have shown, ladies and gentlemen, that this proposed amend- ment to the Constitution should not be enacted unless an income tax should be imposed now. We have shown that the force of this con- cjusion is not in the least weakened by any considerations of what the idea of the framers of our government was or of the mere possibility of a future war. We have shown, further, that this tax should not be imposed, now, for it is not needed for revenue. When my colleagues will have shown that this tax is utterly impracticable, breaking down completely in administration and that it is aggressively dangerous to our government, the force of our conclusion will be irresistible. A little more than a hundred years ago, our fathers laid the THE INCOME TAX. 43 foundation of the American government in the Federal Constitution. Upon that broad and solid basis supported, as it is, by pillars hewn from> the quarry of eternal truth, there has been erected the most splen- did governmental fabric the world has ever seen. Wherein lies the secret of our marvellous history? It lies in the fact that our fathers established this government upon eternal principles of political truth — the Constitution — and that this instrument has remained intact, undis- turbed by the vision of political dreamers, unchanged save when changed conditions made amendment an imperative necessity. The negative lifts its voice in protest against any change in these 'principles and until the affirmative has shown a real need for an in- come tax, until they have shown that it is practicable and that it has not those grave dangers which my colleague will point out, the posi- tion of the negative that this amendment should not be enacted and this proposed power not conferred will remain unshaken. SECO'ND AFFIRMATIVE SPEECH. S. A. Huniter, '10, of Princeton. Mr. Chairman, Ladies and Gentlemen : O'n account of the inadequacy of national methods for raising rev- enues, the income tax is necessary, and you have seen that power to impose it should be given the federal government as a proper right. I propose to show further that it is necessary for securing justice and desire 'tO' lay down three propositions: (i) Our present system is inequitable; (2) the income tax is the best means of remedying the evils; (3) for there reasons the federal government should possess the power to impose it in a just manner. I. Our method of obtaining reveHue for the national government's expenses is inequitable. Although its evils are not at first sight ap- parent, without question it bears unevenly and unjustly upon the poor- er classes. It is based entirely upon the consumption of comunodities, and as a result a miillionaire pays but little more to the support of the government w hicln safe"^uards his wealth than the workingman. He may have five hundred -times the 'latter's income and wealth, but he will net consume five hundred times as much sugar nor smoke five hundred times as many pounds of tobacco^. Consumption, being t/.e one universal characteristic of men, it was formerly thought that the best way to make all pay was to tax something they all used or more. It was supposed that a man's expenditure formed the easiest way to irake abso'utely certain to find out his ability to pay, and hence that to tax the commodities he consumed was the best policy. But it is manifestly impossible to tax all expenditures or all consumption. To make the tax productive, customs duties have been restricted largely to staples. Sugar heads the list of our imports; it likewise yields the 44 THE INCOME TAX. government the greatest revenue of any dutiable object. Manufactured cotton, flax, wool, and lumber are the next in order. Hence we see that the great part of our customs receipts come from the necessities of life and not luxuries. Under our present system a necessity like wool, for example, pays a rate sixteen times as high as a luxury like dia- monds. Since a man's capacity for the consumption of staples is largely limited, this tax takes on the semblance of a poll ot head tax. Nothing was more foreign to the spirit of the framers of the constitu- tion. Bentham showed the folly of this species of taxation when he said that although every man possessed a head, it did not necessarily follow that he possessed anything else. Now, we have generally modelled state and local taxation on the basis of the individual's ability to pay, and made the tax propprtional to his wealth, but usually have taken property and not income as its best criterion. The general view has always been that the government performs its various functions to the end that indus':ry may be safe- guarded and wealth produced. Hence the tax for the support of the government onght to be laid on the income so created or the results of that guardianship. But have we followed this principle of taxation in federal finance? We have absolutely ignored it except for the ten- year period oif the income tax during the civil war. We have always raised our national revenue by methods that resolve themselves into taxes on consumption. Emergency measures during the Spanish War were the stamp taxes, but these were borne by the consumer. And consumption is no fair index of a man's ability to pay, as we have seen. The great masses oi wealth in this country bear little of the burdens of federal expenses. Workingmen of small means and large families consume more sugar, for example, and hence pay more taxes than millionaires with defective appetites. Seven-eighths of our cus- toms taxes are paid by people.whose income does not exceed two thou- sand dollars, according to the statement of Mr. Hull, in the house of representatives on January 25, in summing up the unjust overcharges on this class. In the dark days prior to- the French revolution it was regarded as a proper distribution of the burdens of govermnent that the clergy should pray for the state, the nobles fight for it, and the common people pay all the taxes. Tliis is not our political theory, but it is somewhat our practice. It is true that at the present time wealth en- joys a notorious exemption in national taxation in this country. The man with a small income pays a disproportionate share of the cost of running our government. And hence the first proposition cannot be disputed : The present system is inequitable. II. An income tax will remedy these evils for two reasons. A. Let ti's consider what it will do as a supplement to a defective system, (i) It will ma,ke wealth bear its. proper share. In this respect, however, it THE I\XOAIE TAX. 45 represents no assault on riches. The power to impose a just income tax does not aim at a redistribution of we^ilth, but only an adjustment of the tax burden. The income tax is not a social panacea. Instead of signifying "class" legislation it will abolish the present discrimina- tion against that class with small incomes, by exempting them from its operation. If the income tax were the only federal tax, perhaps the exemption limit should be extremely low ; or possibly there should be no exemption limit whatever; but as a supplement to a defective system, an income tax with exemptions would be a powerful force in making the burden of taxation equitable. Experts can determine the proper amount for us with accuracy and justice, and it need not con- cern us here. (2) The pO'wer to impose an income tax will help to make possible a real reform of the tariff, by affording a supplementary source of revenue at the time the change is made.