HJ
4652
.A22
1916
Income Tax
U.S. Congress. House
B 543489
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1837
434
ARTES
LIBRARY
UNIVERSITY OF MICHIGAN
VERITAS
SCORED FOR
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431-QUERIS PENINSULAM AMCNAM
CIRCUMSPICE
INCOME TAX
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LUCION
HEARING
BEFORE
THE COMMITTEE ON
EXPENDITURES IN THE TREASURY DEPARTMENT
HOUSE OF REPRESENTATIVES
ON
H. RES. 221
DIRECTING THE SECRETARY OF THE TREASURY TO SUBMIT
CERTAIN INFORMATION PERTAINING TO THE
COLLECTING OF THE INCOME TAX
WITNESS, BASIL M. MANLY
STATEMENT BY HON. EDWARD KEATING
JUNE 1, 2, AND 17, 1916
*
WASHINGTON
GOVERNMENT PRINTING OFFICE
1916
·
HJ
465
A 22
1916
COMMITTEE ON EXPENDITURES IN THE TREASURY DEPARTMENT.
HOUSE OF REPRESENTATIVES.
SIXTY-FOURTH CONGRESS.
C. O. LOBECK, Nebraska, Chairman.
2
CHARLES D. CARTER, Oklahoma.
JESSE D. PRICE, Maryland.
HENRY W. TEMPLE, Pennsylvania.
MAHLON M. GARLAND, Pennsylvania.
JAMES H. HANLEY, Clerk.

INCOME TAX.
COMMITTEE ON EXPENDITURES
IN THE TREASURY DEPARTMENT,
HOUSE OF REPRESENTATIVES,
Thursday, June 1, 1916.
The committee met at 10 o'clock a. m., Hon. C. O. Lobeck (chair-
nan) presiding.
The committee had under consideration H. Res. 221, making
ertain inquiries of the Secretary of the Treasury in regard to in-
ome-tax returns.
There was present before the committee Mr. Basil M. Manly, of
Washington, D. C.
The CHAIRMAN. The committee will come to order. Gentlemen,
he committee is called together this morning for a preliminary hear-
ng on House resolution 221, introduced by Mr. Keating on May 3,
1916, and which has been referred to this committee. We are all
familiar with the resolution and, without objection, it will be placed
in the record at this point.
(The resolution is as follows:)
Resolved, That the Secretary of the Treasury be, and he is hereby, directed
to furnish the House with a statement showing the following facts:
First. Whether or not it is true, as stated in published articles in the press
by Basil M. Manly, that approximately $320,000,000 is being annually withheld
from the Treasury of the United States by income-tax frauds and evasions.
Second. Whether or not it is true that the total amount of wages and
salaries paid in the United States in nineteen hundred and fourteen was ap-
proximately $15,000,000,000, and whether of this sum at least $500,000,000 was
paid to men who received salaries over $3,000; and whether or not of the five
hundred thousand persons shown by the census of nineteen hundred and ten
to have been engaged in occupations from which their income was derived
principally by fees the income of said persons which was more than $3,000
per annum would total $300,000,000 per year; and whether or not the income
derived from the ownership of property and the conduct of business amounts
to $30,000,000,000 a year, and, of this, whether or not two-thirds was received
by persons whose annual income was more than $3,000; and whether or not
the estimated amount of income received by persons who should be subject to
the income tax was, therefore, $20,886,000,000.
Third. Whether or not of the above sum, after deduction for taxes and
depreciation, the total remaining taxable income subject to the income tax
could be reasonably estimated at $16,420,000,000; and whether or not, after
deducting exemptions of $3,000 in the case of unmarried persons and $4,000
in the case of married persons, the total remaining income subject to the income
tax would be $14,525,000,000.
Fourth. Whether or not, estimating a reasonable supertax on a proper pro-
portion of said income, the total yield from the income tax should approximate
$361,250,000; and whether or not at least $20,000,000 of taxes on speculative
profits should also be included.
Fifth. Whether or not, therefore, it is reasonable to suppose that the United
States Treasury should be in receipt of $401,250,000 annually from income taxes
instead of $80,190,000 actually collected.
3
4
INCOME TAX.
Sixth. Why the Secretary of the Treasury has not recommended to ti
President that all income-tax returns be made public in accordance with t
authority contained in article (d) of section G of the income-tax act, in or
that fraud may be checked.
I will state that Congressman Keating will not be present th
morning, on account of another hearing on a bill in which he w
interested, but that Mr. Basil M. Manly, whose report that he h
been making to the public is the basis of this resolution which Co
gressman Keating has introduced, is present, and I think it woul
be well to hear him in such an opening statement as he thinks woul
be of benefit to the committee and at the same time in support
the resolution.
Mr. Manly, you will be sworn.
(Mr. Manly was sworn by the chairman.)
Mr. Manly, please give us your full name and your residence.
STATEMENT OF MR. BASIL M. MANLY, 1853 IRVING STREET NW
WASHINGTON, D. C.
Mr. MANLY. My name is Basil M. Manly, 1853 Irving Street NW
Washington, D. Č.
The CHAIRMAN. How long have you lived here in Washington?
Mr. MANLY. I have lived in Washington, you might say, off and or
since 1908.
The CHAIRMAN. What is your occupation?
Mr. MANLY. My occupation is economist and statistician.
The CHAIRMAN. In what particular lines?
Mr. MANLY. I think I could answer that perhaps better by giving
a brief account of my experience.
The CHAIRMAN. Well, I might ask you this question then: Give
your experience as an accountant and actuary.
Mr. MANLY. At the present time I am employed by the News
paper Enterprise Association, which is an association that furnishes
features of all kinds for a large number of papers which take the
service. I am in charge of what they call the news economics de-
partment, which conducts investigations which seem to be to the
interest of the public, and then publishes the results.
The CHAIRMAN. Under whose employ are you, then, directly?
Mr. MANLY. I am under the direct employ of Mr. S. T. Hughes,
editor of the Newspaper Enterprise Association.
The CHAIRMAN. Where is that located?
Mr. MANLY. It is located at Cleveland, Ohio.
The CHAIRMAN. Have you any knowledge as to how long this
association has been in existence?
Mr. MANLY. A great many years. I don't remember the exact
date of its establishment, but it was created originally to supply
feature stories to what are known as the Scripps papers-about 25
newspapers owned by E. W. Scripps-and then the service was
expanded to sell that same service to outside papers. It has been
in operation for a great many years. There are about 195 papers at
the present time which take the service.
Now, prior to that I was director of the Commission on Industrial
Relations, which was in existence from 1913, October, to August.
1915, when it expired by statutory limitation. As such director I
INCOME TAX.
5
vit had charge of all the investigations of the commission, and wrote
in the report which has since been published by authority of Congress.
Prior to that time I was in the employment of the Department of
nt Labor as an expert special agent.
he
The CHAIRMAN. When?
ce.
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Mr. MANLY. From January, 1908, to October, 1913.
h (
The CHAIRMAN. During that time what was the scope of your in-
- wvestigations?
S We
Mr. MANLY. During that time I conducted a number of investiga-
tions for the bureau. I might mention the more important ones.
por
First was the investigation of woman and child labor, where I de-
voted my attention particularly to the glass industry, and largely
wrote the report on that subject.
The next investigation of any consequence was the investigation
into the conditions of employment in the iron and steel industries.
The CHAIRMAN. What year was that?
Mr. MANLY. That was begun in 1910, by direction of the Senate,
and continued through 1912. The investigation was very extensive,
et NT and I had complete charge of that investigation and wrote all of the
report except the section dealing with the question of accidents. The
ton! report was published in three volumes by order of the Senate.
and
The CHAIRMAN. Then was your work statistical in that line?
Mr. MANLY. My work there was purely statistical.
The CHAIRMAN. Did you do anything in the line of actuary work
there?
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Mr. MANLY. Why, to this extent, that the investigation included
not only the question of wages but also the question of the relation
of wages to profits and cost and other questions of that kind, so that
I was obliged to go to the very bottom of the financial condition of
the companies affected.
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The CHAIRMAN. Had you had any experience in actuary work be-
fore that time?
Mr. MANLY. Not as a professional actuary. Following that, in the
fall of 1912, an investigation into the increase in the prices of anthra-
cite coal was ordered by the House of Representatives, and I was put
in charge of that investigation.
The CHAIRMAN. Will you explain fully your connection with that
investigation?
Mr. MANLY. That investigation was made following an increase of
approximately 25 cents per ton in the cost of anthracite coal, by the
coal-producing companies in eastern Pennsylvania, in the authracite
region.
The CHAIRMAN. You say that the cost of coal was increased?
Mr. MANLY. The wholesale price of coal to the consumer was in-
creased 25 cents a ton, following an increase in the wages of the
miners.
The CHAIRMAN. The result then was that the increased cost of coal
was due to the fact that the miners got an increase in wages?
Mr. MANLY. That was the claim of the coal companies; and Con-
gress directed an inquiry to determine to what extent that claim was
valid. They wanted to know the causes of the increase, and whether
or not an increase of 25 cents a ton was justified by the increase in
wages. That investigation was almost entirely a matter of determin-
ing costs of production and drawing deductions from the cost figures
6
INCOME TAX.
furnished by the companies. The result of that investigation was
published in a House document, the title of which is Increase in Price
of Anthracite Coal in 1912.
The CHAIRMAN. What suggestions did you make in regard to that?
Mr. MANLY. I suggested that the whole matter needed careful
study by a congressional committee which could go into fields that I
was not authorized to go into the question of combinations and the
question of establishing a fair price for anthracite coal. That recom-
mendation was made necessary because of the wide divergence in the
costs of production for the different companies. I found that certain
companies were producing coal at a cost which is applied to other
companies-smaller companies-would bankrupt them, because they
had poorer coal lands; and if you fixed a fair price for the com-
panies that had the poor coal lands you were simply handing the
favored owners-who were the large railroad companies-thousands
of dollars every year. If, on the other hand, you fixed a price that
was fair, gave a fair profit to the railroad coal companies, you would
bankrupt a large number of companies which had inferior lands—
companies which had come into the field later.
Those were questions which I could not determine. I answered the
main question, though, that was propounded by Congress in this way,
that the increase in the wages of the anthracite coal miners averaged
approximately 9 cents a ton, taking all the companies together; that
the average increase in the price of coal to the consumer-that is, the
wholesale price-was approximately 25 cents a ton, leaving a margin
of 16 cents a ton for the coal operator, and that amounted, for the
average year's production, to something like $12,000,000 increase in
the total sales of anthracite coal.
The CHAIRMAN. And the consumer finally had to pay it.
Mr. MANLY. The consumer finally had to pay it.
The CHAIRMAN. That was profitable, then, to the larger companies?
Mr. MANLY. That was profitable to the larger companies, as is
shown by their enormous income since that time. And the very pre-
diction that I made at that time has since been shown by the very
large increases in their profits.
Now, might I say in that connection that the Attorney General, on
the basis of that report, has recently recommended that the Federal
Trade Commission take that question up and go to the bottom of it,
and either report to Congress or take such action as is within their
power to readjust the situation?
The CHAIRMAN. Did Congress take any action?
Mr. MANLY. Congress took no action. There was no one that took
the matter up and pressed it after that time. That was the last im-
portant investigation that I made for the Department of Labor.
The CHAIRMAN. What has been your further work?
Mr. MANLY. After that I went with the Commission on Industrial
Relations.
The CHAIRMAN. How did you get into that work?
Mr. MANLY. I was employed by unanimous vote of the members
of the commission.
The CHAIRMAN. Which commission do you refer to?
Mr. MANLY. The Commission on Industrial Relations. I was em-
ployed at first to direct one of the departments under which they
expected to conduct their investigations. That was supposed to be
the department of industrial investigation.
INCOME TAX.
7
The CHAIRMAN. How long did you work at that?
Mr. MANLY. I was in charge of that department until about.
March, 1914.
The CHAIRMAN. Commencing when?
Mr. MANLY. Commencing October, 1913. Then the commission
decided that the most important part of their work would have to
be done through the medium of public hearings, and they directed
me to take charge of the preparation and handling of the public
hearings of the commission, and I did take charge of the hearings
and handled the preparation for the hearings and the selection of
the subjects that were to be inquired into, and the calling of wit-
nesses, the outlining of the questions, and all matters of that kind
until March, 1915, when the director of research investigation, Mr.
Charles McCartee, resigned. I was then elected unanimously by
the members of the commission to take charge of all the work of
the commission.
The CHAIRMAN. Well, who was this commission?
Mr. MANLY. This was a commission headed by-a commission
created by act of Congress in 1912, but which did not go into effect,
owing to delay in appointments, until 1913. The chairman of the
commission was Frank P. Walsh. There were two members of the
commission representing the public, Prof. John R. Commons and
Mrs. J. Borden Harriman; three members representing the employ
ers of labor, Mr. Harris Weinstock, Mr. S. Thruston Ballard, and at
first Mr. Frederic A. Delano, who was later succeeded by Mr. Rich-
ard H. Aishton upon Mr. Delano's resignation; representing labor
was Mr. James O'Connell, Mr. John B. Lennon, and Mr. Austin B.
Garretson.
The CHAIRMAN. Who appointed these men?
Mr. MANLY. They were appointed by the President of the United
States-President Wilson.
The CHAIRMAN. So that it came under an act or resolution of Con-
gress?
Mr. MANLY. Yes, sir. I might say that the commission was cre-
ated under the administration of President Taft, but appointments
were not made until the administration of President Wilson.
The CHAIRMAN. Well, all this work, which is a matter of record,
in your opinion has qualified you to look into the matter of this
resolution in regard to the method of collecting the income tax?
Mr. MANLY. I believe so.
The CHAIRMAN. You think it has given you such experience as
warrants you in formulating these opinions that you give to the
committee?
Mr. MANLY. I believe that is true, for this reason, that the collec-
tion of the income tax is primarily a matter of two things: First,
ascertaining who should be taxpayers and, second, ascertaining what
the probable income of those individuals is.
The first matter is a matter of ordinary investigation, of knowing
statistical sources, knowing the material that is contained in the
various Government reports, with which my acquaintance has been
very extensive; and, second, the matter of ascertaining what the
probable income not only of individuals, but of the income-tax payer
collectively is, which is largely a matter of statistical deduction in
the absence of the accounts which have never been made public by
the Treasury Department.
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INCOME TAX.
The CHAIRMAN. From what sources did you get this information?
Mr. MANLY. I would be very glad to state the way in which this
whole matter came about, and the way in which I went at it.
The CHAIRMAN. Very well, then, just go ahead and make your
statement.
Mr. MANLY. I can make a statement which I think will cover both
points in your mind; first, how it came about; and, second, how I
proceeded.
Through the agencies of the Newspaper Enterprise Association and
the Scripps newspapers, the men that direct that organization be-
came convinced some time last summer that there were very large
evasions of the income tax. They knew of various individuals who
were not paying that tax, or who at least were publicly boasting that
they did not pay that tax. They knew of large amounts of property
which they believed were being taxed at very much less than their
actual income; and in other ways such as a newspaper has at its com-
mand they became convinced that this was a matter that merited
public attention.
The Newspaper Enterprise Association had strongly supported the
income tax at the time that it was introduced, and was interested from
that standpoint in the success of the tax.
The CHAIRMAN. Isn't it true that the people of the country were
interested?
Mr. MANLY. Surely; but I was making that explanation to show
why they were interested in following up the program which they
had started.
When I completed the work for the Commission on Industrial Re-
lations they invited me to make a preliminary investigation to ascer-
tain whether the situation disclosed by these sources of information
indicated any large amount of evasion, and I took the matter up
and went first to the Secretary of the Treasury and discussed it with
him. He told me that there were unquestionably large evasions of
the tax-that they had no method by which they could ascertain what
the evasions amounted to, and only hoped that they would be able
to devise some method by which this could be carried on, with a view
of ascertaining what the evasions probably were and of collecting
the tax and imposing penalties in connection with the evasions.
I then asked for permission to secure such information as the
Treasury Department could give me, under their interpretation of
the law, which, under the regulations that had been issued, prohibited
access to individual returns.
Mr. GARLAND. Do you know who defined the regulations on the
subject?
Mr. MANLY. I presume the Secretary of the Treasury. They were
issued under his name.
I then interviewed the various officials who had direct charge of
the collection of the income tax. Commissioner Osborn at the time
was out of town and I did not see him, but I saw Mr. Speer, who is
head of the Income Tax Division, Mr. Lambert, who is charged with
the collection of the corporation taxes, and Mr. Boyd, who is charged
with the collection of the personal taxes. All of these men were very
frank in stating that there were unquestionably large evasions of the
tax, and giving me some of the evidence which had convinced them
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INCOME TAX.
9
that they were correct, chief of which was that whenever they checked
up returns simply at random they found a large number of evasions.
The CHAIRMAN. Did you also see Mr. McGinnis?
Mr. MANLY. No; I did not see Mr. McGinnis.
The CHAIRMAN. He is the head of the revenue agents.
Mr. MANLY. I did not see him. He is in and out of town, and for
some reason I did not see him.
Then I reported back to my association that the evidence was quite
conclusive that the attention of the public should be directed to this
matter, and that we ought to get all of the information that we could
as to the probable amount of the tax that was being evaded; and they
authorized me to go ahead and go into the matter as thoroughly as
I could.
I then got permission to go to several of the local offices for the col-
lection of internal revenue.
The CHAIRMAN. What do you mean, collectors of internal reve-
nue?
Mr. MANLY. Collectors of internal revenue in the various districts
of the country.
The CHAIRMAN. Will you name some of those?
Mr. MANLY. I was able, however, to go only to New York, because
of the pressure of time on other matters. I was looking after the
publication of the report of the Commission on Industrial Relations
at the time, and was called before one or the other of the Committees
on Printing almost every week to take up matters in connection with
that, so that my time was very greatly curtailed.
I went to New York and saw the collector, Mr. J. Z. Lowe. I also
saw the revenue agents in charge there; and, in fact, interviewed
quite a number of individual revenue agents.
Now, the thing that impressed me there most was that the nearer
I came to the men that actually were out on the job collecting the
tax-the revenue agents and the collectors-the greater they believed
the evasions to be. That seemed to me to be well worth taking into
consideration. The men in the Treasury Department, who saw only
the gross returns, believed that they were large, but believed that they
were getting a substantial portion of the tax. The men that were
actually out, going around from day to day, making the examina-
tions and settlements, believed that there was an enormous amount
of tax that was getting away and that would continue to get away
until some changes were made in the system, which I will take up
at a later point. I got from them, without their disclosing any names
or addresses or anything of that sort, a number of statements of
evasions which had been encountered. They would tell me, for ex-
ample, that a corporation had been found to have done such and such
things in order to avoid the payment of its tax. They would tell
me that an individual who had so much income had done such and
such things and had been found to have concealed such and such
sources of revenue. They did not tell me in any case the names, and
I, of course, could not have used it anyhow, under the provision that
would penalize me by a year's imprisonment if I published any of
the names.
The CHAIRMAN. Why?
10
INCOME TAX.
Mr. MANLY. The income-tax act provides, under the amendment
to section 3167:
It shall be unlawful for any person to print or publish in any manner what-
ever not provided by law any income return or any part thereof or the amount
or source of income, profits, losses, or expenditures appearing in any income re-
turn; and any offense against the foregoing provision shall be a misdemeanor
and be punished by a fine not exceeding $1,000 or by imprisonment not ex-
ceeding one year, or both, at the discretion of the court.
So that was a locked door, not only to ascertaining the facts with
regard to particular individuals except by a method which I will
bring up later-but also to publishing it even if we got it, even if it
came into our hands in a perfectly legitimate way, so I could not fol-
low that end up at all.
Then the big question arose as to how much revenue the Govern-
ment was probably losing. That was entirely a matter of deduction
from the statistics which would go to show the income of the people
who might be presumed to be taxpayers, and we must frankly admit
that it is a matter of inference and deduction almost from start to
finish; but it is the only way in which we can get at those things. An
estimate is the best we can do to make the most accurate estimate
that we can, and proceed on the theory that it is right until it is shown
to be wrong, and by testing such an estimate by every way that we
can to prove it. So I went to work on that and put in some two
months perhaps nearly three months-with the assistance of three
or four different people who were employed to assist me.
The CHAIRMAN. Who were those people?
Mr. MANLY. Mr. J. H. Bradford, who had been an employee of the
Commission on Industrial Relations, and is a resident of Washing-
ton, D. C.; Mr. F. M. Kerby, who is on the staff of the Newspaper
Enterprise Association here in Washington; and I was given some
assistance also by Mr. Kenneth Payne, who is also a member of the
staff of the Newspaper Enterprise Association in New York. I was
also given a good deal of assistance in looking up material by my
wife, who has had some experience as a statistician.
The CHAIRMAN. Did you get any information from any of the
Government bureaus?
Mr. MANLY. I utilized only the reports of the bureaus. They were
able to give me only the material which they published, because the
other material-unpublished material-they almost always hold as
confidential.
The CHAIRMAN. Do you mean by these bureaus, bureaus of the
Treasury?
Mr. MANLY. I mean primarily the Department of Agriculture with
regard to the value of the production of the farmers and of their
probable incomes; the reports of the Bureau of the Census with re-
gard to the value of products and wages and salaries and matters of
that sort in manufactures, telegraphs, telephones, and street rail-
roads, and all sorts of public utilities; the Interstate Commerce Com-
mission with regard to the incomes and expenditures of the railroads;
the Department of Commerce in its various bureaus the former Bu-
reau of Corporations has published a large amount of various de-
tailed information regarding certain of the industries; and in the
Treasury Department, the Bureau of Internal Revenue, and other
Government publications which would throw any light on the amount
INCOME TAX.
11
of income that is produced in different industries, or which accrues
to particular individuals; for example, such as the investigations of
the so-called Money Trust Commission, which secured an enormous
amount of information with regard to stock holdings.
The CHAIRMAN. The Money Trust investigation was ordered by
Congress?
Mr. MANLY. It was ordered by Congress-the commission headed
by Mr. Pujo.
The CHAIRMAN. Well, did you get any information from reports
to Congress by these various departments?
Mr. MANLY. That was what I was alluding to by saying their pub-
lished reports. All of them, I believe, are reports to Congress, with
the exception of the Bureau of Corporations, which reports, I believe,
to the President.
The CHAIRMAN. These investigations that you made, then, led up
to these newspaper articles that you have caused to be published?
Mr. MANLY. Yes, sir. They led first to my estimate of the national
income as being $46,000,000,000 a year. They led next to the attempt
to estimate how much of that $46,000,000.000 probably went to indi-
viduals who should pay an income tax-persons with incomes over
$3,000. And after making those estimates and checking them up in
every way that was possible by comparisons with the known incomes.
in Great Britain and with the results of the probates of estates under
the inheritance taxes in New York, for example. Massachusetts, and
the records in Wisconsin, I then was ready to write my articles; and
those articles were written and were published in series through the
Newspaper Enterprise Association. They were sent out in what the
association called the "daily sheets "—that is, the sheet which gives
the material that is sent to all the newspapers, and the papers indi-
vidually are free to use any part or all of it, as they see fit.
The CHAIRMAN. Well, the comments and headings in large type
that appeared in these newspapers, were they of your suggestion?
Mr. MANLY. They were not of my suggestion. They were written
generally by the individual newspapers. There were some headings
on them as they went out of our office, but they were varied to suit
the taste and editorial policy of the individual newspaper.
The CHAIRMAN. In your opinion, were these headings intended to
reflect on the work of the administration?
Mr. MANLY. I don't think I would be in a position to interpret the
attitude of individual editors. There may have been editors who
wanted to reflect on the administration, but certainly the policy of
the Newspaper Enterprise Association in making the investigation
was not to reflect either on any individual connected with the Treas-
ury Department or on any administration. The whole purpose was
to present to the public such information as we had regarding the
apparent loss in revenue that the Government was suffering and to
direct attention to what we conceived to be the means of stopping
that loss.
The CHAIRMAN. Therefore the intention of these articles was to
assist the Government in collecting these income taxes that were with-
held?
Mr. MANLY. Purely and simply; and that was stated from the be-
ginning in the correspondence and interviews with Secretary Mc-
Adoo.
12
INCOME TAX.
The CHAIRMAN. Then your idea in presenting-in proceeding with
this investigation and these publications was really to assist the Gov-
ernment in securing the revenue that the Government was entitled
to, as intended by Congress under the income-tax provisions?
Mr. MANLY. That was the whole purpose.
Mr. GARLAND. You haven't added in this pamphlet here-you
haven't provided any means any measures of relief, have you? I
did not have time to go over this, so you must excuse me for asking the
question.
Mr. MANLY. Yes, sir; they have been outlined in two or three
places.
Mr. GARLAND. Will you point them out, please?
Mr. MANLY. I will in just one minute. In the article appearing on
page 10 I discussed what seemed to me to be the principal things that
needed to be done. I might say the article on page 10 deals with the
changes, the essential changes which I believe to be necessary in the
law.
The article on page 9 deals with the changes which I think are nec-
essary in the administration of the law. They are under the direction
of the Secretary and are not matters for congressional action.
The CHAIRMAN. You made a statement a while ago that certain
individuals and corporations boasted openly of not paying their
income taxes. Have you the names of such persons or corporations?
Mr. MANLY. They were known to the various individuals in con-
nection with our association. They are not known to me now, except
the general facts, because they would have been of no use to me. I
could not have published them if I had them.
The CHAIRMAN. Under this provision of penalty?
Mr. MANLY. Under the rule of the department.
The CHAIRMAN. Then, their statements have not been investigated,
so far as you know?
Mr. MANLY. Their statements have not been investigated.
The CHAIRMAN. Therefore there could be no results.
Mr. GARLAND. I see this provides here-you say:
First, the adoption and extension of the plans which are being urged by Secre-
tary McAdoo, providing a system of surveillance over every potential income
taxpayer.
Second, the adoption of the simple expedient of publishing the income-tax
returns, so that the Nation may know who are the honest taxpayers and who are
the dishonest tax thieves.
Then over here you say:
The question of income tax is entirely in the hands of the Internal-Revenue
Bureau, and its success as a revenue source depends entirely upon the efficiency
of the bureau.
I would assume from that that the bill in reality gives enough lati-
tude for the Secretary of the Treasury to direct plans for finding the
amount of income as he may see fit.
Mr. MANLY. That statement that you have quoted, that the collec-
tion of the income tax is entirely in the hands of the Internal-Revenue
Bureau, must be taken in connection with the article which begins on
page 7, in which the defects in the law-and which I had overlooked
in calling your attention to the recommendations-where the defects
in the law have been pointed out. Granted that you have a law-
INCOME TAX.
13
what I meant to say there is a law that is efficient-then the collection
depends entirely on the efficiency of the bureau.
Mr. GARLAND. Yes; I think that is right.
Mr. MANLY. And I have shown that the law itself was not adequate
to get in all the revenue.
Mr. GARLAND. In your examination of the methods of collection in
these different customhouses that you visited, did you find a uniform
sheet everywhere; I mean is there a uniform system used that is
directed by the Treasury Department?
Mr. MANLY. As I say, I was only able to visit the New York office,
but
my understanding from the officials here in the Treasury Depart-
ment is that there is a uniform system throughout.
Mr. GARLAND. I should think there would be.
Mr. MANLY. There is no question about that. Every form is num-
bered, and they have the most elaborate system of forms and methods.
Mr. GARLAND. Don't you think it is very much complicated as
well-the system?
Mr. MANLY. I do think so, but I do not see how you can very
greatly simplify it under this present law.
Mr. GARLAND. I know this, that while I have a very meager in-
come, I pay a small tax, but it certainly does keep me guessing at
times as to how I should fill out the different propositions in those
blanks.
Mr. MANLY. It is an extremely complex law, largely because of
the attempt to collect part of the revenue at the source and the
other part from the individual taxpayer.
The CHAIRMAN. But in some cases it has been called to my atten-
tion that those who were called upon to make their return on income
tax have paid even more than they were required to pay under the
law.
Mr. MANLY. I think there have been cases of that kind, without
any question, due to misinterpretation of parts of the statute. But
those are, I believe, absolutely insignificant cases as compared with
the whole sweep of the law. A man may occasionally pay $25 or
$50 more tax than he should-he will not pay $50,000 more simply
because he doesn't understand the law. When he gets up into the
class where he pays enough tax to count, he has two lawyers and
two or three expert accountants that go over the return before it
goes in, and he doesn't make any mistakes against himself.
Mr. GARLAND. I found that two different agents of the department
gave me different ideas of how I should fill out my form, and nearly
got me into hot water thereby.
Mr. MANLY. Was that in the first year?
Mr. GARLAND. No; that was last year. I went into the Pittsburgh
customhouse-
The CHAIRMAN (interposing). You mean the collector's office?
Mr. GARLAND. Yes. First, I think, I filled out one here and sent
it there. They informed me that it was wrong. I went home, then,
to Pittsburgh, and went in there and had the direction of a man who
is accustomed to that, who helped me fill out the blank. I filled it
out and sent it in here, and it was wrong, so I had to go and make
out another one.
The CHAIRMAN. I want to say to you gentlemen that the Treasury
Department, in a letter signed by Secretary McAdoo, dated May
14
INCOME TAX.
29, 1916, has written me a reply to my letter of May 5, inclosing
House resolution 221, introduced by Representative Keating, and I
think this letter ought to be placed in this first day's hearing, if it
meets with the approval of the committee.
Mr. GARLAND. Yes; I think it should be put in. Of course we
will consider it later.
The CHAIRMAN. To be considered later by the committee.
(The letter referred to follows:)
TREASURY DEPARTMENT,
Washington, May 29, 1916.
MY DEAR CONGRESSMAN: I have your letter of May 5, inclosing House resolu-
tion 221, introduced by Representative Keating on May 3, regarding alleged
income-tax frauds and evasions.
In reply permit me to say that the Treasury Department is enforcing the
income-tax law with all the vigor which the small force authorized by Congress
for the purpose will permit, and is making every effort in its power, with the
ineans at hand, to collect every cent due the Government.
In my annual report to Congress, submitted at the beginning of the present
session, I said:
"There has been a decided improvement, both in the administration of the
income-tax law and in the general knowledge and understanding of the law by
the public, which has simplified matters to a large extent, but there is still room
for improvement. Many inaccurate returns are made, some deliberately and
some ignorantly, and there are, without doubt, wholesale evasions of the law
throughout the country. The remedy for this is to clarify and strengthen the
law where needed and to provide a larger and more effective field force for the
investigation and checking up of income-tax returns and for the discovery of
those who are liable for the tax and have failed to make returns."
The remedy there stated is as true to-day as it was then. The essentials for
the effective enforcement of the law are the clarification and strengthening of
the statute, where experience has shown this to be necessary, and adequate
appropriations to permit the Treasury Department to collect the revenue. The
statement in my annual report mentioned above was accompanied with specifie
recommendations for amendments of the law, and these are now under considera-
tion by the Congress. I further recommended that the appropriation for the
income-tax field force for the next fiscal year be increased by $1,000,000 and the
office force by $90,000, but Congress has allowed only an increase of $440,000
for the field force and $40,000 for the office force. In addition to this, an esti-
mate was submitted for an increase of 40 clerks on the statutory roll, but only
20 were granted. I earnestly hope that the Congress may even yet grant the
remainder of the appropriation I asked for and authorize the employment of the
additional clerks required to administer the income-tax law.
This is a new law to the United States and it requires time to educate the
public to its provisions and to evolve an efficient system of collection. The
recommendations I made to Congress in the beginning of the session were based
upon the experience of the department in enforcing the law. This experience
has clearly shown that if the Government is to get all of the revenue due from
this tax, the Treasury Department must have an adequate office and field force
for the investigation of returns. For every dollar spent in this manner the
Treasury receives many dollars in return.
I can not too strongly emphasize the fact that a great weakness in the enforce-
ment of the income-tax law is the inadequacy of the force charged with the duty
of verifying and examining returns filed by taxpayers. Even with the inade-
quate force with which the Bureau of Internal Revenue is now operating, its
activities in investigating returns and pursuing every avenue of information has
resulted in the assessment or collection of approximately $8,400,000 so far during
the current fiscal year. This represents tax which was not reported in the
original returns filed by taxpayers and which was unearthed by investigation
and a careful analysis of the returns.
It is estimated that the income-tax law will yield $110.000.000 during the
current fiscal year, as compared with $80,190,693.80 for the fiscal year of 1915
and $71.381.274.74 for the fiscal year 1914. The tax for the last-named year
included only 10 months on individual incomes, March 1, 1913, to December
31, 1913.
INCOME TAX.
15
Mr. Keating's resolution asks whether or not certain statements in published
articles by Mr. Basil M. Manly are true. The gist of these articles is to the
effect that approximately $320,000,000 is being annually withheld from the
Treasury by income-tax frauds and evasions, and that the collection of this
amount of money can be secured only by giving full publicity to income-tax
returns.