- There is little like- lihood of our tearing down our customs houses in the immediate future, ■but there does seem to be a strong demand for the reduction of the tariff. Thoit will be made possible and easy with a supplementary source of revenue. That the income tax may facilitate reforms is re- flected in the opinions of Senator Aldrich and Senator Depew, leading conservatives, expressed in the senate last May. Senator Aldrich (Congressional Record, p. 4022) described the measure as "a tax which is sure in the end to destroy the protective system." We, however, are not arguing for the tax as a substitute for, but a supplement tO', the present system. The advantages of the proposal, then, are (i) it will iijake wealth bear a proper share of the burden, and by an exemption limit it will offset the present overcharges on the men of small means; (2) it will make true tariff reform possible when desired. Gladstone used the tax for this purpose in England. B. We have seen that the income tax, then, is desirable for the results it will have when regarded as a supplementary part O'f our rev- enue system. Viewed as an independent measure, it is a desirable tax.. It squares with the most commonly accepted canons of taxation, (i) It is a just tax, for taxation, to be just, should be based on ibi'.ity to- pay ; and authorities are generally agreed that income is 2 fair index of ability ; the tax is not the same in years of adversity as of prosper- ity. (2) It i.s economical to collect, as my colleaT;ue will show. (3) Everyone who pa}'s an income tax is perfectly aware of what he is paying, and as such it stands in sh^rp contrast to present national taxes. The government in Washington has been forced to go on the theory of P. T. Barnum, that tlie people like to be humbuo^p-ed ; that they like to have their pockets picked rather than be forced out and out to pay their share. Gladstone condemned this system in strong language. There is a growing demand on the part of the people th^t they be informed when they are being taxed. If they realize what amount they are paying, and \o whom they are paying, it will follow 46 THE INCOME TAX. that they will inevitably ask why they are being called upon; and we can justly expect more popular interest to be manifested in the dis- posal of the national funds. (4) It is a tax whose entire revenue ■will go to the governmemt. Under the customs system the burden of the tribute is great, the real revenue fromi the tax is small. The seven dollars arid forty cents, per capita, that goes into the public purse every year is only a small pant of a larger amount which finds its way into the private pocketbooks as a result of our tariff methods. As an independent measure, the income tax is a good tax, and the government ought to have it. C. The income tax is the best possible remedy foT these evils. A\'Tiat are the other national possibilities? In time of peace, if the expenditures keep increasing we can increase the list of dutiable objects, but that only increases ithe burden ; in time of war we can em- ploy stamp taxes, etc., but they are flagrantly unequal, as their in- cidence is always on the consumer. A corporation tax has been sug- gested for the deficiency this year. The pending measure is itself es- sentially an income tax levied in an incomplete, and hence unjust, fashion. Professor Seligman declares the present measure, now before the country, is "repugnant to all ideas of justice," for it passes by the Dondholders entirely. Fundier, the tax has not as yet weathered the constitutional test. III. The federal government should have this power, and the power to impose it in a modern manner. Now, what -are the gentle- men in the nega.tive urging against its possession? They are asking us to confine exclusively to the states a taxing power which has always belonged tO' the federal government, and which it vitally needs, which the states do not need, do not use, and which it was not intended for them to monopolize. The weight of authority is with the advocates of this measure. In 1882, Senator Sherman made the prophecy that "a few years' fur- ther experience will convince the people that a system of national taxes which rests the whole burden upon consumption is in- trinsically unjust." His forecast is now proving true, and the people are becoming convinced. The proposal has- been advocated consistently by the Democratic party for years, and at last incorporated as Republi- can doctrine by Presidents Roosevelt and Taft. Tlie economist and the statesman join in its recommendation. Professor Seligman advis- es its adoption as "a. desirable adjunct to our system," and says that it is necessary as a present-day measure for securing justice now. Gov- ernor Hughes thinks it best to have the power, but hold the tax for a reserve measure; and so expressed himself recently by saying: "I am in favor of conferring upon the federal government the power to lay andcolleot an income taxe without apportionment among the states accorcing to population. I believe that this power should be held by the THE INCOME TAX. 47 federal government so as properly to equip iit with the means of meeting- national emergencies." These were his words in his special message of January 3, 1909, commending the principle we are arguing for to- night, but criticizing a wording of the amendment which would grant the power. To conclude, you have already seen that our present one-sided sys- tem of gathering national taxes is inadequate, and that an income tax will relieve that inadequacy. I have tried to show that the system is furthermore inequitable, and that the income tax as a supplementary means will remedy present injustices. You cannot expect the national government to measure out even-handed justice in the raising of its revenues if you force its system to be one-sided, and allew one of its taxing arms to continue to be shackled with a constitutional restriction. The m'anacle that hinders fairness is a itechnicality — an obsolete rule of apportionment. Rend this fetter, abolish this technicality, free this taxing arm from its encumbrance, and congress will have a means for attaining justice in federal finance, and rounding out present inequal- ities. With this power, profiting by the experience of other countries, congress can impose an incomie tax purged of its earlier defects, puri- fied of its administrative disadvantages, whose effect will be to make our system' fairer and more equitable. The measure is a good tax ! The nation ought to have it. SECOND NEGATIVE SPEECH. J. de M. Ellis, 2L., of Harvard. Mr. Chairman, Ladies and Gentlemen: The negative opposes a constitutional amendment giving Congress the power to levy an income tax because we believe that the Con- stitution should not be amended until there is urgent and immediate need. We have shown that no such necessity arises from the present deficit as warrants the proposition of the affirmative. Nor is their contention justified by the possibility of a war demanding an increase in our federal resources. It is evident that our argumient thus far has reference only to the granting of power to Congress. We must now turn to the now vital question of the exercise of this power and examine the case, as- suming that a necessity does exist, and that Congress has the power to levy an income tax not apportioned among the states according to population. We propose to show that this power is of such a nature that its exercise is not suited to our present governmental conditions, and that the income tax when actually put into practice must be either unproductive or must destroy our democratic institutions. Our federal government is one of delegated powers. Within its 48 THE INCOME TAX. ' own sphere it is supreme, but aside from the power granted it by the states; the central government is powerless. This is a fundamental piincipJe, and any proposed power to be given to the federal gov- ernment must conform to (this principle. In the relation of the state to the individual, the tendency has always been away from centrali- zation until it has become a general doctrine in the United States that the federal government shall come into contact with the individual to as slight a degree as possible. When we come to apply this principle to the levy and collection of an income tax by the central government, we find that the political theory and the necessity of the tax are wholly incompatible. It is in the very nature of the income tax that the government shall come into the closest possible relation with the individual, that its officers shall be able to reach the citizen directly in his every-day .life and shall have