The department has communicated with the Bureau of Census, the Bureau of
Labor Statistics, and the Secretary of the American Statistical Association in
an effort to obtain statistics as a basis for an analysis of Mr. Manly's figures.
The secretary of the American Statistical Association advises that-
66
No one has ever succeeded, so far as I know, in determining, even approxi-
mately, the national dividend' of this country."
The Director of the Bureau of Census says:
"It is impossible to make even an approximately accurate estimate of the
number of persons in the United States whose incomes are derived from fees, as
shown by the census of 1910."
The Director of the Bureau of Census and the Commissioner of Labor Statis-
tics replied that they were unable to furnish any information bearing on the
questions asked in the second and third paragraphs of the resolution.
The Government actuary estimates the gross income of the United States
at $20,000,000,000 in 1914. Mr. Manly's estimates are premised on the assump-
tion that the gross income of the United States in 1914 was $46,000,000,000. It
is impossible to get definite figures from any source on the gross national
income.
I quote from a memorandum prepared by the Government actuary:
"The gross income of the Nation may be roughly estimated at $20,000,000,000
for the calendar year 1914. The great danger in making an estimate of this
kind, is that of duplication. For example, in the case of professional and
personal services, incomes are often duplicated in part by being given separately,
and by being also included in the income from the gross receipts of manu-
facturing, transportation, insurance, and other concerns, who retain many
doctors, lawyers, drivers, chauffeurs, and other professional and personal-service
employees. After deducting the expenses, etc., allowed by our income-tax law,
but not the exemptions, the net annual income of the people of the United States
will be about $16,000,000,000, or an average of about $750 per annum for every
family.
"The total wealth of the United States for the calendar year 1914 may be
estimated at $200,000,000,000, based upon the census report of $187,739,071,090,
as of 1912.
"From this must be deducted the value of property from which it is impossible
to derive income-that which is absolutely unproductive so far as money income
is concerned, such as the value of public buildings, Government reservations,
parks, churches and religious property and institutions, products of all kinds,
agricultural, manufactured, imported, mining, etc., in the hands of the con-
sumers, awaiting consumption, clothing and personal adornments in use, fur-
niture, etc., in use, the value of the ships belonging to the United States, etc.
In 1914, these items amounted to at least $50,000,000,000. The value of the
taxable real property for 1914 was something over $100,000,000,000. This left
$50,000,000,000 as the value of all other property, including live stock, farm
implements, and machinery, the property of manufacturing, mining, transporta-
tion, telegraph and telephone, shipping, canals, and other business concerns,
together with the gold and silver coin and bullion in the United States, etc. A
fair return from the total value of the real estate would be $6,000,000,000.
This deducted from Mr. Manly's $46,000,000,000 total income would leave $40,-
000,000,000 as the income to be derived from the remaining $50,000,000,000 of
capital wealth, an average return for the entire United States of 8 per cent per
annum.
The wealth of Great Britain before the war was estimated at $90,000,000,000,
and her income was estimated by Sir George Paish, editor of the London
Statist, as amounting to $12,000,000,000. Other estimates run as low as
$8,000,000,000. The gross income of all of the belligerent nations of Europe
prior to the war has been estimated at $50,000,000,000, or only $4,000,000,000
in excess of the estimate made by Mr. Manly for the income of the United
States alone.
These figures would seem to indicate that Mr. Manly's estimates of
$46,000,000,000 as the gross income of the United States are purely speculative.
In addition to the above, which deals with the premise upon which Mr
Manly based his estimate, I would like to draw attention to one important
16
INCOME TAX.
omission which Mr. Manly makes in arriving at his estimate of income tax
due the Government. He has failed to deduct anything from his figures of
gross income for expenses for conducting business, which is allowed under the
income-tax law. While he has made allowances for wages and salaries, there
are other expenses of conducting business which should be deducted.
The sixth paragraph of the resolution asks "why the Secretary of the
Treasury has not recommended to the President that all income-tax returns
be made public, in accordance with the authority contained in article D of
section G of the income-tax act, in order that fraud may be checked." That
provision of the law refers only to returns of corporations, and there is no
authority to make returns of individuals public in any circumstances or under
any conditions. As a matter of fact, such publication is forbidden and is
punishable by a heavy penalty. The question whether individual income-tax
returns should be made public is for the Congress to determine.
Sincerely, yours,
W. G. McADOO, Secretary.
Hon. CHARLES O. LOBECK,
Chairman Committee on Expeditures in the
Treasury Department, House of Representatives.
(Whereupon, at 11.30 o'clock a. m., the committee adjourned to
meet at the call of the chairman.)
COMMITTEE ON EXPENDITURES
IN THE TREASURY DEPARTMENT,
HOUSE OF REPRESENTATIVES,
Friday, June 2, 1916.
The committee met at 10 o'clock, a. m., Hon. C. O. Lobeck (chair-
man) presiding.
The committee had under consideration H. Res. 221, making cer-
tain inquiries of the Secretary of the Treasury in regard to income-
tax returns.
STATEMENT OF HON. EDWARD KEATING, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF COLORADO.
The CHAIRMAN. Do you want to be heard first, Mr. Keating?
Mr. KEATING. Mr. Chairman, I do not know that it is necessary
for me to make any statement. The resolution speaks for itself. I
was led to introduce the resolution by perusal of the newspaper
articles and by my acquaintance with Mr. Manly, the author of the
articles. I was familiar with his record as an investigator in the
employment of the Government and had a great deal of confidence
in his ability to get at facts.
I went over the situation with Mr. Manly before introducing the
resolution and felt he had a message which it would be worth while
for this committee to receive. Personally, I think the very best
work the committee can do is to hear Mr. Manly and permit him to
present his facts and figures and then permit the representatives of
the Treasury Department to respond. In that way you will be able to
approach the truth, at any rate. I am sure the officials of the Treas-
ury Department are anxious to enforce the income-tax law. So far
as Mr. Manly's endeavors are concerned, they are not in any sense
an attack on the Treasury Department or the officials of that de-
partment; in fact, the most friendly relations exist between the offi-
cials of the Treasury Department and Mr. Manly, and what he did
INCOME TAX.
17
was done with their knowledge and to a certain extent with their
assistance; that is, assistance to the extent of permitting him to ex-
amine the records.
I am particularly impressed by Mr. Manly's suggestion that we
should have publicity of income-tax returns. It is possibly due to
the fact that all my life I have been connected with organs of pub-
licity and I have a great deal of faith in the curative powers of pub-
licity. I think it is a mistake to conceal these returns. I think they
should be open to inspection and that it might be well to give them
a more pronounced publicity than that by publication. It seems to
me if you adopted that policy, while it might be rather trying to
some gentlemen, yet, all being treated alike, none could particularly
complain. The evidence of the Treasury officials themselves, as
given to the public press, indicates that there is very great need of
strengthening the service; perhaps, very materially amending the
income-tax law, but I do not desire to go into that phase of the mat-
ter this morning.
The CHAIRMAN. Mr. Keating, in the letter we received from the
Secretary of the Treasury-I do not know whether you have re-
ceived a copy of it or not, it is dated may 29, 1916-the Secretary
states he has recommended to the Congress that there shall be addi-
tional force allowed him; that his force is too limited for the scope
of the work.
Mr. KEATING. I think that is a very good suggestion, too, because
I happen to know something about the efforts to collect the income
tax in my own State. For instance, I have in mind the case of a man
who was drawing a salary of, I think, $5 a day, who found it neces-
sary to check up the income-tax return of the most capable, the
shrewdest, and the wealthiest business man in the intermountain
West. Now, as a matter of fact, the man who was receiving $5 a day
was capable of performing the task and did perform it, in my judg-
ment, in an efficient fashion, but he should have received more than
$5 a day. If he had the ability to perform that kind of work, then
Uncle Sam should not ask him to work for any such salary. Uncle
Sam should be prepared to pay for service, and I am afraid, in a
great many instances, when you pay $5 a day you get a $5-a-day man,
and when you get a $5-a-day man, then he is not capable of doing
that kind of work.
The CHAIRMAN. There is also an allowance of $3 a day.
Mr. KEATING. Yes; when he is away from the town where he lives.
Mr. GARLAND. And railroad fare, I presume?
Mr. KEATING. I think that is true.
Mr. GARLAND. That is usual, although it does not state that in
the bill.
Mr. KEATING. The allowance is $3 a day for subsistence, and a
man engaged on this kind of work can not travel through the west-
ern country, at any rate, and live in a western town on $3 a day
and live as a representative of a great Government engaged on im-
portant work should live. You simply can not go to a decent hotel
and get a decent room with proper meals for $3 a day. This man I
have in mind happens to be a personal friend of mine, and I know
that every month he travels he loses money. I just happen to know
that. He is not an extravagant liver, but he wants to stop at fairly
54080-16- -2
18
INCOME TAX.
good hotels. I am not so familiar with this eastern country, but I
know that in the western country you simply can not do it, and
I believe that without extravagance it would pay the Government to
give the men proper salaries and sufficient expense money to enable
them to live as men who are intrusted with such important work
should live.
But, gentlemen, as I was saying, I would prefer if you would
hear Mr. Manly and prosecute the investigation along those lines.
I thank you.
Mr. GARLAND. If you do not mind, Mr. Keating, I would like to
ask you a question before you sit down. I notice the resolution
inquires why the Secretary of the Treasury has not recommended
that all income-tax returns be made public. That authority is in the
present bill, I presume?
Mr. KEATING. Yes; that is in the bill.
Mr. GARLAND. And has not been done. I just did not quite under-
stand whether that was in the bill or not. There is another feature
I would like to ask you about. Do the men employed in this busi-
ness get a per diem for every day in the year; do they get $5 a day
for every day in the year?
Mr. KEATING. I would not be positive as to that.
Mr. GARLAND. I know that is the custom in the Customs Service.
Mr. KEATING. Some of them get more than $5.
Mr. GARLAND. I know; it runs up to $8.
The CHAIRMAN. I think they get $5 a day when they are working.
Mr. KEATING. I would not be sure as to that.
Mr. GARLAND. In the Customs Service there is no exemption of
days made, and there are a lot of them on day work at $3 a day, and
it is for every day in the year.
The CHAIRMAN. I know from looking over an expense account of
one man who turned in $5 a day for the month when he had not
worked all the time and the department deducted it. That was cor-
rected shortly afterwards, and they now all understand it.
Mr. GARLAND. I think the allowance for hotels is very, very much
too small.
Mr. KEATING. Of course, I do not mean to suggest that every man
in the income-tax service should have his salary boosted, but there
should be some discretion in the Secretary of the Treasury so that
he can employ competent men to do this very important work.
Mr. GARLAND. I think there was something in one of the bills, I do
not recall which one, providing for an additional appropriation for
payment of special agents or employees on special work; would that
apply here?
Mr. KEATING. I do not know.
Mr. CARTER. What bill was that in?
Mr. GARLAND. I can not recollect the bill, but it was an appro-
priation, I think, of $50,000.
Mr. KEATING. Was not that the legislative, executive, and judicial
bill?
Mr. GARLAND. Probably it was; I can not recall the exact bill.
That would not apply here?
Mr. KEATING. I am afraid not.
The CHAIRMAN. Mr. Manly, will you take the stand?
INCOME TAX.
19
STATEMENT OF MR. BASIL M. MANLY-Resumed.
The CHAIRMAN. On yesterday we got about as far along with your
statement as the point where you stated you had interviewed the
chiefs of bureaus here and also had made some investigations in the
internal-revenue offices in New York and of the men employed there,
and that was about the sum and substance of what we led up to
yesterday, was it not, Mr. Manly?
Mr. MANLY. Yes, sir. We had one question left over yesterday
with regard to what should be done about these articles.
The CHAIRMAN. That is a matter we can take up later.
Mr. MANLY. Surely.
The CHAIRMAN. Mr. Manly, were you assisted any by Mr. Hughes
or by any of the Newspaper Enterprise Association, especially Mr.
Hughes?
Mr. MANLY. Only in the form of suggestion as to what he thought
might be a valuable line of inquiry; such lines as from his experience
both as a newspaper man and as a man who had lived among the
class of people who had to pay an income tax, he thought might
lead to valuable results.
The CHAIRMAN. But you do not know that he made any personal
investigation?
Mr. MANLY. No; I do not believe he did.
The CHAIRMAN. He has furnished us with a copy of his authority
here and these articles published, and I wanted to know whether he
had made any investigation?
Mr. MANLY. I might say, however, I was in consultation with him
as the man to whom I was responsible throughout the entire investi-
gation, and not only had constant correspondence with him, but
made, I suppose, half a dozen trips to Cleveland for conferences and
advice.
The CHAIRMAN. You stated yesterday the men who had assisted
you in the work.
Mr. MANLY. Yes, sir.
The CHAIRMAN. Do you know whether any of these assistants
investigated any other collection offices throughout the country?
Mr. MANLY. They did not.
The CHAIRMAN. The only office you investigated was the New York
office?
Mr. MANLY. The New York office; yes.
The CHAIRMAN. Did you investigate the office here in Washington
any?
Mr. MANLY. I did not investigate the Washington office.
The CHAIRMAN. The local office?
Mr. MANLY. No, sir.
The CHAIRMAN. On yesterday you stated that the gross income of
the people of the United States for the year 1914 was approximately
$46,000,000,000, and from that you deduct the amount of income tax
that ought to be collected annually from the people of the United
States?
Mr. MNLY. Yes, sir.
INCOME TAX.
20
The CHAIRMAN. I note in a letter received from Secretary McAdoo
he quotes from a memorandum prepared by the Government actuary,
which states:
The gross income of the Nation may be roughly estimated at $20,000,000.000
for the calendar year 1914. The great danger in making an estimate of this
kind is that of duplication. For example, in the case of professional and per-
sonal services incomes are often duplicated in part by being given separately
and by being also included in the income from the gross receipts of manufac-
turing, transportation, insurance, and other concerns, etc.
After deducting the expenses, etc., allowed by our income-tax law, but not the
exemptions, the net annual income of the people of the United States will be
about $16,000,000,000, or an average of about $750 per annum for every family.
Now, that is quite different from your statement.
Mr. MANLY. Yes, sir. Would you like for me to comment on that
now?
The CHAIRMAN. I think so. The memorandum further says:
The total wealth of the United States for the calendar year 1914 may be esti-
mated at $200,000,000,000, based upon the census report of $187,739,071,090 as
of 1912.
Now, I want to ask you this question. You state that $46,000,000,000
would be the gross income of the people of the United States in 1914;
now, that is an average of 23 per cent, is it not?
Mr. MANLY. On this estimate of national wealth?
The CHAIRMAN. Yes.
Mr. MANLY. Yes. I would like to take that up all together when
we are ready for it and tell you about how that estimate of national
wealth was arrived at and why I believe it is substantially less than
the probable wealth of the Nation, and also take up the actuary's
estimate of $20,000,000,000, because it is all interwoven.
"
The CHAIRMAN. Suppose you go on with a statement of that now.
Mr. MANLY. In the first place, I would like to take up the question.
of the estimate of the total wealth of the United States, which is
based upon a census report issued in 1915, applying to the year 1912,
which estimated the national wealth at $187,000,000,000. That esti-
mate was based upon the tax returns of the various States and mu-
nicipalities. That was the source of practically every item included
in the estimate of wealth. The same criticism which I have directed
to the collection of the income tax and with regard to evasion, under-
valuation, etc., applies, as I believe every man in the country knows,
to local taxation. Particularly in the case of personal property of
all kinds, value of plants, and other forms of property there is gross
undervaluation throughout the country.
Mr. KEATING. May I ask Mr. Manly a question right at this point?
The CHAIRMAN. Certainly; you may ask him a question at any time.
upon
Mr. KEATING. Just to make it clear at this point, do I understand
the census estimate of the wealth of the country is based
assessed valuation returned by the assessors in the various subdi-
visions of the States, counties, cities, and so on?
the
Mr. MANLY. It is based upon the assessed valuations, allowing for
what they consider the probable true value; that is, in certain States
they assess regularly at two-thirds of the value, and the census allows
the addition of that percentage; but where the assessing official fails
to assess property, or fails to assess it even at two-thirds, which is
the assessment provided, then that is lost.
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INCOME TAX.
21
Mr. KEATING. But where the law, for instance, provides that where
property shall be assessed at its full value, do the census officials
accept the returns as being full value?
Mr. MANLY. Yes, sir.
Mr. KEATING. I think as you have said, most of us would agree
with you that under those circumstances the values are considerably
undervalued.
The CHAIRMAN. In the State of Nebraska my recollection is, for
instance, the percentage of the mill tax is on one-fifth value of the
property, realty, personalty, and otherwise, so that while they assess
on one-fifth or 20 per cent, there is no reason why we should not
know the full value by just multiplying by five.
Mr. MANLY. That is what they do, and that is as I have stated it;
but the cases of undervaluation, the cases of failure to assess at all,
I think everybody knows are not only frequent but almost universal
throughout the country in assessing various kinds of property taxes.
Mr. KEATING. A striking example of that, if you will bear with
me, is furnished in Ohio, if you have not already furnished it for
the record, where Gov. Harmon secured the adoption of a law which
placed a moderate tax on personalty, with the idea of inducing those
who possessed personalty to make returns. The assessment in-
creased tremendously as a result of that loss, showing there must
have been very great evasions in Ohio prior to the enactment of the
law, and what is true in Ohio probably would be true in every other
State in the Union.
Mr. MANLY. Now, that is the basis upon which I feel deductions
drawn simply from that census report of 1912 are sure to give you
an idea that the gross income of the United States is very much less
than it really is.
I would like next to take up the estimate of the actuary that the
gross income of the Nation may be roughly estimated at $20,000,000,-
000 for the calendar year 1914. I am very sorry that the actuary
did not furnish any of the items that went to make up that estimate;
but proceeding simply on his broad statement I would like to say,
first, that there have been a number of estimates of the gross income
of the people of the United States. Probably the most complete and
detailed is an estimate by Prof. Willford I. King, professor in the
University of Wisconsin, which was published in 1915, and is en-
titled "The Wealth and Income of the People of the United States."
Prof. King made an estimate based upon a very elaborate examina-
tion of the available statistics for the year 1910, and arrived at the
conclusion, as shown on page 129, that the total money income of the
people of continental United States was $30,530,000,000. That was
for 1910. Similar estimates had been made by other statisticians,
very largely by English statisticians, who have been more interested
in this matter than Americans, among them Sir George Paish, the
editor of a leading financial paper in Great Britain, and by Mr. L.
G. C. Money, a member of Parliament and a very distinguished sta-
tistician. They have substantially agreed with the estimates of Mr.
King. In other words, going back to 1910, or four years ago, these
economists were estimating the national income as $30,000,000,000 a
year. Now, so far as I have been able to discover, there has never
22
INCOME TAX.
been an estimate which was substantially less than $30,000,000,000
a year.
The CHAIRMAN. That is for England?
Mr. MANLY. No, sir; for the United States, and that is as far back
as 1910. Now, since 1910 we know from various figures, particularly
from the figures of individual deposits in the banks throughout the
country, that there has been an increase of something like 25 per cent
in the national income. That is to say, individual deposits have
increased about 25 per cent. We know that the value of manufac-
tures has increased about 20 per cent, and we know that the value
of agricultural products in 1914, as compared with their value in
1910, shows an increase of approximately 30 per cent. So that,
averaging the whole thing up, there is every indication of an increase
of about 25 per cent. Therefore, simply on the basis of those cal-
culations by these and other statisticians, we would have an income
of something like $37,500,000,000, or an income very greatly in ex-
cess of the figures of the Government actuary.
The CHAIRMAN. You quoted a minute ago from Sir George Paish.
Mr. MANLY. Yes, sir.
The CHAIRMAN. In this letter received from the Secretary, he
states that the wealth of Great Britain before the war was esti-
mated at $90,000,000,000.
Mr. MANLY. Yes, sir.
The CHAIRMAN. And her income was estimated by Sir George
Paish as amounting to $12,000,000,000.
Mr. MANLEY. Yes, sir.
The CHAIRMAN. And he states that other estimates run as low as
$8,000,000,000?
Mr. MANLY. Yes, sir.
The CHAIRMAN. Taking it at $12,000,000,000, or at that highest
amount-
Mr. MANLY (interposing). That is for Great Britain-
The CHAIRMAN (continuing). And we have double the amount of
wealth. At that time it was about $187,000,000,000-
_______________
Mr. MANLY (interposing). I would like to point out there that the
estimate-
The CHAIRMAN (interposing). Excuse me, but I am trying to
bring this in. Now, if our income was twice as much, or if our
wealth was over twice as much, would our income increase in the
same way-that is, would it be twice as much?
Mr. MANLY. It would probably be very much larger, because, as-
suming that the estimates of the wealth were correct, or that they
were comparable, which I do not believe they are, the income on
property in this country, or the rate of income on property in this
country is considerably higher than it is in Great Britain. I can say
that it is over 50 per cent higher. I mean by that that property
earning 4 per cent in Great Britain will earn 6 per cent here, and
property earning 6 per cent there will earn 9 per cent here, etc.
The CHAIRMAN. Where do you get that?
Mr. MANLY. I can show you from the dividends paid by the banks
of Great Britain, I can show you from the incomes, I can show you
from the earnings of manufacturing establishments, and I can show
INCOME TAX.
23
you from the earnings from their railroads, and other thing of that
sort. If you simply compare one class with another, you will find
that that is true. Agricultural property, for instance, in Great
Britain earns a very much lower rate of return than agricultural
property in the United States.
Mr. GARLAND. In addition to that, it is a fair comparison to show
the difference in the wages there and here?
Mr. MANLY. Yes, sir; I was coming to that later. Now, let us
assume that Sir George Paish's estimate of the income at
$12,000,000,000 is correct.
The CHAIRMAN. Before you do that, let me ask you whether in the
wealth of Great Britain you include the wealth of her colonial pos-
sessions, like Canada and Australia?
Mr. MANLY. That is one point that I have not had an opportunity
to look up in connection with the estimate of $90,000,000,000.
The CHAIRMAN. Will you do that?
Mr. MANLY. I will try to do it. I do not know where the Gov-
ernment actuary got this $90,000,000,000 estimate, and it would take
some time to check it up. I do not think, however, it would be in-
cluded in it. I think it is a pretty fair estimate of the wealth of
Great Britain, including England, Ireland, Scotland, Wales, etc.
The CHAIRMAN. Not including Canada and Australia?
Mr. MANLY. Not including Canada and Australia. But I think
this is true: I think that the estimate of the wealth of Great Britain
is made up on a very different basis from that on which our estimate
is made up. They have far better figures upon which to base an
estimate. They do not base theirs upon local taxation, but they base
it on returns that they get from their inheritance taxes, which covers
almost everything, and which gives them a perpetual inventory
almost of the property of the country. Their inventories of land
have been gone over very thoroughly since Lloyd George introduced
that proposition of taxing unearned increment. They have gone
over their lands piece by piece, and they are assessed uniformly
throughout the country. Therefore, that estimate of the wealth of
Great Britain will certainly be very much higher proportionately
than the estimate for the United States. For that reason I do not
think that the two estimates are comparable.
Now, let us take Sir George Paish's estimate of $12,000,000,000.
The population of Great Britain is a little less than half the popula-
tion of the United States. I have forgotten the exact figures, but
I am very sure that that is within 1 per cent of it. It is something
like 49 per cent, as I remember it. So that, simply upon the basis of
population, assuming that we have the same per capita income, or
the same income per person, then we would have twice their income.
That is to say, it would be $24,000,000,000 a year. But, further than
that, taking it from top to bottom of our population, the income of
all classes is very nearly twice the income of the people of Great
Britain. Beginning with the wage earner, the wages in the same
classes of employment, taking it throughout-in some cases there
are exceptions, of course, but taking it throughout, and our wages
are very nearly double the wages paid in Great Britain. That does
not mean that they are double in actual comfort obtained from the
24
INCOME TAX.
wages, because our price level is higher than theirs, but in actual
money that passes through a man's hands that estimate would be
true. That is true right along up the line. There are no fortunes
in Great Britain that are comparable to the great fortunes here,
except the fortune of William Waldorf Astor, which was picked up
and carted over to Great Britain, and which, by the way, should
still pay income taxes here, or its proportionate income tax. I might
further say in that same connection that I went over the returns
for the British inheritance taxes for the past seven years, and there
has never been an inheritance there in all those years of more than
$75,000,000. I do not know which one of the estates was represented
by that $75,000,000, but that was the largest.
Now, compare that with the situation here in the United States
during the last year. Here, for instance, are two members of one
family who are practically unknown, the Harkness brothers-C. W.
and L. V. Harkness-both of whom died leaving estates which their
lawyers say are worth more than $100,000,000. They have not yet
appraised them, but the latest estimate on the estate of L. V. Harkness
is $170,000,000, while the estimate on the estate of Charles W. Hark-
ness is almost as much. He owns nearly twice as much Standard
Oil securities. P. A. B. Widener, of Philadelphia, died and pro-
vided in his will that nobody should know how much his estate was
worth, but the lowest estimate on it is from $50,000,000 on up to
$100,000,000. There have been nearly a dozen estates in the United
States during the last year worth in the neighborhood of $75,000,000
each. So that it is pretty clear that, taking all classes of the popula-
tion together, the income per person will average somewhere in the
neighborhood of twice as much as the income of the average person
in Great Britain. We have twice as many people, and each of these
people is getting nearly twice as much; and if our people were
getting exactly twice as much as it would give us $48,000,000,000 a
year as income, based on that estimate of Sir George Paish, and my
estimate is $46,000,000,000.
The CHAIRMAN. You have referred to Mr. Harkness or to the
Harkness brothers.
Mr. MANLY. Yes, sir.
The CHAIRMAN. On page 12 of these newspaper articles that have
been compiled here I notice you make the statement that the estate
of L. V. Harkness is worth $100,000,000, and that if his rate of in-
come was only 5 per cent his income would be not less than $5,000,000 ?
Mr. MANLY. Yes, sir.
The CHAIRMAN. And you state here that the income tax paid by
Mr. Harkness was only $58,035. You state that he ought to have
paid income tax on $5,000,000, and that the income tax on $5,000,000
would be $341,020. Would you like to have that go into the record?
Mr. MANLY. I am perfectly willing to have it go into the record,
and I would be glad to take up the Harkness case rather fully when-
ever you would like to go into it, because I think that is one case
that shows one of the biggest sources of tax loss to the Government.
Mr. KEATING. I was just going to suggest that as an illustration.
Mr. GARLAND. I think all that matter should go into the record.
The CHAIRMAN. If it is the desire of the committee, this printed
statement will be inserted in the hearing.
(The matter referred to is as follows:)
INCOME TAX.
25
THE UNITED STATES INCOME-TAX STEAL.
THE FACTS AND THE PROOF ABOUT $320,000,000 TAKEN ANNUALLY BY THE RICH
FROM THE UNITED STATES TREASURY.
[Being an investigation conducted by Basil M. Manly for the newspapers served by the
Newspaper Enterprise Association, May, 1916, Cleveland, Ohio.]
RESOLUTION INTRODUCED IN CONGRESS BY REPRESENTATIVE EDWARD KEATING AS A
RESULT OF MANLY'S INVESTIGATION.
Resolved, That the Secretary of the Treasury be, and he is hereby, directed
to furnish the House with a statement showing the following facts:
First. Whether or not it is true as stated in published articles in the press
by Basil M. Manly that approximately $320,000,000 is being annually withheld
from the Treasury of the United States by income-tax frauds and evasions.
Second. Whether or not it is true that the total amount of wages and sal-
aries paid in the United States in 1914 was approximately $15,000,000,000 and
whether of this sum at least $500,000,000 was paid to men who received salaries
over $3,000; and whether or not of the 500,000 persons shown by the census of
1910 to have been engaged in occupations from which their income was de-
rived principally by fees, the income of said persons which was more than
$3,000 per annum would total $300,000,000 per year; and whether or not the
income derived from the ownership of property and the conduct of business
amounts to $30,000,000,000 a year and of this, whether or not two-thirds was
received by persons whose annual income was more than $3,000; and whether
or not the estimated amount of income received by persons, who should be
subject to the income tax was, therefore, $20,866,000,000.
Third. Whether or not, of the above sum after deductions for taxes and
depreciation the total remaining taxable income subject to the income tax could
be reasonably estimated at $16,420,000,000; and whether or not after deducting
exemptions of $3,000 in the case of unmarried persons and $4,000 in the case of
married persons, the total remaining income subject to the income tax would be
$14,525,000,000.
Fourth. Whether or not estimating a reasonable supertax on a proper
proportion of said income, the total yield from the income tax should approxi-
mate $361,250,000; and whether or not at least $20,000,000 of taxes in specu-
lative profits should also be included.
Fifth. Whether or not, therefore, it is reasonable to suppose that the United
States Treasury should be in receipt of $401,250,000 annually from income
taxes instead of $80,190,000 actually collected.
Sixth. Why the Secretary of the Treasury has not recommended to the
President that all income-tax returns be made public in accordance with the
authority contained in article "d" of section "g" of the income-tax act in
order that fraud may be checked.
The articles which are published in this pamphlet were written
by Pasil M. Manly as the result of a six months' invesigation con-
ducted by him for the 200 newspapers served by the Newspaper
Enterprise Association.
Manly's reputation as an economist stands behind these articles.
This reputation was established as the director of the most impor-
tant investigations conducted by the United States Government in
recent years, notably the investigation of the iron and steel indus-
try in 1910, the anthracite coal industry in 1912, and the investi-
gations of the Commission on Industrial Relations in 1914-15, for
which Manly was director of research and investigation.
The demand for these articles has been so great, in spite of their
enormous newspaper circulation, that the Newspaper Enterprise
Association has reprinted them in the present form so that they
may be read consecutively.
In sending you this copy of the income-tax investigation, the
undersigned begs to solicit your viewpoint upon the results of it,
as presented here. If you will consent to render such opinion, be
assured it will be treated with utmost courtesy, be it favorable or
otherwise. May the undersigned ask that you address him?
S. T. HUGHES,
Editor Newspaper Enterprise Association.
CLEVELAND, OHIO, May, 1916.
26
INCOME TAX.
$320,000,000 IS STOLEN YEARLY FROM THE UNITED STATES AS A RESULT OF
EVASIONS OF THE INCOME-TAX LAW.
Three hundred and twenty million dollars of your money was stolen last year
through income-tax frauds and evasions, involving thousands of wealthy and
prominent citizens and thousands of the most profitable American corporations.
250,000 CITIZENS SHOULD HAVE PAID, BUT MAKE NO RETURNS.
The income tax should have produced at least $400,000,000 revenue. The
total collections were only $80,000,000.
Two hundred and fifty thousand American citizens and resident aliens, who
should have paid income tax, failed to file a return or a proper return.
At least $10,000,000,000 of annual income upon which the tax should have
been paid succeeded in evading the law.
The United States income tax is a failure both as a revenue producer and as
a means of making the rich pay their just share of the Nation's burdens.
INCOME-TAX LAW DELIBERATELY DRAWN TO ALLOW VIOLATIONS.
The income-tax law was deliberately drafted to permit just such frauds and
to render their perpetrators practically secure from detection and punishment.
These are the big facts that stand out as the result of the first exhaustive
investigation of the workings of the income-tax law.
I have the facts as the result of an investigation extending over more than
six months.
In the following series of articles I will lay these facts before you clearly
and completely.
I will show you:
First. How these millions are stolen.
Second. Who some of the tax thieves are.
Third. How to stop the thefts.
IF INCOME TAX IS COLLECTED THERE WILL BE PLENTY FOR PREPAREDNESS.
'Preparedness," even on the moderate program advocated by President Wil-
son, will create a deficit of $167,000,000 if the sugar tariff and stamp taxes are
discontinued.
66
But if the income-tax thefts are stopped and the $320,000,000 stolen from the
Treasury are recovered, the administration will have not only more than enough
to pay the entire cost of military preparedness, but also more than $100,000,000
which can be used for old-age pensions, unemployment insurance, and the other
social measures which must form the basis of any true national preparedness
and efficiency.
The penalty for failure to make a return is the addition of 50 per cent to
the tax originally due, and for fraudulent returns 100 per cent.
If the penalties which are now due upon the $320,000,000 evasions of last
year are collected the Nation will have at its disposal $500,0000,000 to spend
as it chooses for national preparedness and social welfare.
The committees of Congress are now busy devising new taxes to meet the
impending deficit. These new taxes will rest either upon the common people
or upon those of the rich who are honestly paying their income taxes.
Do you want to pay more taxes?
If not, insist on immediate action by the President and Congress to recover
these stolen millions and punish the thieves.
STOP THIEF.
More than $300,000,000 was stolen from the United States Treasury last year.
Two hundred and fifty thousand men and women succeeded in evading the
income tax.
These are the big facts that have been revealed by the searching investiga-
tion of the Federal income tax by Basil M. Manly, who directed the investiga-
tions of the United States Commission on Industrial Relations and wrote the
famous "Manly Report."