the power of inquisition intO' his business affairs. In short, the levy of an income tax demands that uur govern- ment shall be highly centralized. Whether or not it is desirable that we have a highly centralized government is beside the question. The fact remains that we have not such a government at the present time. It is into Such a govern- ment as exists today that the affirmative must inject their power; it is under the existing conditions that the power must be exercised, and its successful administration will depend upon the nature of that form of the government that is to exercise the proposed power. In short, it is difficult to see how a tax requiring a highly centralized form of government for its successful administration can hope to be efficient in a government that is essentially decentralized. We have seen that the federal income tax is not compatible with the theory of our dual fonn' of government. Turning from the politi- cal aspect of the collection of the income tax we must examine its actual operation under any political 'mental conditions. It is in this cUrection that the strength or weakness of the affirmative case must become apparent. If we are to grant a power to Congress, it must be such a power as can be successfully exercised. It- will not be con- tended that Congress should have the power to levy a tax if that tax is of such a nature that it cannot be efficiently collected. The administration of any tax depends largely upon the subject of taxa- tion. When property is of such a tangible nature that it can be levied upon with comparative ease, the administration of a tax upon that property is simple. But as property becomes less tangible, the diffi- culty of levying and collecting a tax upon it increases. Thus it is com- paratively easy to collect a tax levied upon land, since its ownership is obvious. A tax upon watches is more difficult of collection. But •a tax upon personal services is impossible, both of levy and collec- tion. THE IXCOI\lE TAX. 49 A further distinction must be made as to the nature of a tax ■upon property and persona.1 services. While a tax levied upon land values may be a simpler matter, a tax levied upon the income de- rived from land values is more difficult of collection. Thus an official may appraise a piece of land as worth $10,000 and the tax be levied upon this valuation. But when the official must determine the in- come actually received from this land, he is confronted with a prob- lem of increased complexity. He cannot say arbitrarily that this land should earn six percent and levy upon the resulting income. The proposed tax involves a determination of the income actually received. And since gross income cannot represent "ability to pay," there arises innumerable difficulties in determining the various items to be deducted from the gross return in order to arrive at the net income, which must be the basis of assessment. It is apparent, therefore, that the collection of a tax becomes increasingly difficult as the subject of taxation loses its tangible char- acter, and as we tax the income from the value rather than the prop- erty itself. When we examine the income tax, we find that it proposes to levy upon all the income derived from all property. Thus it em- bodies a tax upon the most intangible and unreal subject of taxa- tion that has been proposed, attempting to reach not only the most intanglible forms of property but a derivation from property that is still more unreal. The advocates of the tax have been content to assure us that it will be collected in some way or they have entirely igiioTed this pha,se of the question. There are only three possible methods of levying and collecting a tax upon incomto. liither the individual must declare his income, or a trained body of officials must ascertain the amount of income, or the two methods must be com- bined. As the last must embody all the features of the first two methods, we may leave it out of consideration, and any fact con- cerning them must apply with double force to this method. A tax that depends upon personal declaration for its assessment must be both "^unproductive and unjust. A man will not declare more property than he is compelled to because it is against his immediate interest to pay a large tax. If we are to depend upon this method of levying a tax we shall receive only a part of our revenues, and this part will be upon that form of property which a man cannot con- ceal, his tangible property. The intangible property, the subject of the income tax, will be so successfully hidden that very little return would be received. Grave injustice would result from the scheme of personal declar- ation. Deplorable though it may be it is true that there is a large class of our population who do not come forward with an absolutely honest return when it comes to questions of taxation. It is onl) 50 THE INCOME TAX. necessary to consider the elaborate schemes at present in vogue by which men defraud the g-overnment of millions o-f dollars which should be collected from the most tangible forms of property, to see what would be the result under an income tax. If only the honest pay under such conditions, it is probable that even these few will disappear under the temptations of a system that allows a man's total income to be concealed in his pocket and carried away or stored in a safety deposit vault where none may see. The income tax levied according to this method means that there will be an inadequate return to the government and that the honest will pay while- the dishonest go free. And it must be remem- bered that no form of collection has been devised in which this sys- tem has not some part. But if we are to ascertain a man's income by means of official, assessors and collectors we are affroaited with even greater difficulties. There are always some forms of income that can be determined cjnly by personal declaration, as the income from personal services, and these invariably form a large part of the natural income. This miethod : would be unproductive either through corruption or laxity. Nothing is better known than the frauds practiced by officials at present in assessing taxes. Great corporations by bribing pay a very small pro- portion of their just tax; whole districts in our cities are assessed at a lower valuation than any one imagines is just, because their alder- man has a ''pull," or the official through mere carelessness and laxity will fail tO' make a diligent search for property, or will fail to give a fair valuation. These things exist today and they are gi'ave evils. The income tax would only increase the possibility of fraud and care- lessness by decreasing the possibility of detection, and increasing the difficulties of ascertaining what property a man had. VVe have had experience with these methods of collecting an in- come tax, and the lesson should prove a warning to> us. During the Civil War, an income tax was tried under most favorable circum- stances. People were fired by patriotism' and a greaiter proportion were willing, even anxious to pay taxes than ever before. Yet in the decade from 1861 to 1871 only $350,000,000 was realized from the income tax, an amount equalled in any three years by the returns from either the internal revenue or the customs duties. As a revenue measure in times of emergency its efficiency may be judged by the fact that during the actual period of the war from 1861-1865, th« income tax yielded only 1.6 percent of the total expenses, as against 7.6 percent from the customs duties and g percent from the internal revenue. The income tax contributed to the total amount of taxes raised dur- ing this period only 9 percent as against 42 percent from the cus- toms duties and 49 percent from the internal revenue. But not only has our experience shown that the income tax is THE IXCCAIE TAX. 51 unproductive, its manifest inequality is evidenced by tlie number of people who paid the tax. In 1868, when the exemption was $1,000 out of a population approximately forty millions, only two hundred and sixty thousand