This means: You will have to pay your share of increased taxes to replace
the millions which were virtually stolen from Uncle Sam last year by mil-
lionaires and multimillionaires!
INCOME TAX.
27
Think of this every time you put a lump of sugar in your coffee, and remem-
ber that you are paying a tariff on sugar this year because others refused to pay
their taxes on incomes last year.
Think of this every time you pay the penny tax on a telegram; every time
you have a long-distance telephone call; every time you put a stamp on a legal
document.
Stamp taxes caused the American Revolution. The tax burden upon the
common people in America is already too heavy. They can not evade the pay-
ment of the indirect taxes to which they are subject.
There must be no increase in the present Federal taxes until the stolen mil-
lions are recovered.
This is a Democratic administration pledged to the income tax and pledged
also to "pitiless publicity" regarding all national affairs.
We hope President Wilson, with the aid of his Democratic Congress, will lift
the veil of secrecy which now shrouds the income tax and turn a white light
upon its whole administration.
We hope President Wilson calls "stop thief!" so that all the world may hear.
WILL WILSON AND MCADOO ALLOW THE UNITED STATES INCOME TAX TO REMAIN
A JOKE?
PRESIDENT AND SECRETARY OF TREASURY CAN CORRECT MISTAKE OF CONGRESS.
The Federal income tax for the year ending June 30, 1915, yielded only
$80,190,694. The total tax collected should have been not less than $400,000,000,
The Nation was thus defrauded of at least $320,000,000, and probably more.
These enormous frauds were accomplished in the time of the Nation's greatest
need and were perpetrated by many of the same individuals who are now
calling most loudly upon the Nation for increased expenditures to defend their
property from real or fancied danger.
How are such enormous frauds possible?
Is the wealth and income of the Nation so enormous that an income tax
ranging from 1 per cent to 6 per cent will yield $400,000,000 taxes?
Who are the thieves?
Is the Treasury Department woefully inefficient or corrupt?
These are some of the questions that must immediately spring to your mind.
I am going to answer the last question first. The Treasury Department is
not inefficient, measured by Government standards, and there is not a bit of
evidence to indicate that corruption of Treasury officials is responsible for the
enormous evasions. The Internal-Revenue Bureau, which is responsible for
the collection of the tax, lacks the men necessary to enforce the tax under the
existing law, and is not organized upon the most efficient plan.
But the Treasury Department is not in the first place responsible for the
failure to collect the tax.
The original responsibility rest upon Congress for introducing into the law
provisions which not only invite fraud and evasion, but also make the detection
of income-tax thieves virtually impossible.
Congress invited fraud by providing for the secrecy of returns, by imposing
the same criminal penalties upon any person for revealing any information
regarding income frauds or evasions that are imposed upon the tax thief who
robs the Treasury of millions. Congress stimulated concealment of income by
providing that income from dividends need not be reported by individuals unless
the net income was more than $20,000. Congress encouraged evasion by pro-
viding that returns should be made only when the net income of individuals
exceeded $3,000.
66
Congress protected the thieves by providing that the income-tax returns,
although described as public records " should be open to public inspection only
upon formal order of the President under the regulations of the Secretary of
the Treasury.
The President of the United States and the Secretary of the Treasury are
responsible for the continuance of the frauds, because they have failed to
exercise the power given them by Congress to open the returns to the public
in order that the Nation might know who the tax thieves are and assist in
recovering the millions which they have stolen.
The law effectually conceals their individual identity. Only the United
States Treasury Department is permitted to know and its officials refuse to
reveal any definite information, although Secretary of the Treasury William G.
28
INCOME TAX.
McAdoo admits in his annual report that the evasions by corporations alone
amount to more than $20,000,000!
My investigations have revealed some of the great frauds through which mil-
lions of dollars of income have excaped taxation. But even in laying these
cases before you I must omit names, for to reveal any fact regarding the income-
tax return of any corporation or individual would make me liable to imprison-
ment for one year.
I will show you, however, that many of those who have most largely failed
in the payment of income taxes are those who are best able and who should
most readily pay their just share of the Nation's expenses.
But the identity of the thieves is for the present a minor question. The big
question relates to the amount of revenue which the Nation is losing through
the failure to collect the income tax.
This question must be answered largely by statistical proofs, which, to be
convincing, must be set forth in detail. Through them I will show you that
that national income is much greater than the estimates which are currently
accepted. The national income in 1910, as can be demonstrated from Federal
statistics, was approximately thirty-six and one-half billion, instead of the
30,000,000,000 at which it has generally been estimated.
The income which was intentionally or unintentionally omitted in making
these estimates of national income was that derived from the increment in the
value of property. This omitted income, amounting to more than $5,000,000,000
a year in 1910 is exactly the income which is most largely subject to the income
tax. Only an insignificant fraction of it was assessed under the income tax.
Similarly the tax failed almost entirely to reach the gains resulting from
speculative transactions, which from January to June, 1915, were enormous.
The profits from speculation in “war babies" alone amounted to more than
$100,000,000!
In the articles which are to follow I will discuss all these questions in detail.
The facts to understand now are these:
The rich regard the income tax, enacted by the people after a quarter century
fight, as a joke. They laugh at it in their clubs and in their offices.
Why shouldn't they laugh at it? The Internal-Revenue Bureau has only one
income-tax agent for every 400,000 people; the tax dodger is protected by the
secrecy clause of the law from everything except chance detection; and there
has never been an indictment for fraud, except an Italian feather importer, who
had already been caught smuggling by the Customs Service!
Will President Wilson and Secretary McAdoo allow the income tax to re-
main a joke?
Or will they exercise the power that is in their hands and make it one of our
greatest sources of revenue?
FULL PROOF THAT RICH DO STEAL $320,000,000 YEARLY FROM THIS NATION.
I have already indicated the general character of the evasions of the United
States income tax, which, in the aggregate, amount to more than $320,000,000——
an amount which this Nation stands in desperate need of for her "prepared-
ness,' a bill that can not possibly be paid by the workingmen alone. In this
article I will exhibit the evidence upon which I base the statement that the
income tax should yield $400,000,000 annually instead of the $80,000,000 which
the United States Treasury collected under this statute last year.
The Federal income tax is a tax upon the income of individuals and also
upon the net earnings of corporations, providing for the collection of a tax
of 1 per cent upon the net earnings of corporations, and also for what is known
as a normal tax of 1 per cent upon the incomes of individuais amounting to
more than $3,000 in the case of single persons, or in the case of married per-
sons of more than $4.000. Income derived from the dividends of corporations
upon which a tax of 1 per cent has already been paid at the source is exempt
from this normal tax but is required to pay the super tax. In each case the
law allows unmarried persons an exemption of $3,000 and married persons an
exemption of $4,000.
In addition to the normal tax, individuals with incomes of more than $20,000
are required to pay an additional tax, known as the super tax, upon the
amounts by which their incomes exceed $20,000. The super tax rates are:
On income over $20,000 and less than $50,000, 1 per cent.
On income over $50,000 and less than $75,000, 2 per cent.
On income over $75,000 and less than $100,000, 3 per cent.
INCOME TAX..
29
On income over $100,00 and less than $250,000, 4 per cent.
On income over $250,000 and less than $500,000, 5 per cent.
On income over $500,000, 6 per cent.
It is worth while noting at this point how much difference it makes whether
a dollar of income is subject to the super tax or only to the normal one. A
dollar in an income over $500,000 must pay not only the normal tax of 1 cent
but also a super tax of 6 cents, so that every dollar of the incomes of the very
rich which is escaping taxation is costing the Treasury seven times as much as
if the fraud were committed by a person of moderate income. It is very impor-
tant to remember this, for it will explain how the tax collections can be greatly
increased, even though only a relatively smaller amount of income is evading
the tax.
In order to see what the income tax should produce it is necessary to
analyze the national income to ascertain what part of it is received by persons
with incomes over $3,000 who should be subject to the tax. By national income
we mean the aggregate incomes received during the year by the people of the
United States, and not the amount of the national production, for it is obvious
that a very large part of the national income is received by persons who have
no part in production, either as owners, managers, or workers, but who derive
their incomes from professional and personal services of all kinds.
In order to estimate the amount upon which income tax should be paid, we
will first ascertain the total amounts of the incomes of persons who should pay
income tax, and then by deducting the exemptions of $3,000-$4,000 allowed in
the case of individuals arrive at the amount upon which the tax should be
assessed.
The national income of the United States in 1914 was approximately
$46,000,000,000. In a later article I will show you in detail how this figure is
arrived at and why there can be no question that it is well within the facts.
The income of persons who should pay an income tax are derived from one
of three sources: (1) Salaries over $3,000; (2) fees for professional services
amounting to more than $3,000; (3) income derived from the ownership of
property or the conduct of business amounting to more than $3,000 per year.
Although in the text I am stating the exemption at $3,000, in the calculations
due allowance has been made for the fact that the exemption for married men
is $4,000.
The total amount of wages and salaries paid in the United States in 1914 we
know with reasonable exactness to have been in round figures $15,000,000,000.
Of this total at least $500,000,000 was paid to men who received salaries over
$3,000.
The total number of persons whose incomes are derived primarily from fees
is shown by the census of occupations to be approximately 500,000. While
there are no exact data upon which to base an estimate of their total incomes,
the available information indicates very certainly that their incomes average
at least $1,800 and amount in the aggregate to more than $900,000,000. Of
this we may safely estimate that $300,000,000 is received by persons with
incomes exceeding $3,000 per year.
The income derived from the ownership of property and the conduct of
business amounts to $30,100,000,000. This figure is arrived at by deducting
from the total national income ($46,000,000,000) the amount of income in the
form of salaries and wages ($15,000,000,000) and fees ($900,000,000). But it
is very closely checked by an independent analysis of the returns from property
ownership and business management.
From the records of appraisals of estates in a number of States and from
the researches of statisticians we know that more than two-thirds of the prop-
erty of the Nation is owned by persons with incomes of more than $3,000. who
should be income-tax payers. It is probable that the proportion should be
more nearly three-fourths, but it is absolutely certain, as was shown by the
report of the commission on industrial relations, that less than 2 per cent of
the adult population owns two-thirds of all the wealth of the United States.
On the basis, therefore that two-thirds of the income from property goes to
persons who should pay income tax, we have $20,066,000,000 from this source,
The income-tax law permits the deduction of an allowance for the deprecia-
tion of property and for taxes. Depreciation is, of course, chargeable only
upon property subject to wear and tear. The depreciable property owned by
persons who should be subject to the income tax amounts to about
$66,000,000,000. At the rate of 5 per cent the depreciation charge is
$3,300,000,000.
30
INCOME TAX.
The taxes to be deducted are only those which are paid by persons with
incomes over $3.000. It should be noted also that only three-fourths of the
receipts of National, State, and local governments are derived from taxes. In
the case of the Federal Government the only direct tax is the income tax. The
other Federal taxes (customs, excise, and stamp taxes) are taxes upon con-
sumption,and are distributed over the whole population. At the outside,
income-tax payers, who make up less than 2 per cent of the population, do
not pay more than 10 per cent of such indirect taxes. Of the State, county,
and municipal taxes which are chiefly property taxes, we may assume that the
income taxpayers pay in proportion to their holdings of property-that is, two-
thirds of the total, although it is a notorious fact that even in the case of
local taxes the most widespread evasion is among the wealthy.
We have, therefore, as the amounts of the taxes paid by income taxpayers
the following figures:
Federal taxes:
Income tax__
Other taxes (one-tenth paid by income taxpayers).
$80, 000, 000
60, 000, 000
140, 000, 000
976, 000, 000
Total.
1, 116, 000, 000
The income-tax law allows a deduction for interest paid upon indebtedness,
but no deduction for this item need be made in these calculations, because in
making up the sum of the national income no income derived from interest was
included, on the theory that it was a self-canceling item. That is, if we include
the income derived from interest on a mortgage, we must deduct the same
amount from the income of a farmer as part of his fixed charges.
We may now sum up the amount of income received by persons who should
be subject to the Federal income tax.
State, county, and municipal taxes:
Two-thirds paid by income taxpayers.
Total national income_-_
Incomes over $3,000 derived from salaries_
Fees --
Property and business..
Deduct:
Taxes
Depreciation.
Total__.
$1, 116, 000, 000
3, 330, 000, 000
$46, 000, 000, 000
500, 000, 000
300, 000, 000
20, 066, 000, 000
20, 866, 000, 000
4, 446, 000, 000
Net income subject to tax..
16, 420, 000, 000
Now, as we have seen, the law allows the exemption from the normal tax
of $3,000 in the case of unmarried persons and $4,000 in the case of married
persons. Under this exemption we may allow for the deduction of $1,875,000,000,
leaving $14.525,000,000 upon which the normal tax should be collected. At 1
per cent this would yield $1,452.500,000.
It may be noted that income derived from dividends upon which the tax
will be paid at the source has been included above. This has been done wholly
for the sake of convenience and clearness, and proper allowance for the divi-
dends received by persons subject to the tax upon individuals will be made
when we come to consider the corporation tax.
We have now to ascertain the amount of income which should be subject to
the super tax. This is the greatest source of loss, not only because the amount
evading taxation is proportionately very great, but because every dollar subject
to the super tax pays from two to seven times as much tax as it would if
subject only to the normal tax.
We have seen that the income of persons who should pay income tax is
$16,420.000,000. It is certain that at least one-half of this amount is received
by persons with incomes over $20,000, and should therefore pay a supertax. As
I shall show in detail in a later article, in a large number of corporations,
including those whose stock is most widely held, such as the Steel Corporation,
the Pennsylvania Railroad, etc., which I analyzed for this investigation,
INCOME TAX.
31
the holders of blocks of 1,000 shares and over own $1,202,545,410, or 50.7 per
cent of the $2,368,735,500 outstanding stock of those companies. It seems
obvious that persons owning 1,000 shares in a single corporation must have
enough other property to make their incomes more than $20,000. This conclu-
sion is confirmed by an examination of the estates appraised in New York
during 1915. There was not one single estate out of less than $350,000, which
at 6 per cent would produce an income of more than $20,000, in which a block
of 1,000 shares or more in a single corporation appeared.
It would seem almost certain, therefore, that 50 per cent of all corporate net
earnings goes to persons with incomes over $20,000. As the proportion in the
case of other property is probably somewhat less, we will assume that only one-
half of the income from the property held by income taxpayers goes to persons
who should pay the supertax. This is only one-third of all property income,
and is surely a most conservative figure. Allowing for all exemptions and
deductions for taxes and depreciation, this would be $8,200,000,000 income
received by persons who should pay the supertax. From this we must deduct
approximately $1,000,000,000, representing income of less than $20,000,000, upon
which only the normal tax is paid, leaving the income assessable for supertax
$7,200,000,000.
The average rate of the supertax levied in 1914 was 2.6 per cent. It is
certain that this is very much too low. Since the evasions were greatest among
persons with incomes which should have paid 5 or 6 per cent supertax, it seems
probable that the average rate should have been 3.5 per cent. To be on the
safe side, however, we may assume only 3 per cent. At this rate the supertax
should have yielded $216,000,000.
The total assessments upon individual taxpayers should therefore have been:
Subject to normal tax:
Total income__
Exempt under $3,000_
Assessable at 1 per cent.
Tax yield.
Subject to supertax :
Incomes over $20,000.
Exempt under $20,000.
Assessable at 3 per cent.
Tax yield__.
$16, 400, 000, 000
1, 875, 000, 000
14, 525, 000, 000
8, 200, 000, 000-
1, 000, 000, 000
7, 200, 000, 000
$145, 250, 000
216, 000, 000
Total yield-----
361, 250, 000
The total yield from the incomes which go to individuals should therefore be
$361,000,000. This does not include incomes derived from speculation in se-
curities, which, while impossible to estimate with any exactness, should have
paid a tax of at least $20,000,000.
It will be remembered that in the above calculations the income derived from
dividends was included with other personal incomes, although it is not taxed
except at the source. In dealing with the corporation tax we must therefore
exclude this item, which we have estimated at two-thirds of the total divi-
dends. The corporation tax for 1914 yielded $39,144,000. Secretary McAdoo,
on page 18 of his annual report, states that the "omitted" taxes amounted to
$20,891,000, which would make the total collections $60,000,000. Estimating
that one-third of the net earnings of corporations go to persons who do not pay
income tax, we have at the very least $20,000,000 to be added to the personal
tax as estimated above.
The total collections from the income tax should therefore have been:
Normal tax___
Supertax
Tax on speculative profits not included above_.
Tax on net earnings of corporations not paid to individual income
taxpayers
$145, 250,000
216, 000, 000
20, 000, 000
20, 000, 000
Total...