persons paid an income tax, or, roughly, 6 percent. Two years later, when the exemiption was raised tO' $2,000 only one hundred and sixteen thousand, or 3 percent of the population could be discovered who were able to pay a tax on their incomes. As Mr. Laylor aptly puts it "This is ncit taxation. It is plain confiscation." But more dangerous than the unproductiveness and the inequality of the income tax in practice is its evil political influence. In the United States, the tax collector is an unwelcome guest in our midst. We are not accustomed to having a government official peer- ing over our shoulder to watch our daily transactions ; our people have never felt the hand of the government in their pockets. If we are itO' have an official collection of this tax and this in some form is inevitable, it will mean that in the national capital there will be a central body of taxing officials, in every state a subsidiary board. It will mean that a trained body of tax gatherers will go throughout every county, city, into every house of business, imto our very homes in the unending search for the elusive income they must find. It will mean that every transaction that in any way savors of money must be open to the scrutiny of the tax gatherers. Nor is this a fiction of imagination. Congress m 1894 made just such a provision for col- lecting the income tax. It provided that at stated intervals the gatherers should go throughout their districts ascertaining incomes ; that accounts should be open to their view, that business transactions should be scrutinized. And if the information was refused, or there was doubt as to its correctness then the tax gatherers could inquire of a man's neighbors, or by any other means ascertain his true income. This is what has been done in the past. Congress under the im- pression that it had the power attempted to impose such a law, and the same kind O'f a law will be passed. This is the power the affirma- tive asks us to give Congress. We are asked to amend the Constitu- tion in order th-t Congress may have power to levy a tax that cannot' be collected, a power that is directly op- posed to the principles of that Constitution. The affirmative would give Congress the power to fix upon this country the perfect sys- tem of officialdom that the administration of an income tax necessi- tates. Such an official inquisition might find favor in the Russian bureacracy. It may find toleration in monarchial Germany, even aris- tocratic England may countenance it. But democratic America will never submit to a bureacracy of tax gatherers that is not only con- trary to our political ideals but inimical to our very democracy itself. 52 THE INCOME TAX. THIRD AFFIRMATIVE SPEECH. Chauncy Belknap, '12, of Princeton. Mr. Chairman, Ladies and Gentlemen: It has been the part of my colleagues to prove that it is politically- expedient and economicaUy just for the Federal Go-vernment to have- the power to inapose an income tax not apportioned among the states according to population. We maintain that there is no reason v.hy this power, possessed by the Federal Government for more than a. century, should now be held exclusively by the states. Placed once more within the range of federal jurisdiction, it could be used by Congress to satisfy two important needs: one urgent at- the present tim-e, the other no less vital because not immediately- pressing. Congress could use the power to secure closer correspond- ence between revenue and expenditure. In the second place it would place the finances of the nation on a firmer basis in a great foreign war. My first point is that the power to impose an income tax would, enable Congress to strike a balance beween revenue and expenditure which is at present impOiSsible. A study of the treasury tables of the last fifty years exhibits a great number of surplus and deficits, and it is usually assumed that these are necessary evils of our American system. Is this analysis true of the facts? It is not the cabinet form of government which enables England to adjust revenue to expenditure, but the power of the sovereign Parliament to impose certain elastic- duties tending to equalize the two. The most important of these flexible taxes is that upon incomes, the rate of which is varied from year to year to meet the requirements of the government. It has- been found that a variation of rate produces an almost exactly propor- tionate variation in revenue received. The return from a definite rate is therefore at all times approximately certain. But let us examine conditions in the United States. A budgetary comlTiission has recently been appointed to secure a closer approxima- tion between revenue and expense ; but it is attempting an impossible- thing. It must meet a fairly constant or steadily -increasing bill of ap- propriations with a revenue depending on the uncertain fluctuations of" trade. What has been tie result? In one year, between 1880 and. 1881, the excess of revenue over expense jumped from 65 millions to 100 millions. Between 1884 and 1885 it decreased from 104 mil- lions to 63 millions ; between 1899 and 1900 a deficit of 89 millions was- converted into a surplus of 79 millions ; and we are again confronted with a hu3e defic'it. How shall we meet it? First, by economy wherever possible. Is it paradoxical to assert that granting Congress an additional mode of raising revenue will be- a stimulus to greater ecomomiy? Not upon due consideration of the- power. Why is Congress extra-vagant ? Because the electorate de- THE INCOME TAX. 53 mands it.- To secure re-election, to cater to popularity, the Congress- man must get a maximum amount of money for his district. The ma- jority of the electorate is like the little boy who thinks that a bank is a place to get money from. He does not realize that he must put it there before he can draw it out. The electorate does not realize that before Congress can squander millions on pensions and harbor im- provements, each individual must deposit money in the Treasury bank. Few of us taste the tariff in our sugar and our tobacco. The only way to impress this fact upon the public is by means of a tax which will be felt. They must understand that every additional dol- lar ci pensions comes out of their pockets. Then, when the burden is felt, the cry will not be for extravagance, but for economy. The most popular Congressman will not be the one who helped raise the tax by extravagant appropriations, but the cautious representative- whose economy helped to lower the tax. There is only one practical .•ipur to economy, and that is the spur of the electorate. An income tax being a tax felt by all, will supply this stimulus. But economy is not the only remedy. We must have an elastic feat- ure in our system to meet the Government's needs in the years when the tarifif falls oil. During the panic years of '93 and '94, at the very lime when money was needed, the revenue from the tarifT declined- from 203 millions to 130 millions. This one power of levying a tax on incomes, which would satisfy the requirements, hangs in the air. The states do not want to use it ; the federal government cannot use it. Just consider the palpable absurdity of the situation. This power in the hands of tbe federal government would be an easily adjustible lever to preserve the needed equilibrium. It is an es- pecially just regulator, because it does not aiifect prices or industry, or interfere with the free employment of capital. The case is clear. We have a condition tO' meet ; a long succession of surpluses and de- ficits in the Treasury, both demoralizing in their effects on business. We have a method of meeting these conditions whch has been tried in twelve nations and succeeded. We are robbing the states of neither revenue or power, when we ask that they do not be allowed to have exclusive control over it. We further maintain that Congress should have this power be- cause it was once vital' to the life of the nation, and the emergency is easily conceivable when it will be so again. More than one-half of our annual