401, 250,000
The total income-tax collections should therefore have been more than $400,-
000,000 instead of the $80,000,000 which were collected.
32
INCOME TAX.
CLOSED DOOR ON INCOME-TAX RETURNS ROBS NATION OF HUNDREDS OF MILLIONS
YEARLY; WILSON CAN OPEN IT AT WILL.
Now that it is established that the United States income tax is a failure-
and a colossal failure-we must discover why it is a failure.
To accomplish this it is necessary to begin with an analysis of the income-
tax law itself-to examine it in order that we may determine whether or not it
is intrinsically an adequate instrument if properly enforced.
The weaknesses of the present law are many, some affecting great principles,
which are worthy of discussion, while others, which affect only details, need not
even be enumerated at present.
The first great weakness in the law is the provision that only persons having
net incomes over $3,000 are required to file returns. The effect of this is to
throw the entire burden of proof upon the Government at the most critical
point, that of discovering who should be taxpayers.
If the Government suspects that John Doe should make a return, it can not
turn a wheel to compel him to do so unless it has in its possession tangible evi-
dence that John Doe has a net income greater than $3,000. Now, to prove net
income the Government must know practically every fact regarding not only
John Doe's income but also his expenses. If the Government can prove that
John Doe has a gross income of $10.000 and tries to force him to make a return.
John Doe need only say, "That is all very well; but can you prove that my
allowable expenses and deductions are not greater than $7,000? I will not
Inake a sworn return until you do."
Any court will sustain his position and reprimand or punish any officer who
tries to compel him. As the tax which would be due from John Doe would
probably be less than $25, the Treasury is very apt not to waste any time in an
effort to get the necessary proof.
The law should be amended to require everyone with a gross income over
$3,000 to file a sworn return, with an adequate penalty for failure. Further-
more, the Treasury Department should be authorized to require any individual
to make a return upon proper demand.
Second. The dividend joker," however, probably results in almost as many
failures to make returns and in the loss of an even greater amount of tax.
The "dividend joker" was inserted in the act very cleverly by an amendment
to one of the most complex sections. It provides "that persons liable for the
normal tax only, on their own account or in behalf of another, shall not be
required to make return of the income derived from dividends on the capital
stock or from the net earnings of corporations, joint-stock companies or asso-
ciations, and insurance companies."
This means that unless you have more than $20,000 a year income from divi-
dends you need not make any return, and the Treasury can not compel you to
do so.
If a collector comes to you and says, “You are living at the rate of at least
$15.000 a year; please make a return of your tax," you can answer, if you are
wise, "Not so fast; it is true that I am spending more than $15,000; but until
you can prove that I get more than $3,000 from some source other than divi-
dends you will get no return."
Furthermore, this provision has been liberally interpreted by many taxpayers
and lawyers as relieving the taxpayer of responsibility for reporting any divi-
dends, no matter how large the income may be.
Third. The law provides no effective means of assessing the enormous income
derived from the increment in the value of land and other property. This
value increment in 1910 amounted to more than $5,000,000,000 a year. The
Treasury failed almost entirely to collect the tax upon this enormous source of
revenue, because it has no means of ascertaining or assessing the amount of
this value increment. At least two-thirds of this value increment goes to people
with incomes over $3,000, who should be income taxpayers. The tax collec-
tions from this source alone should amount to $150,000,000. But it can not be
collected until Congress provides in the law machinery similar to that of Great
Britain for ascertaining the amount of the value increment.
Fourth. The provision of the law which allows the deduction of “all interest
paid within the year by a taxable person on indebtedness" offers a ready means
of escape from the income tax and puts a bonus upon speculation and upon the
extension of monopolization. The provision doubtless was intended to permit
the legitimate deduction of interest paid on loans necessary for the conduct of
private business, but as the law stands and as the Treasury Department has
2
t
INCOME TAX.
33
been forced to interpret it, the provision is inequitable and permits the deduction
of interest paid for any purpose whatever.
The whole force of the provision is to encourage speculation and monopoliza-
tion and to tax thrift and exempt profligacy. Furthermore, every such provi-
sion greatly increases the chance for successful dodging, inasmuch as the Gov-
ernment can never check up each such transaction and now has no basis upon
which to question any claim for indebtedness, no matter how large it may be,
A correction in this connection would directly bring to the Government at
least $1,000,000 a year in taxes and prevent the escape of as much more which
gets by through inclusion with this item.
Fifth. A very large amount of tax is leaking away through the deduction
allowed for depreciation. The bureau is attempting to allow depreciation de-
ductions only when the amount is actually set up as a liability upon the books
of the firm or individual, but it can not possibly ascertain this without an actual
examination of the books.
The real preventive of complete collection lies in the antipublicity clause,
which imposes the same criminal penalty (imprisonment not exceeding one
year) on the man who reveals any information regarding any item of a return
as it does upon the man who deliberately defrauds the Government of $10,000,-
000 in taxes. This cloak of secrecy not only hampers the collection of the tax
but can serve to conceal any inefficiency in the Treasury Department, and may
ultimately result in the forging of a most pernicious political machine, with
unlimited powers to extort campaign funds from the rich with perfect safety.
The income tax will never be collected nor will the Treasury Department be
free from suspicion until the returns are thrown wide open to the public and
disseminated through the newspapers.
President Wilson can to-day issue an order which will throw the returns
open to public inspection. Such action will reveal immediately millions of
dollars in taxes which are now being lost.
A refusal on the President's part to issue the publicity order can be inter-
preted only to mean that he prefers to conceal the information regarding the
amount and sources of income of the owners of America and does not desire
to take the obvious step which will bring a flood of revenue to the National
Treasury and made futher taxes unnecessary.
PRESIDENT WILSON CAN STOP INCOME-TAX THEFTS-HERE'S THE LAW.
Here is subsection d of article G of the United States income-tax law. It
reads:
"When the assessments shall be made as provided in this section the returns
shall be filed in the office of the Commissioner of Internal Revenue and shall
constitute public records and be open to inspection as such, provided that any
and all such returns shall be open to inspection only upon the order of the
President under rules and regulations to be prescribed by the Secretary of
the Treasury and approved by the President."
PUBLICITY OF ESPIONAGE?
The United States income tax must be collected unless we are ready to aban-
don the results of a 20 years' fight to make the rich pay their just share of the
cost of government and unless we are also anxious to continue to pay each year
the millions which the failure of this tax imposes.
With the heavy burden of high prices already upon the people, the profits
from which go to enrich the very class who are successful in evading this tax,
it will be poor statesmanship and insane politics for Congress to ask for one
penny in new taxes until it has taken every step to insure the collection of this
tax, which is everywhere recognized as the most just and equitable that can be
imposed.
The income tax must be paid, and paid in full.
The action which the present Congress takes with regard to the income tax
will more definitely display its true character than any other issue which will
come before it.
54080-16-3
Congress may dodge the issue by making petty amendments to the law and
adding slightly to the Treasury's force of inspectors. But every Congressman
that does so side step will return to his people discredited and distrusted.
Congress may choose to create in the Treasury Department a new secret-
service force, which will create a system of espionage over the entire field of
34
INCOME TAX.
business and private life, sufficient to detect every attempt at tax evasion.
Such is the system in use in Prussia. There an army of inspectors and ex-
aminers collect the tax with true German thoroughness. Will Congress choose
to transplant this system to the United States, where, because of our enormous
territory and greater population, the force of inspectors must be increased
tenfold? If so, it is certain that a bureaucratic Frankenstein will have been
created which sooner or later will prove a menace to our liberty and to the
very spirit of our Government.
Congress may, however, choose to follow American traditions and apply the
only remedy which has ever proved effective in a democracy-publicity. Pub-
lish the returns that the public may know not only who the tax thieves are but
also whether the Treasury Department is doing its work honestly, efficiently,
and thoroughly.
Congress will do what you and the 15,000,000 other voters demand.
Which line of action will you choose-publicity or espionage?
RICH WILL NOT PAY SHARE IN AMERICA'S BILL FOR PREPAREDNESS UNLESS M'ADOO
TRANSFORMS SYSTEM.
Now that I have shown the United States Treasury is being robbed of
$320,000,000 income taxes annually, largely because the law creating the income
tax is itself defective, let us examine the administration of this inadequate law.
The collection of the income tax is entirely in the hands of the internal-
revenue bureau, and its success as a revenue source depends entirely upon the
efficiency of this bureau.
The bureau of internal revenue is not yet an efficient machine for collecting
the income tax.
In the first place, until the creation of the income tax, the bureau was
trained entirely in dealing with tangible properties. It had to find many bar-
rels of whisky and beer and see that the tax was paid, to sell so many stamps
and keep a check on the tobacco and oleomargarine markets. This did not
require a high order of ability-simply enough men to keep a close watch over
the entire country. It seems fair to say that no large amount of tax evasion
was possible without the collusion of the revenue officers.
With the income tax, particularly the personal tax, the situation is entirely
changed. The bureau must deal entirely with intangible income of which the
evidences are meager and often deceptive. Brains, imagination, and wide
knowledge of affairs is necessary for its successful administration.
The collection of the old excise taxes was a policeman's job; the income tax
is worthy of the best efforts of Sherlock Holmes.
This fact seems to be realized in only a small measure either by Congress
or the majority of officials in the bureau.
It is a striking fact, illustrative of the policy of the Federal Government,
that no man in the income-tax division of the bureau is paid enough salary to
be subject to the income tax. There are a few men who are worth more than
the maximum salary, but they must all look outside Government service for
their reward These are the men whom Uncle Sam pits against the shrewdest
business men, the most skillful accountants, and the cleverest lawyers in the
country.
In the personal-tax division the detection of fraud and evasion rests entirely
upon the acumen of eleven $1,800 clerks, who examine the returns from the
entire country. If the return looks "fishy" to one of the clerks, it will
be referred to a revenue agent for examination, but if it is well balanced and
cleverly constructed so that all the items appear reasonable, no question will
ever be raised, though it may cost the Government $50,000 in taxes. Any
skillful accountant can construct a return for any except the best known of the
multimillionaires that would exempt him entirely from the tax and not stand
one chance in a hundred of detection.
Secretary McAdoo says he has plans now under way which will furnish
means of detecting and punishing frauds, if Congress will give him the neces-
sary appropriation.
Here is what the Secretary of the Treasury must do in order to carry out
his promise:
First, he must card index all information contained in the lists of stock-
holders and bondholders to which his agents have access, in the public records
of leases, mortgages, real-estate transactions, probates of wills, in court records,
stock-brokers' offices, banks and trust companies, as well as the thousand and
one hints which appear in the papers indicative of those who are living "like
INCOME TAX.
35
income taxpayers." All this information must be assembled and classified at
Washington so that all the facts regarding any one individual will appear on a
single card.
Second, one or more districts must be picked out and the best examiners on
the force put to work conducting a drag-net investigation, which will serve as
an example to the whole country, while other examiners are looking up individ-
uals scattered throughout the country.
Such drag-net investigations will not only show exactly how much fraud and
evasion there is, but will serve to scare out of their holes the tax dodgers who
are waiting in apparent security for the tax collector to come around.
Third, the Secretary must see to it that the bureau enforces all penalties
rigidly and prosecutes every case of genuine attempt to defraud. This is not
the case now. The internal-revenue bureau needs to grow some teeth and
use them in the enforcement of the income-tax law. The minimum penalty
prescribed by law for failure to file returns on time is $20, but this penalty
is being regularly compromised at $5.
Why is this " compromise" being made?
Why is it that, in the majority of cases, when the examiners find that the
deductions have been grossly overstated, the bureau does not assess the 100
per cent penalty but simply collects the additional taxes which are due?
Why, in spite of the many palpable frauds which have been unearthed by the
revenue agents, has the bureau taken practically no steps to bring about crim-
inal prosecutions?
This condition of apathy is taking the heart out of many of the most com-
petent and zealous agents in the department. After they have worked with
great acumen to dig out and verify the details of an attempted fraud, it gives
them little incentive to see the whole case closed by the assessment simply of
the taxes which were due in the first place.
Secretary of the Treasury McAdoo probably does not know that this is the
fact. But if he will spend a day in having a frank talk with the revenue agents
who are on the job in any one of the big offices, he will learn much that will
open his eyes.
Fourth, the Secretary of the Treasury in his scheme of reorganization must
provide for putting men with brains directly in charge of the assessment and
collection of the tax and give them an opportunity to work.
The bureau should have three or four first-class men who would be freed
absolutely from routine duties and given every opportunity to rake the tax-
collecting system over from top to bottom, to devise and develop sources of
information, to teach the clerks, examiners, and revenue agents how to do their
work and how to detect frauds.
Last, but not least, the bureau needs the time and the force to find out accu-
rately and fully the results of the two years of income taxation. Fully half
the questions I asked about the tax could not be answered because the figures
have never been compiled. Nobody knows now how much the tax for 1913 or
for 1914 has yielded, because the data on collections apply to the fiscal year in
which the tax was taken in and not to the year in which it was due. Nobody
knows very much more about the results of the tax than the inaccurate and
practically valueless tables published in the Commissioner of Internal Revenue's
report.
All the information in the returns could be tabulated for $10,000 and would
be absolutely invaluable not only as the best possible index of our national
economic condition, but simply as revealing the points at which the income tax
is being dodged.
But no matter how much improvement in administrative detail may be made,
the increase in income-tax yield will be insignificant. The reforms which are
necessary to insure the collection of the tax are fundamental and affect the
central policies which controls its administration.
At present the dominant idea in the enforcement of the act is secrecy; no
vital results will be secured until publicity is made the slogan.
TO COLLECT $320,000,000 NOW EVADED, TREASURY MUST EITHER MAKE ALL RETURNS
PUBLIC OR CREATE EUROPEAN SYSTEM OF ESPIONAGE.
In the preceding articles I have shown you that the frauds and evasions under
the Federal income tax amount to more than $320,000,000-enough to pay the
entire cost of "preparedness"-and that these frauds can not be prevented nor
the taxes collected either under the law as it now stands, or with the existing
administrative machinery.
36
INCOME TAX.
The great question now arises, What are we going to do about it?
These taxes must be collected; the Nation needs the revenue and justice de-
mands the enforcement of the law.
There are only two effective methods.
First, the adoption and extension of the plans which are being urged by Secre-
tary McAdoo, providing a system of surveillance over every potential income-
tax payer.
Second, the adoption of the simple expedient of publishing the income-tax
returns so that the Nation may know who are the honest taxpayers and who are
the dishonest tax thieves.
The publicity plan proved its success as a means of insuring the payment of
the income tax during the Civil War.
Under the Civil War income tax the individual returns were published and
resulted in the uncovering of large frauds and delinquencies. But in 1870, when
Congress reached the lowest depths of corruption and venal subserviency to the
rich, when the public lands were being turned over to the railroads in return
for bribes almost openly given, when Jay Gould and Jim Fisk were popular
heroes, the income-tax law was amended to prohibit publicity. The only
ground urged was that it was "obnoxious to those who paid the tax." What
was the result?
In 1870 when the returns were published the number showing income over
$2,000 was 94,887. In 1871, when publicity was prohibited, the number fell to
74,775, and to 72,949 in 1872.
The existing system of complete secrecy is at the basis of the present tax
frauds. It is fundamentally wrong and un-American. Tax paying is public
business, and public business ought to be public.
Secretary of the Treasury McAdoo admits and has directed the attention of
Congress to the enormous frauds and evasions under the income-tax law. He
does not agree with the estimates given above as to the probable amounts of
the frauds, but he does agree that they are enormous.
I discussed with Secretary McAdoo upon three occasions what he proposes
to do. This is his answer:
"There can be no doubt that thousands of persons are successfully evading
the income-tax law and that wholesale frauds are being perpetrated in all
parts of the country and among all casses of taxpayers. People are not volun-
tarily going to pay this tax any more readily than they do any other. They
must be made to pay it and this can be done only through a very large increase
in the number of revenue agents and examiners. We must do more than simply
examine the returns. We must build up a system that will give us knowledge
of the identity and probable income of every person who ought to be subject
to the tax.
"Call it espionage if you will. The tax is just and equitable and can be
collected only by such a system as I have outlined. I am asking Congress for
nearly $1,000,000 to increase the force of income-tax agents and for certain
amendments which will make them effective.
"First, they must be in a position to know who ought to make a return, and
this I am proposing to secure through an amendment to the law requiring every-
one with a gross income over $3,000 to make a return. Second, they must have
complete powers to make an examination of books and papers, even if no return
has been made.
"At present only persons with net incomes over $3,000 per year are required
to report, and this not only gives a man a chance to make his own deductions
for what may be imaginary expenses and losses and thus salve his conscience,
but also opens a loophole for ignorance and plain fraud. Nobody can estimate
with any exactness what any man's net income is, after the deductions which
the law allows are made, but in every community the men with gross incomes
over $3,000 are well known. If this change in the law is made, it will mean
that we will get returns eventually from all those who are subject to the tax.
"With this information as to who the taxpayers ought to be it will be possi-
ble for the revenue agents, if they are given the broad powers which I am
asking, to compel the revelation of income from every source.
"I wish also to have enough agents to make it possible to compile and utilize
all the information that we can get from stockholders' lists; from records of
mortgages, leases, and probates of estates; and from all the thousand and one
sources which will give information regarding the people who should pay income
tax and the amounts upon which they would pay.
"If we can find the taxpayers, we will get the tax."
INCOME TAX.
37
This sounds effective and businesslike. But there are two inevitable con-
sequences which the American people and their Representatives in Congress
should clearly understand before they consent to the extension of the present
system of secrecy and espionage.
First, bribery and corruption to an extent never before known are inevitable
if the Government continues the present policy of keeping the returns secret,
while leaving the fixing of the assessments in the hands of revenue agents
and collectors. The profits of evasion are enormous, the chances of detection
negligible. There are now 60 taxpayers who are paying income taxes of more
than $60,000 each per year. Several of these same multimillionaires have,
within recent years, been detected in attempts to evade the customs duties
where only a few thousand dollars were involved. They have demonstrated
that they will resort to fraud and, if necessary, to bribery. Five per cent of
the smallest tax will pay the salary of any of the revenue agents for a year.
To save the taxpayer thousands of dollars the agent need not commit any
crime; he need only shut his eyes for a minute.
The Treasury Department needs the publication of the returns to keep its
collectors, inspectors, and agents free from any suspicion of graft. Sooner or
later attempts will be made wholesale to bribe the revenue agents to permit
fraudulent returns. Sooner or later the agents will succumb to the tempta-
tion, if the transaction can be hid under the cloak of secrecy provided by the
present act. Sooner or later, by force of circumstances, such graft will in the
shadow of secrecy reach even to some of the higher officials until a system,
safe because of its sure concealment, will be developed.
It is because we do not wish to see the Treasury Department the scene of
another whisky-ring scandal, or of another sugar-customs scandal, that com-
plete publicity of returns is demanded.
The other inevitable result of the method of collection advocated by Secre-
tary McAdoo is the creation of a bureaucratic spy system of enormous pro-
portions.
The income-tax act places the remedy for the existing frauds and the
preventive of the dangers just described in the hands of the President and
the Secretary of the Treasury. Article (d) of section G provides:
**
"The returns
shall be filed in the office of the Commissioner of
Internal Revenue and shall constitute public records and be open to inspection
as such: Provided, That any and all such returns shall be open to inspection
only upon the order of the President, under rules and regulations to be
prescribed by the Secretary of the Treasury and approved by the President.
What will he do?
*
What will you damand that he do?
We have the choice between publicity and espionage. Any system of espion-
age sufficient to insure the collection of the tax without publicity must in-
evitably develop into an all-prevading secret service and spy system, keeping
tab on the income and expenses of every American, browbeating or corrupting
employees, blackmailing taxpayers, and reaching the innermost secrets of
every family.
Put a spy behind every curtain, a dictagraph in every business-man's desk,
and the income tax will not be collected. But publish the tax returns broad-
cast in the newspapers of America, and sources of income which are now un-
known will yield up a huge stream of revenue to the Treasury.
The thief fears the light of day and the rich man fears the papers!
THE MEANEST THIEF.
The meanest thief in the world is the man who steals what he does not need.
The man of wealth who evades the just tax upon his income steals from every
less fortunate man, woman, and child in the country. He steals the revenue
which they must pay, unconsciously perhaps, but none the less surely, into the
public treasury through tariff duties and excise taxes.
The rich tax thief does not do his own stealing. In smug complacency he
swears that his return is true "to the best of his knowledge and belief." But
in his heart of hearts he knows that it is not true. He knows that his lawyers
and his clerks have seen to it that the return is the smallest which can hope
to pass muster before the United States Treasury Department. He knows
that they have not only falsified the return, but that it has been done cleverly,
since that is what they are paid for.
38
INCOME TAX.
He rests secure, knowing that his theft is safe from the eyes of the world,
and that only by sheer accident can the truth be discovered by Uncle Sam's
agents. His books are ready for their examination, carefully prepared to
correspond exactly to the sworn return. Only his business associates, men
of his own class, know his true income, and he is protected even from shame
before their eyes because they will never know the amount of income to which
he swore.
Does he know that he is a thief? Perhaps not, for generations of loose
civic morality in America have recognized tax dodging almost as a virtue,
never as a vice.
But in time to come, perhaps almost at once, the tax dodger, particularly if
already surfeited with the world's luxuries, will be branded by public opinion
as the meanest thief of all.
FIGHT OVER HARKNESS ESTATE OUGHT TO STIR UNITED STATES TO RECOVER MILLIONS
IN STOLEN TAX.
The contention over the estate of L. V. Harkness, lately deceased Standard
Oil magnate, said to be valued at $100,000,000, has uncovered what may prove
to be one of the greatest frauds in the history of the United States income
tax, involving more than $1,000,000 in taxes and penalties. A record of 700
pages has been filed in New York in connection with a suit by the State of
New York to determine whether the estate is taxable under the New York
inheritance law. The heirs have set up the claim that the estate is not taxable,
alleging that Harkness was not a resident of the State of New York, but of
Louisville, Ky.
Among the records is evidence showing that the total Federal income tax
paid by Harkness was $58,035. The records do not reveal the exact value of
the estate, but the statement of the New York State tax commissioners places
the value of the estate at $100,000,000. This estate consists almost entirely
of stocks and bonds, among which the most numerous are Standard Oil
securities, which not only pay enormous dividends, but which have also nearly
doubled in value since the time of the famous "dissolution." Even at the
rate of 5 per cent, which is far below the average rate, on stocks, the income
from an estate of $100,000,000 would be not less than $5,000,000.
The income tax on $5,000,000 is $341,020. The income tax actually paid by
Harkness was only $58,035. The loss to the United States Treasury therefore
would be $283,000 per year. This is positive proof that the conditions, which
I am exposing to you, exist in numerous instances.
The income tax has been in effect two years. The total amount lost by the
United States, at this reckoning, would therefore be more than $500,000.
The alleged frauds uncovered in this case are merely typical of the enormous
evasions systematically practiced to-day by the richest men in America.
Ac-
cording to my estimates, instead of the 60 who reported incomes of more
than $1,000,000 in 1914, there should have been more than 100 with incomes
greater than that amount.
How long are we Americans going to tolerate this?
ONLY 173 CITIZENS OF UNITED STATES ADMIT $500,000 INCOMES.
In my earlier articles I have indicated that the greatest income-tax evasions
were among the very wealthy-among the handful of multimillionaires who
collectively own more than one-tenth of the entire wealth of the United States.
The evasions among the multimillionaires are of two classes: First, plain
fraud in the filing or false returns and the concealment of sources of income,
and
Second, the utilization of various legal subterfuges to escape taxation. Chief
among these legal subterfuges has been the creation of the so-called founda-
tions, which I charge, and will try to demonstrate later, were formed pri-
marily to evade the Federal income tax.
To-day we will examine the evidence relating to the income-tax payments of
the multimillionaires and a few specific cases of evasion.
In order to deal with this question intelligently, I secured from the Treasury
Department an analysis of the returns of the 173 individuals who reported
incomes of more than $500,000 for the year 1914.
The figures which follow showing the incomes of the 173 millionaires with
over $500,000 have never before been published. In brief they show that
INCOME TAX.
39
these 173 individuals, who constitute less than two ten-thousandths of the
population of the United States, had gross incomes in 1914 of $246,327,605, or
the equivalent of the earnings of 500,000 wage earners. And yet, incredible as
the figures just quoted seem, it is my firm conviction as a result of my in-
vestigation that these multimillionaires have succeeded in concealing more than
half of their actual incomes and that the amounts reported should have been
at least twice as large.
The detailed figures showing the sources of income and the deductions
claimed are as follows:
Incomes:
INCOMES OF 173 MILLIONAIRES WITH INCOMES OVER $500,000.
Salaries_
Professions
Business-private
Rents
Interest-notes, mortgages, etc.
Interest-bonds, etc
Fiduciaries
Partnership gains.
Foreign sources_
Royalties
Dividends
Other sources.
Total gross income__
Deductions:
Expenses, "individual business'
Interest, "personal indebtedness
Taxes
Losses, not compensated
Debts, "charged off".
Depreciation_-_-
66
""
$13, 571, 000
5, 350, 000
16, 495, 000
3, 094, 000
1, 330, 000
2,822, 000
Total deductions
42, 662, 000
Total net income____
203, 884, 000
The first item to attract attention is the largest item in the list-dividends
of $153,700,000. At 6 per cent this would represent dividends upon invest-
ments of $2,561,666,000. Now, we know beyond a doubt that the aggregate
stockholdings of these 173 multimillionaires amount to much more than
$2,500,000,000. In fact it is certain that not more than 25 out of the 173
actually own stock worth more than $2,500,000,000. In 1914 Mr. Rockefeller
gave the Rockefeller Foundation $67,200,000 worth of stocks, but he did not
give up one single share of stock in the Standard Oil Co. of New Jersey, in
which his known holdings were worth nearly $400,000,000, nor a single share
in the Western Maryland Railroad or the Southern Pacific Railroad or the
Colorado Fuel & Iron Co., or any of the other companies in which he is known
to have enormous holdings, except the following: American Shipbuilding Co.,
Atchison, Topeka & Santa Fe Railway, Erie, Consolidated Gas, International
Mercantile Marine Co., Manhattan Railway Co., and National Lead Co.
short, in none of the companies in which he holds control did he give up any of
his stock.
In
$2,674, 000
553, 000
14,473, 000
15, 097, 000
10, 209, 000
29, 987, 000
6, 382,000
7,984, 000
2, 889, 000
74,000
""
153, 700, 000
2, 305, 000
246, 327, 000
The dividends of $153,700,000 received by these multimillionaires is only 3.9
per cent of the total American dividends of 1914. The analysis of such stock-
holders' lists as I have been able to secure shows that they own nearly 20 per
cent of all outstanding stock. Assuming, however, that they own only 10 per
cent, the loss in the failure to declare dividends must amount to the tax on
$250,000,000 of net income, or nearly $15,000,000.
It would be interesting to analyze the various items shown in the returns, as
it would indicate very clearly the excessive size of the deductions claimed, but
before closing this article I want to show one or two concrete cases of evasion
among the multimillionaire class which my investigations have brought to light.
One is the L. V. Harkness case, which I discussed yesterday, and which has
40
INCOME TAX.
opened up great probabilities of fraud and evasion. In 1914 only one person
in the State of California paid an income tax on more than $500,000. We know
now that this was L. V. Harkness. Now, in the State of California there are
a large number of multimillionaires, many of whose incomes, I believe, must be
more than $500,000. There is John D. Spreckles, Mrs. Phoebe A. Hearst, the
Stanford estate, the Huntington estate, and whole colonies at Pasadena and
other points along the coast whose incomes I certainly think reach the $500,000
mark.
If the Treasury Department would take only California, and, after publishing
the returns that have been filed, make a sweeping investigation of the million-
aires of that one State, there can be no doubt that the total taxes and penalties
collected would amount to millions!
The many evidences of extensive frauds among our multimillionaires are so
compelling that it seems only a matter of logic to ask Secretary McAdoo the
following questions in the hope that the public will demand an answer:
What action, if any, has he taken in the Harkness case?
How many returns in the $500,000 class have been examined, and with what
result?
ROCKEFELLER CONSIDERS FOUNDATION PRIVATE INTEREST," BUT IT PAYS NO INCOME
TAX.
66
Chairman WALSH. What connection, if any, did he (Ivy Lee) assume with
what is known as the Rockefeller Foundation?
JOHN D. ROCKEFELLER, Jr. No connection ** f ** but our office staff is a
sort of family affair. We talk over all kinds of matters of private interest.
We have not drawn sharp lines between our business and philanthropic
interests.
66
ROCKEFELLER'S CHARITABLE" FOUNDATION ONLY DEVICE TO EVADE INCOME TAX!
CHARGES MANLY.
The Rockefeller Foundation, with its enormous fund of more than $100,000,000
of income-yielding securities, is paraded before the world as "the greatest
benefaction in history."
Yet I charge that this great "foundation" is only a device created for the
selfish purpose of evading the income tax; that every penny of its $100,000,000
endowment and its $6,000,000 income is under the absolute control of John D.
Rockefeller; that its activities are not limited to " 'educational, religious, and
charitable purposes," but, on the contrary, thousands of dollars of its funds
have been expended for the direct benefit of the " Rockefeller interests."
Furthermore, I charge that the Rockefeller Foundation has by its activities
in behalf of purely selfish interests transgressed the clause of the income-tax
law under which it has claimed immunity, and now owes the United States
Treasury in taxes and penalties more than $1,000,000—a sum we need for our
"preparedness" bills.
Every fact I will cite in this or following articles regarding this foundation
is based either on the testimony of Rockefeller and the members of his personal
staff before the United States Commission on Industrial Relations or upon the
annual report of the foundation.
Every event in the history of Rockefeller's attempts to secure a charter for
the foundation coincides with a critical date in the enactment of the Federal
income tax. The first application for a Federal charter was made almost imme-
diately after the submission of the income-tax amendment to the States for
ratification. Every effort was made to jam the proposed bill through Congress
before March 4, 1913, when it had become certain that the income tax would
become law at a special session of Congress. The Rockefeller lobbyists were
active up to the last minute of the session, but failed to get by the Senate.
The attempt to secure a Federal charter was then precipitately abandoned, and
in absolute secrecy a charter was rushed through the New York State Legis-
lature on May 14, 1913, just in time to evade the income-tax law.
That Rockefeller regards the foundation as one of his private interests ap-
pears from his own testimony before the United States Commission on Indus-
trial Relations:
Chairman WALSH. What connection, if any, did he (Ivy Lee, Rockefeller
press agent) assume with what is known as the Rockefeller Foundation?
JOHN D. ROCKEFELLER, Jr. No connection, no official connection or connection
as a director, but our office staff is a sort of family affair. We talk over all
INCOME TAX.
41
kinds of matters of private interest. We have not drawn sharp lines between
our business and philanthropic interests.
This, I contend, shows that the Rockefeller Foundation was created for the
direct purpose of evading the income tax, and that it is now regarded by Rocke-
feller as one of his private interests, to be managed in direct connection with
his corporate business.
DOES ROCKEFELLER'S TAX-FREE FOUNDATION BELONG TO THE PUBLIC?
The acid test of Rockefeller's real purpose in establishing the foundation is,
"Who controls the money?"
If it was in truth a gift to the American people, to be expended for the wel-
fare of mankind, the funds would have been placed under the control of the
wisest and most experienced men in the Nation.
But Rockefeller placed the absolute control of the $100,000,000 in the hands
of a finance committee composed of his son, John D. Rockefeller, jr.; his
personal attorney, Starr J. Murphy; and an ex-private secretary, Jerome D.
Greene. When appointed, these three men were the "personal staff" of John D.
Rockefeller. Greene has since been removed to make room for Ivy Lee, Rocke-
feller's press agent!
Rockefeller, Murphy, and Greene are also a majority and quorum of the
executive committee, which controls all activities of the foundation.
With two exceptions, every member of the board of trustees, as shown in the
annual report, is either a member of the Rockefeller family, the Rockefeller
"personal staff," or a man whose job and salary is controlled by John D.
Rockefeller.
Rockefeller even made his private secretary one of the trustees.
The number of trustees has been limited to 11, so that the majority with
absolute control in every line are:
John D. Rockefeller; John D. Rockefeller, jr.; Starr J. Murphy, personal
attorney; Frederick T. Gates, ex-member "personal staff"; C. O. Heydt, private
secretary; and Jerome D. Greene, ex-private secretary.
The voting power of the stocks held by the foundation, which amount to
nearly $70,000,000, is vested in John D. Rockefeller, jr., or whomever he may
designate.
The entire $100,000,000, under the absolute control of John D. Rockefeller,
jr., may be, and perhaps has been, used to control the stock market.
In 1914 the foundation's transactions in securities amounted to more than
$8,000,000, upon which there was a reported gain of $170,901.