revenue is derived from^ import duties, which in case of a war with a great foreign nation would either cease entirely or be ma- terially diminished. The government would be forced to resort to stamp duties and excise taxes. I freely admit that they could thereby raise considerable revenue. But let us not forget that both of these taxes place the burden of supporting the war just where it should be lightened, on the man of moderate means, the average lawyer and physi- 54 THE INCOME TAX. clan, the shopkeeper, the farmer. The millionaire scarcely knows that- he is paying the stamp duties ; and the excise, being a tax on consump- tion, is even more unfair to small man. -However, waiving all question of justice, there is a grave doubt, whether stamp and excise duties would be sufficient to meet every exig- ency of a prolonged war. Where duties are raised above a reasonable limit, consumption of the dutiable goods ceases proportionately. Dr. Frederick C. Howe says in his work, "Taxation in the United States un- der the Internal Revenue Sytem" : "The income tax produced in 1865 . as much revenue as was returned by the tax on liquors, both roalt and distilled, and tobacco combined. The following year it produced 40- percent more than these combined resources, and in 1867 one quarter of the entire internal revenue was collected by it. And at that t!me the entire service was experimental, the men untrained, and the ma- chinery imperfect." The lai-gest sum returned from the stamp tax be- tween 1863 and 1872 was 16 millions; from the income tax, 72 mil- lions. In making preparations for the national defence, our aim is to pro- vide against every conceivable emergency. Why, therefore, should we place an. arbitrary and unwarranted limit on the means for maintaining our defences ? Is there anything in the nature of interest from stocks^ dividends on bonds, rents from lands, and wages for services rendered, that they should be placed beyond the reach of the Federal government in cases of dire necessity? On the contrary, with the administrative machinery in running order, no source of revenue responds more quick- ly to urgent needs or yields supplies more steadily than a tax upon in- comes. It is capable of immediate and indefinite expansion in time of temporary necessity. In order to meet the demands of the war ia South Africa, the rate of the British income tax was doubled. As a re- sult, the returns from^ the income tax were more than doubled. By denying Congress the power ever to levy an income tax, we are virtually cutting off our third line of defence. Mr. .Justice Flarlan said' of the Supreme Court decision which, on solely legal grounds, destroyed the power in '95, "It strikes at the very foundation of national authority, in that it denies to the general gov-' ernment a power which is ot may become vital to the very existence of the Union in a national emergency." Harlan had lived through the dark hours of the Civil War, when. Abraham Lincoln found this power essential to the nation's life. He knew that the possession of this power by the Sovereign parliament of,' Great Britain had enabled Pitt to conquer Napoleon. And we maintain that by denying to Congress this vital power^. recognized as right and just for more than a century, we are jeopardiz-- ing the life of the nation. We are mvolved this evening in a discussion of the advisability of THE INCOME TAX. 55 restoring an old power to Congress. We cannot pretend to know ex- .actly what uses will be made of it, any more than the makers of the Constitution could foresee the precise use of the powers therein con- veyed to the Federal Government. Still less can we know the meth- ods of administering the power. Some claim^ that, it is extremely dif- ficult to secure a fair administration. Granting this to- be the case, still it is a matter which should be left to the discretion of Congress. Provided that the administrative difficulties outweigh all the advan- tages in time of peace, surely this is no reason for withholdin,g the power when Congress may judge it necessary for the preservation of the Union. But we maintain that the fact that the tax is in use in foreign countries affords at least a strong presumption that Congress can de- vise an effective machinery for collecting it whenever it is deemed nec- essary. We admit that there are certain difficulties in assessing and col- lecting an income tax, but we take the position of Senator John Sher- man, who once said, "There are no difficulties in the assessment and collection of an income tax which I cannot point out for any other lax." Consider our present tariff system^. Would it ever have been ^idopted if submitted to the same searching analysis as the income tax ? Think of the huge expense of maintaining the customs houses on our Loundaries ; the opportunities for evasion and graft ; the inquisitor- ial nature of the system, requiring an examination of every pack- age that enters the country. Yet these obstacles have been fairly well overcome, and an effective machinery developed. We do not ■claim absolute perfection for the income tax. We do demand a fair judgment 011 its relative merits. And more, we maintain that there .iire certain real advantages which this tax has over our present meth-- ods. In the first place it is cheap to collect. The price of collecting the customs duties in this country for the last forty years has been about 3 1-2 percent. Figures gathered from all over the world where an income tax has been used return an average cost of collec- tion for the same period of but 2 percent. In England it is even lower. We have the machinery for collecting it almost ready to our hand. The (...refull> assembled statistics of the census would afford a basis for le\ying it. Internal revenue tax bureaus and post offices jjive us the means of reaching practically every citizen in the country. It is therefore evident that the tax would hardly be more difficult to ■collect than the customs and internal revenue duties already in force. In the second place die tax would be as easy of assessment as r.ny other tax. We do not maintain that there would be no evasions. Every tax is evaded. No amount of vigilance on the part of our customs officers is able to detect every case of smuggling. A new .56 THE INXO^IE TAX. law must develop its own machinery which becomes more and more ■perfect each successive year. liut although we cannot entirely eliminate the opportunity for ■evasion we can greatly restrict it. Should a bill be passed imposing an income tax as soon as this power is granted to Congress, it is im- possible to foresee exactly what method they would take for assessing the tax. The probability is that they would adopt a_plan similar to those in use in foreign countries. The principle of stoppage at the source as exemplified in the British system requires that the income be taxed before it comes into the hands of the person entitled to it. Com- petent authorities estimate that by this method, whereby all possibili- ty of evasion is obviated, three-quarters of the tax could be collected. For the remaining quarter we should have to resort to some method of personal declaration together with appraisal by government officials. We would have a system very similar to the methods of our customs houses. We have shown that the Federal Government should possess this power, because it is politically expedient, economically just, and generally desirable. These are the three necessary requirements for everv power which Congress now has. The feasibility of an immedi- ate imposition of the tax is something which the legislators must de- cide. The power so to decide should undoubtedly be theirs. THIRD NEGATIVE SPEECH. H. M. Potter, 'lo, of Harvard. Mr. Chairman, Ladies and Gentlemen: The TSTegative originally laid down the proposition that the consti- tution should not be amended until the power tO' be conferred by that amendment should be immediately exercised. We believe that the power to impose a federal income tax should not now be exercised, because, as we ha,ve endeavored tO' explain, it is unnecessary and it is impracticable. But even if no great constitutional principle were at stake, even if there were a necessity for tlie income tax, and even if it had been shown to be amenable to collecition, still the proposition of the gentle- men from Princeton must be rejected. The tendencies of the times, coupled with the extreme power which this amendment would confer upon congress, would inevitably and immediately create two tremen- dous dangers, which would threaten the prosperity — aye, even the life of this republic. The tendencies to which I refer, are those of public extravagance and the divergence of sectional interests, and the dangers of which I speak are those of an increased reckless expenditure on the part of the federal government, and the vicious complement thereto — •class legislation. THE INCOME TAX. 57 It is an accepted ethical dogma, that to fail to be economical is to fail to be moral. In this respect the American people are highly im- moral, for our lavish extravagance has become the wonder of foreign nations. This tendency is no more strikingly illustrated tlian by the an- nual anomaly, with which we come face to face, of a billion dollar ses- sion of congress. It sounds quite satisfying to say that we are a billion dollar nation, but when we look back and find that our expenditures have almost doubled in a short decade, and learn that we now expend more than ten dollars a year, over and above all state and local outgo, for every man, woman and child within the country, we must realize that we really are spending' too much money. I am aware that we have undertaken a system' of national defense which requires great outlay; with that I do not now find fault, for the upkeep of an army and a navy is a national affair. But I do complain of certain kinds of expenditures so numerous each year, in the making of which the federal government introduces itself into that sphere properly reserved to the staites. Such expenditures, for example, are those for the irrigating of countless arid fields in the west, and for the dredging of numberless little streams all over the country, streams which were never intended by nature to bear a row-boat upon their surfaces. Such expenditures as are the direct out- come of that abominable legislative practice termed log-rolling, and as are incorporated in the soi-called omnibus bill, and rushed through congress on the last day of every session, without having been given so much as a glance by most of those who vote upon the bill. When the leader of the administration in the senate, Mr. Aldrich, can stand upon the floor of that chamber and declare that the federal government should be administered for an amount $300,000,000 less than that which is now annually expended, and not have his approxima- tion, disputed by any considerable number of public men; when, fur- thermore, the President of the United States goes to the extreme end of declaring as he did in his Newark speech of Feb. 23, that "*■ * * everyone familiar with governmental method's now in vogue must rec- ognize the possibility of reforms leading to great economy ;" I say, when these evidences are before us, it seems a waste of time to recite further instances of useless expenditures, to prove their existence. Everyone must realize the ridiculously benevolent attitude which congress has assumed, — of malice toward none and an appropriation for all. With a congress, of this complexion, then, it is no cause for won- der that a deficit has arisen in the past few years. But mark you what congressmen- do when such a deficit appears. Do they — as any sensible business man would do, as any well conducted firm would do, — seek to discover the cause of the unnecessary leak, or endeavor to reduce the expenses of conducting the business? Oh, no! Like spoiled children, they begin to cry for more money, to beg for a new taxing power ; and the gentlemen of the affirmative would humor their whims and en- courage their extravagances. They would turn over to congress a new 58 THE INCOME TAX. and unlimited power of taxation ; they would throw wide the doors to the richest storehouse of wealth this nation knows ; they would give to congress ithe power to thrust its hands into the pockets of the capable, the energetic, the wealthy men of this country, and expend that bounty for the benefit of all alike, — a total disregard for that institution for the protection of which this government was established — the institu- tion of private property. Is that the way to reduce our expenses ? Is that the way to secure a conservation of our resources ? Is that the way to instill into the hearts and minds of the members of our national ap- propriating body the fundamental truth', that, in a republic, the strength and simplicity of the government depend upon the economy of its administration? To confer this new power upon congress could but enhance our already too' great tendency to- the path of extrava- gance, leading directly to eventual decadence. This is the first great danger in the income tax amendmient, and it suggests the second, — class legislation. In the bestowing of a new power upon congress it behooves us to discover, not so much what congress ought to do with that power, as whait congress is most likely to do with it. Why was it that the fath- ers and framers of the constitution saw fit toi insert this direct tax ap- portionment clause in that document, (thereby refusing to deposit com- plete and unlimited power of direct taxation in the hands of congress ? They must have had a reason for so doing. Yes, and a good onet They foresaw that with the inevitable growth of this country tO' the south and west, and under majority rule and universal suffrage, that sooner or later the representatives from' the newer sections were bound to outnumber those from the older states in the senate, and, in all probability, in the House. So, they adopted this clause as a pro- tective safeguard for the minority against the majority, under a dem- ocratic foTmi of government, practicing universal suffrage. And well did they foresee. For no longer ago than the year 1894, an attempt was made upon the part of the majority to unduly tax the minority. In that year, President Cleveland recommended the passage of an income tax, not, as he distinctly stated in his message to Congress, for the purpose of raising revenue, for the other means of taxation sufficient to meet the needs. His purpose was to redeem a party pledge. The bill was introduced in the House by a Western Represen- tative and in the Senate, and it was passed by the unanimity of the Western and Southern votes: But the most remarkable thing about that bill of '94 was that the exemiption from paying the tax was placed on incomes as high as $4,000, without a precedent in this or any ether country. We had not known an exemption higher than $2,003. England's exemption, for example, was $850. Four thousand dollars, mind you, when such an income, at the average rate of in- terest of five percent, represents an accumulation of $80,000! Is a THE INCOME TAX. 59 :.man in that condition a suitable object of charity, for exemption from taxation is nothing less than charity? There could have beei. but one object in imposing such a hisph exemption in the tax of '94 — to permiit the citizens of one section of the country, although well .-able to pay something, to shift the burden of the income tax upon -the citizens of another section of the country. Everyone must have remembered that, under the income tax of the Civil War with its low exemption four-fifths of the whole had been collected from the four eastern states of New York, New Jersey, Massachusetts and Pennsylvania. Everyone must have seen that under the tax of '94, ■oncithird of the whole was to come from the state of New York -alone. The Senators and Representatives from the Eastern States realized the excessive burden which this income tax would place Tjpon the people of their section, and they proteated. But to no avail. The majority rules in our Congress, and the majority came from those states which would not have paid a majority of the dollars to be •collected under this income tax. The President recognized the iniquity of the bill, and he refused to sign it. It became a law without his .approval. And the people of the Eastern States were saved from the injustice of the measure only by a timely decision of the Supreme Court declaring it to be unconstitutional. I care not, for my present purposes, whether there is a Con- gressional division of East against West, or whether the wealth has "been accumulated in the North or in the South, it nevertheless re- mains an indisputable fact, that w hen you confer upon Congress the power to impose an income tax not apportioned among the states ac- •cording to population, you give to the poor the power to tax the rich without limit, you set up for spoliation, at the hands of one class another class which has attained its position by ability, thrift and industry. That's class legislation! Class legislation of the most vicious sort, of the sort against which there stands that monumental warning of the result of inequality in taxation— the French Revolu- tion. The Negative pleads for the avoidance of these tremendous -dangers of public extravagance and class legislation. The Negative pleads for the maintenance of our Constitution in its fundamental parts just as it is, until there has arisen a necessity for its change. The Negative pleads for the retention of our present system of taxa- tion, imperfect though it may be, until there has been presented for ■our consideration another system which will compare favorably with the old one in practice, and which can be shown to some reason- able degree to be capable of collection. How the income tax is to Jje collected still remains a vague and unfathomable problem. 6o THE INCOME TAX. FIRST NEGATIVE REBUTTAL. J. de M. Ellis, 2L., of Harvard. Mr. Chwirnicm, Ladies and Lretitlemen : The case of the affirmative presents a struggle to answer the two questions : "What is the necessity for the power to levy an income tax," and "How such a tax is to be collected?" Their attempts to find a necessity have been a constantly retreat- ing sequence of positions each weaker than the former. The first position taken was that the present deficit demanded an immediate increase in revenue that could only come from an income tax. But we have shown that this deficit is no cause for alarm as 26 per-cent of the years of our history have been years of deficit. Uf>qn each oc- casion the country has retrieved itself and there has been no halt in our national growth. We have also shown that upon the authority of the present administration this deficit under present conditions will ■disappear within a year. Federal revenu,es are increasing showing this year a large surplus over the returns for a corresponding period last year. But even if this deficit did exist and could not be covered by our present revenue ^system, it does not follow that we must have an in- come tax. We have pointed out the extravagances of Congress, how it is prone to spend all its money and then cry for more. • The affirmative would give it more money to play with, would open to it the entire storehouse of private property. It is strar^ge that the idea of economy has never been thought of. Yet that seems a more plaus- ible solution of a deficit problem than giving Congress additional revenues. Finding no true necessity in the present deficit the affirmative have shifted their ground and say that we need the power in order that we may use it in case of war. There is notliing at present to indicate a war in the near future. But even if there were such a possibility we have shown that the income tax is a most inefficient measure. A tax that yields only 1.6 percent of the revenue needed is a weak prop in an emergency. A tax that has only yielded nine one-hundredths of the revenue received during a war period can scarcely be counted upon to aid our country in the crisis of war. Retreating from- this position the affirmative stand in the last ■ditch and declare that it is only reasonable and just that Congress be given all taxing powers. The only attempt that has been made to explain how the income tax is to be collected is a reference to the meth- od of "stoppage at the source" now used in England. Even could this plan be operated in the United States there would still be approx- imately one fourth of the incomes, those from personal services, that can only be reached by personal declaration and all the objections to that method would apply as to this one fourth. As to the remainder. THE INCOME TAX. 6i ■"stoppa,g;e at the source" is the complete working out of the method 'Of official collection and is subject to all the objections found to obtain ■against a bureaucracy of tax gatherers. But a more serious objec- lion arises to this method. The great advantage pointed out as to the income tax is that it makes men pay according to their ability. Now a man's ability to pay is measured not by his gross income, but by his net income. "Stoppage at the source" makes no attempt to levy upon •an individual's net income. In fact, the tax is collected with no refer- ■ence to the individual's ability to pay but upon the gross sum of mon- «y he receives in a given time thus doing away with the ideal of pay- ing taxes according to ability. And yet the affirmative urge that their proposition is reasonable ! We maintain that nothing could be more unreasonable than to grant a power to Con,gress when there is no necessity for that power, that it is not reasonable to give Congress a power that it cannot exercise, to levy a tax that cannot be collected. We believe it the height of folly to amend the Constitution upon such doubtful grounds as are urged in '.favor of the income tax. SUMMARY OF FIRST AFFIRMATIVE REBUTTAL P. S. Wallers ' 1 0, of Princeton. Mr. Chairman, Ladies and Gentlemen : We of the affirmative are not demanding a new power. We are re-asserting the right to an old one. The right to levy an income tax is one of- the oldest principles of government. And in such things there is no reason to suppose that our government will be any more -extravagant than the governments of Europe. We have also endeavored to show that, though the necessity of the government may not be immediate, an emergency may arise at any time where it v.'ill be immediate, and we should not leave this emergency unguarded "gainst. And when this emergency does arise, we have shown you that the federal government will be unable to m.eeit it. For a^ we said, to pass an amendment of this kind and get it : approved by .three-quarters, the necessary proportion of the states, requires time, and time in an emergency would be the one thing lacking. In closing, I am very much surprised that the negative should •venture to drag in the Constitution, for there is nothing more utterly foreign to the issues of this debate, nothing as we have shown, more -utterly irrelevant to the present discussiojj. SECOND NEGATR'E REBUTT.\L. H. H. Breland, '12, of Harvard. Mr. Chairman, Ladies and Cattlemen : The gentlemen of the affirmative have expressed surprise at the 62 THE INCOME TAX. fact that the Constitution has been brought into the discussion. It is at least pertinent to inquire why he introduced the subject if he is so surprised at its being raised. Is he surprised at his own argument? In his opening speech, the gentleman will rememiber he argued that this income tax power was originally given to Congress by the Constitution, that it was in effect, taken out of the Constitution by the Supreme Court in 1895, and that, therefore, this power should be re- stored to Congress by an aniiendment to the Constitution. Yet, ladies and gentlemen, he says he is surprised that any reference has been made to the Constitution at all ! The second speaker for the affirmative in attempting to refute our argument that the Constitution should be preserved intact has asked, "Why be bound down by a blind, legal document?" W-e shall say in reply only this, that when one dismisses all constitutional considerations by merely denouncing that instrument as a "blind, legal document,'' he had better be careful least he awaken the suspicion that he has located the blindness in the wrong place. You have been told by the affirmative that the direct tax clause was merely a compromise over slavery and by virtue of the abolition of that institution, is now obsolete. We admit that this clause was a com- promise over slaves but not over slavery — over persons but not over an institution. The abolition of slavery, then, so far from' rendering the compromise obsolete has made it all the more necessary. If there was need of a clause to prevent the more populous states from taxing unduly the smaller ones, when five negroes counted for only three whites, how can that clause be obsolete when five negroes count for five whites? The North feared that she would be unjustly taxed by the South if slaves were counted as a basis of Congressional repre- sentation, but at last a comproimise was effected by which the South was given representation for three-fifths of her slaves and direct taxes apportioned according to population. In this way, the state that had more representatives in Congress and hence more f>ower to levy taxes would also have to bear those taxes they levied in propor- tion to their greater influence in having it imposed. This protected the smaller states against unjust taxation by the large ones. The necessity for such protection is certainly not lessened by the abolition of slavery and the consequent increase in the size of the basis of representation in Congress. The affirmative has rested its whole case on the need of an income tax for revenue and for brit^ing about justice in our present system of taxation. If we can remove these two supports, their case will be "suspended in the air." Our argument already advanced that we do not need an income tax for revenue has not been successfully con- troverted. The present deficit is being used as a bug-bear ; compared with deficits in other years, it is small. The president predicts an THE IXCOAIE TAX. ( early surplus. As for bringing justice, a system of taxation which falls on such srrtall per cent of the population, which sets up one section of the coui try for taxation by the' other cannot be called just. This tax is gros ly unjust, for from its very nature it falls heaviest upon the mo honest. Indeed, no one will ever pay an income tax except thoi who are too honest or too stupid to evade it. It is a tax on honest; but ladies and gentlemen, honesty ought not to be taxed ; it's one of oi infant industries and ought to be protected. SUMMARY OF SECOND AFFIRMATIVE REBUTTAL. S. A. Hunter, 'lo, of Princeton. Mr. Chairman, Ladies and Gentlemen : — There is no more oppO': tune time in the debate than this to take up the question of the defic: and its relation to the advisability of an income tax. In the past tw years our national expenses have eaten up a capital of two million doii lars. This is decidedly not caused by extravagance, as a widesprea opinion has it, for coming down to facts and figures, the per capit expenditure in America is but little over half that in England ; it i! caused by the familiar, world-wide problem of increased expenses, i The chief reason why this increase can most justly be met by thi income tax, is because such a tax does not discriminate against th'i class of small means. Though on the one hand, the negative readil]' admit that a tax must be raised, on the other, they cannot justify evci our present tariff, for its greatest revenues come from articles mos used by the poor. We of the affiTmative are far from asking for <| ^ specific tax, with specific exemptions. What we do ask for is a jusll- tax, a tax that will force every man to share his government's exi| ; penses in proportion to his means. THIRD NEGATI\'E REBUTTAL. By H. M. Potter, 'lo, of Harvard. Mr. Chairman, Ladies and Gentlemen : The gentleman preceding me has correctly stated that sectional prejudice has arisen under our present taxation system, and he has correctly inferred that "gentlemen from the south" are able to reahze j the existence of such prejudice as well as sane persons from any other section of the country. But the negative has not undertaken to defend the present system. We only attack the income tax, because it would clearly tend to increase the sectional prejudice which is already too widespread. We cannot see the wisdom in endeavoring to put out the fire by heaping on more fuel. Here then is the position of the negative. We originally laid down the proposition, — and it has remained undisputed, — that the con- stitution should never be amended until the power to be conferred by 64 THE INCOME TAX. that amendment should be immediately exercised. We then submitted the belief that the power to levy an income tax should not now be exercised, because it is unnecessary, and because it is impracticable. It is unnecessary to meet a current deficit, for that deficit is negligible. It is unnecessary as a war emergency, because our most recent conflict — the Spanish-American war — was admirably financed withouit an in- come tax. It is impracticable, in that it must be collected by one of two objectionable methods; — ^the first, a bureaucratic army of tax gather- ers, the very presence O'f whom in any community would be abhor- rent to the instincts of an American citizen ; the second, voluntary dec- laration, which would obviously lead to wholesale evasion. In short, the income tax cannot be efficiently collected. Then we have tied to their proposition two tremendous weights, from which the affirmative cannot shake loose the income tax — those dangers of public extrava- gance and class legislation. The negative believes that we should avoid such dangers as long as it is possible. The negative believes that we should never adopt a new form of taxation which does not even compare favorably in practice with our present defective one ; a new kind of tax which is not subject to collection to any reasonable degree. The negative be- lieves that we should retain intact in its fundaments that sacred safe- guard of the American people, that bulwark of the American republic — the constitution — until there has arisen an actual crying necessity for its amendment. That necessity the negative is unable, by any stretch of the imagination, to discern. SUMMARY OF THIRD AFFIRMATIVE REBUTTAL. C. Belknap, '12, of Princeton. Mr. Chairman, Ladies and Gentlemen : The burden of proof obviously falls on the Negative in this argu- ment. It is they who are taking the radical staiid; we of the af- firmative are merely advocating a restoration to Congress of a power that Congress formerly held and successfully exercised, a power at I)resent in actual use by seventeen of the world's foremost nations. The income tax is a resource that the stress of war may necessitate sud- denly in the future, whereas the delegation of this power to Congress entails the slow procedure necessary to ratifying a Constitutional amendment. Moreover, if "feeventeen nations can use it. Congress should certainly be able to devise a system that will work. Its uses, in addition, are evident enough when we really consider what it means that in one year this tax raised seventy-itwo million dollars,, while the stamp tax raised but sixteen millions. Economy, too, favors the income tax, for under its provisions the popular Congressman will not be the one who secures appropriations,, but if- at man who can cut down appropriations and thereby reduce the taxes for rich and poor alike. ESTABLISHED 1818 jentbmen's ^nttsljtnj BROADW>>Y COR. TWENTY-SECOND ST N£W YORK. CLOTHING Suits and Overcoats for College and Vacation. J'' Flannels for tennis, golf, \ and so forth. FURNISHINGS Attractive displays of , English Shirts, Neckware, Gloves, and so forth. HATS Latest Shapes from London. and Stray*' Hats from England and the Continent. Polo Caps, Helmets. SHOES Conforming to the English Models. Durable, Easy Fitting, Not Expensive. 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