Two million dollars of the annual income of the foundation is set aside, with-
out warrant of law, to be expended for such purposes as John D. Rockefeller,
sr., may designate.
The entire $100,000,000 fund may at any time be distributed or returned to
John D. Rockefeller simply by the votes of any eight out of the nine trustees,
who are either members of the Rockefeller family, the Rockefeller "personal
staff," or salaried men in one of the Rockefeller institutions!
ROCKEFELLER'S "PERSONAL STAFF" CONTROLS TAX-FREE $100,000,000 FUND.
The finance committee chosen by Rockefeller to control his $100,000,000 "gift
to the American people" were the members of his personal staff:
His son, John D. Rockefeller, jr.
His attorney, Starr J. Murphy.
An ex-private secretary, Jerome D. Greene.
These same three men form a majority of the executive committee, and thus
control all activities of the "foundation."
Rockefeller, jr., has power to vote all stock held by the foundation!
ROCKEFELLER FOUNDATION SPENDS MONEY ON ROCKEFELLER INTERESTS.
My charge that the Rockefeller Foundation owes the Treasury of the United
States more than $1,000,000 income tax is based upon the testimony of John D.
Rockefeller, jr., already quoted, that the foundation is regarded by the Rocke-
fellers as a private interest, upon the absolute control of the foundation's funds
by the personal staff and salaried employees of Rockefeller, and upon the evi-
dence which I present herewith that the foundation is not operated exclusively
for "
religious, charitable, scientific, or educational purposes," and that thou-
42
INCOME TAX.
sands of dollars of its funds have been expended for the benefit of Rockefeller
or the corporations in which he is interested.
The only clause of the income-tax law under which the foundation can claim
exemption is article G, subhead (a), which provides that "Nothing in this sec-
tion shall apply to **
any corporation or association organized and
operated exclusively for religious, charitable, scientific, or educational purposes,
no part of the net income of which inures to the benefit of any private stock-
holder or individual."
If the foundation has transgressed this clause of the act in any particular it
thereby becomes liable for taxation upon the whole of its income.
First, then, is the foundation operated exclusively for "religious, charitable,
scientific, and educational purposes"?
In 1914, $50,000 of the foundation's funds were appropriated to pay expenses
connected with the drafting of the reactionary New York State constitution,
which was rejected at the polls by an overwhelming vote. At best, this expendi-
ture was purely political, but inasmuch as the main features of the constitution
were the practical prohibition of any taxation reforms and the protection of
property interests, it does not seem unreasonable to believe that this expendi-
ture was made for the benefit of Rockefeller interests.
Let us next consider what may at first sight seem the most disinterested of
the foundation's activities-the China medical board.
In order to understand Rockefeller's activities in China it is necessary to
know that the estimated value of the Rockefeller-Standard Oil holdings and
concessions in China is greater even than in the United States.
Now, with that fact in mind, the purpose of the Rockefellers becomes clear
when we read in a memorandum prepared by Frederick T. Gates for the guid-
ance of the China medical board:
"The plan also utilizes to the full through generous cooperation with the mis-
sionary boards the whole power of Christian sentiment in this and other lands
and enlists this sentiment in greater practical service.
"This plan promises also the largest economic advantages. It will awaken
enthusiasm at home; it will command confidence abroad."
That the Rockefeller Foundation's activities are not restricted to "religious,
charitable, scientific, and educational purposes" is most conclusively proved by
the testimony of Jerome D. Greene, secretary of the foundation, before the
United States Commission on Industrial Relations, in which he admitted the
power of the foundation to do any of the following things:
Conduct a propaganda against trade-unionism.
Circulate literature against workmen's compensation.
Champion free trade or protection.
Champion trusts.
Promote programs of political parties.
Thousands of dollars, moreover, have been expended for the promotion of
activities which directly benefit the Rockefeller interests.
The most conspicuous is the employment of W. L. Mackenzie King in activi-
ties for the sole benefit of the Colorado Fuel & Iron Co., and for which he
should have been paid by that corporation.
The letter from Jerome D. Greene, secretary of the foundation, stated that
Rockefeller and Greene, "as directors of large industrial enterprises," desired
King's services. Nothing was said about any philanthropic purpose. Yet King
has been paid a large salary and liberal expenses by the Rockefeller Founda-
tion, although his only active service has been advice to the Colorado Fuel &
Iron Co. as to the settlement of labor troubles. Other corporations pay large
fees for such advice from other similarly qualified experts.
In the same class is the appropriation of thousands of dollars for the con-
struction of Young Men's Christian Association buildings in the camps of the
Colorado Fuel & Iron Co., although in a letter to Welborn, president of that
corporation, Rockefeller had previously urged the construction of such build-
ings at the expense of the company. This expense has now been shifted to the
tax-free foundation, while the company directly benefits by this "welfare
work" among its employees for which other corporations must pay out of
their own funds.
It must be remembered that in dealing with the activities of the foundation
we are limited to the very brief period in 1913-14 for which it has rendered a
public report. Although four months of 1916 have now elapsed, no report for
1915, the first year of real activity, has yet been published.
INCOME TAX.
43
I contend, however that the evidence which has been presented in these col-
umns constitutes far more than a sufficient basis for Secretary McAdoo to
demand that the Rockefeller Foundation pay the United States Treasury an
income tax of more than $1,000,000, which this Nation needs if its
ness" bills are not to stagger the working people of America.
prepared-
MAKE THE INCOME-TAX THIEVES PAY THE PREPAREDNESS BILL.
Preparedness must be paid for.
It is going to cost nearly $200,000,000 this year.
The only question now is, "Who will pay the bill?"
Basil Manly's investigation of the United States income-tax frauds as pub-
lished in this newspaper shows where all of the needed millions and more can
be raised without resort to new taxation and without burden to any honest man.
If Secretary McAdoo will collect any substantial part of the $320,000,000
income tax which annually is being evaded, the entire preparedness bill can be
paid quickly and easily.
The Nation's answer to the demand for more revenue must be, "Make the
tax thieves pay the preparedness bill.”
FOREIGN FIRMS, GROWING FAT ON OUR TRADE, CHEAT INCOME TAX.
The income-tax evasions by foreign corporations on their American business
have been enormous. One reliable estimate places the total evasions at more
than $1,000,000.
The most conspicuous tax dodgers in this class have been the foreign steam-
ship companies. These companies have had a practical monopoly of the ocean
transportation of American cargoes, and have made enormous profits through
the maintenance of freight rates by pools and secret agreements. Since the
beginning of the European war these companies have increased their rates more
than 500 per cent.
During all the six years since the enactment of the corporation tax the United
States Treasury has allowed the steamship companies to report deficits of mil-
lions when most of them were really making enormous profits.
How did they do it? By the simple process of charging up against American
business practically all the expenses of their entire operations. Meanwhile
Uncle Sam sat with his eyes closed and his hands folded.
Take the case of one of the English steamship companies whose books have
just been examined. This examination shows that although the returns of the
company to the Treasury Department for the six years from 1909 to 1914 showed
an alleged loss on American business of more than $10.000.000, there was in
fact a net profit on American Business of more than $4,000,000.
This one company owes the United States Treasury more than $40,000, while
the tax due from all of them runs toward the million mark.
At the same time that this company was not paying one cent of tax to the
United States it was paying into the British income tax more than $150,000.
This case is simply illustrative of what was done by practically every one of
the foreign steamship companies.
It shows clearly also many of the things that are wrong with the income-tax
law and our Treasury Department.
How many years would the steamship companies have been able to turn in
such absurd returns if the information had been public before protests from
their American competitors were lodged with the Treasury Department?
How long could the Treasury Department have remained with closed eyes and
folded hands before some enterprising newspaper exposed the whole game or
some alert representative of the people demanded the enforcement of the law-
especially now, when we are seeking revenue to pay our great impending "pre-
paredness" bill?
STAGE AND MOVIE STARS DODGE INCOME TAX-ACTOR FOLK ROB UNITED STATES OF
$2,000,000 A YEAR.
The theatrical industry alone has succeeded in defrauding the United States
Government annually of more than $1,000,000 in income tax.
This is a conservative estimate-not only has there been an almost universal
failure to make returns on the part of individual promoters, managers, and
44
INCOME TAX.
actors, but the theatrical companies have largely failed to make returns or have
concealed a very large part of their incomes.
One of the largest producing companies in New York City, operating a circuit
of theaters throughout the country, reported taxable income of only $17,500.
When I came across the case in the course of my investigations an examination
was just being made of its accounts. At that time only the profit-and-loss
account, which gives simply the general results of the year's business, had been
examined. This superficial examination disclosed $153,000 of taxable income
and indicated that several times as much-probably $500,000-would be dis-
closed by a complete examination.
All corporations are required to withhold the tax on all salaries over $3,000.
Not one cent of salary tax had been withheld, nor had any report of salaries
been made by this theatrical company. An examination of its pay rolls showed
more than 1,000 actors and actresses who should have paid the tax.
This is one of the cases which reveals the almost complete lack of exact knowl-
edge by our revenue bureau with regard to the entire income tax. It does not
even have the data upon which it could, if it wished, compile a statement
which would show how much tax was paid by the theatrical or any other
profession. The bureau has no means of knowing if it has collected one-half
or only one-hundredth of the revenue that ought to come from this source.
The same situation exists in the moving-picture industry, which has grown
to have an annual production of $75,000,000. The net profits of the industry
reach, it is estimated, $25,000,000, upon only a small fraction of which the
Federal Government receives any tax.
The salaries of the "stars" alone total several millions, all of which should
be liable to pay the supertax.
Mary Pickford's reported salary of $600,000 would be liable to a total tax
of $34,510. Charlie Chapman's alleged $670,000 would have to pay a tax for
1916 of $39,410.
Altogether, the theatrical industry in all its branches ought to pay into the
Treasury under the income tax on individuals and corporations not less than
$2,000,000 a year. Nobody knows what it does pay, but the best-informed
revenue agents do not believe it is paying even one-tenth of that amount-and
this at a time when the Government is scurrying everywhere to find money to
pay our impending "preparedness" bills.
Will Secretary McAdoo try to stop this leak by sending one of his revenue
agents to examine a few of the returns, or will he publish the facts and let the
force of public opinion and public knowledge help him?
All of his 57 revenue agents working for a year could not make a thorough
investigation of the thousands of returns that are made or should be made by
this one industry.
Could there be any better evidence of the futility of the existing system?
AMERICA'S NATIONAL INCOME IS FORTY-SIX BILLION DOLLARS A YEAR.
The income of the people of the United States in 1914 was $46,000,000,000.
This amount seems an absurdly large annual national income until it is
pointed out that, were it distributed evenly among the 100.000.000 people of
the United States, it would give each person an income of only $460 per year.
The income of the average reader of this paper, it is true, will not amount
to more than $200 for each member of the family. But the reason for the dif-
ference between $460 and $200 becomes clear as soon as it is remembered that
there are thousands of families, each of which receives the income of more
than a thousand ordinary wage and salary earners.
There are 10 American families which together receive the income of more
than a quarter of a million wage earners. John D. Rockefeller's income alone
is equal to that of 100.000 average wage earners.
How do we know that the income of the American people is $46,000,000,000?
In order to answer this question we have to go back to 1910, the last year
for which complete official statistics are available. A very conservative
analysis of these statistics shows that in 1910 the national income was $36,-
769.000.000. This figure differs from the previous estimates of national in-
come, which have placed the total at from $30.000.000.000 to $31,000,000,000
chiefly because these previous estimates have entirely omitted the enormous in-
come derived from the increase in the value of land and other property. This
so-called unearned increment is one of the largest single sources of income.
When we know the amount of the national income for 1910, it is very easy
to calculate the figure for 1914. The best single index of the increase of the
INCOME TAX.
45
national income is the amount of individual deposits, which increased 26 per
cent between 1910 and 1914. As a check on this, we know that the value of
agricultural products increased 30 per cent, and the net value of manufactured
products increased 20 per cent during this period. In order to be well within
the facts, however, we will figure on an increase for 1914 of only 25 per cent
over 1910, which makes the national income $46,000,000,000 for 1914.
The items which go to make up the national income can not be stated in
detail for 1914, but in 1910 they were as follows:
AMOUNT AND SOURCES OF THE INCOME OF THE AMERICAN PEOPLE IN 1910.
Raw materials:
Farm products
Mining and quarrying.
Forest products, except as indicated with farms_
Fisheries..
Furs...
Manufacture (value added to raw materials).
Transportation and communication ____.
Electric light and power (gas included with manufacture)
Trade, wholesale and retail_
Construction
Land, value increment.
Business, value increment
Rent, residences only, other rent already included_.
5, 000, 000
8, 529, 261, 000
3, 207, 042, 000
100, 000, 000
5,464, 000, 000
1,500, 000, 000
3,036, 000, 000
2, 150, 000, 000
930, 000, 00J
719, 398, 000
20, 000, 000
1, 750, 000, 000
1, 500, 000, 000
36, 769, 301, 000
Although the general character of each of the above items is sufficiently clear,
a brief explanation on the method of calculation is necessary.
First, labor becomes, both wages and salaries, are in each case included with
the industries to which they apply. They are an item of expense to the em-
ployer, but a source of income to the employees.
It will also be noted that no items appear either for interest or any form of
rent except the rent of residences. This is because both of these items, while
constituting income for the money lender and landlord, are deductible expenses
for the corporation or individual that has to pay them. The same is true of
advertising.
Insurance
Banking services, other bank income already included...
Professional services
Domestic and personal services_
Total____
$5, 869, 938, 000
1, 491, 582, 000
447, 080, 000
50, 000, 000
The increment in the value of land has been calculated to include only the
profit which is actually realized through the sale and transfer of land. Fur-
thermore, the depreciation of land values is offset against the value increment.
The increment in business values refers to the appreciation arising from
good will, organization, etc., which is regularly realized upon in the sale and
transfer of businesses or in their recapitulation. The whole basis and method
of calculation of this business value-increment is too complex to be explained
in detail, but the essential facts may be stated. This value-increment is estab-
lished in two ways: first, the increase in the price of securities, and second,
the issue of stock dividends.
The public generally has no conception of the rate at which the value of
corporate property has increased in the United States over and above any new
investment. Some idea may be gained from the fact that the average price
of all securities traded in on the New York Stock Exchange increased from
$77.24 for the five years 1900-1904 to $95.82 for the five years 1910-1914. This
is an increase of $21.58 during the 10 years on each share. An almost identical
increase took place during the preceding 10 years. A part of this increase is
unquestionably due to the reinvestment of earnings, but this is more than
offset by the enormous issues of stock dividends, which in the aggregate amount
to hundreds of millions of dollars.
Now these figures are so enormous and so startling that they may seem in-
credible. But just consider that the American people spend annually for
luxuries more than $6,000,000.000, of which more than two billions are spent
for intoxicating liquor, and you will readily see that $46,000,000,000 must be
a very conservative estimate of the total national income.
46
INCOME TAX.
WHO GETS THE $46,000,000,000 INCOME THE UNITED STATES PRODUCES EVERY YEAR?
In yesterday's article I showed you where the national income of $46,000,-
000.000 comes from. An even more important question is Who gets it?
The first big question is:
What do the wage and salary earners get the millions of workers who pri-
marily produce the Nation's wealth? There are 24,000,000 of them, and with
their families, they constitute two-thirds of the total population, yet their ag-
gregate incomes are only $15,000,000,000—less than one-third of the national
income.
The farmers, including owners and tenants, get about $4,000,000,000-less
than one-tenth of the total, after deducting interest and taxes.
The lawyers, doctors, and other professional men, who derive their incomes
from fees, receive about $900,000,000.
The other $26,000,000,000 of national income-more than 56 per cent-goes
to the bankers, merchants, manufacturers, and property owners. We lack the
necessary data upon which to base even an approximate division among these
various classes, but we know that the bulk of it goes to stock and bondholders,
and that only a comparatively small part to the individuals who conduct their
own private businesses. Except in a few lines, the independent small business
man is practically extinct. Look, for example, at manufacturing, where, as long
ago as 1909, 80 per cent of all products were made by corporations. Even in
retail trade, the last stronghold of the small business man, enormous inroads
have already been made by the department store and the "chain store."
Who owns these corporations? There are hundreds of thousands of stock
and bondholders, many of whom are salaried people and a few even wage
earners, but the holdings of the majority are relatively insignificant. The real
ownership and the absolute control is concentrated in the hands of a few
thousand multimillionaires, fully one-half of whom live on that little nub of
rock known as Manhattan Island.
There is a fiction industriously circulated by the capitalistic press that the
stocks, particularly of the great corporations, are very widely distributed. The
United States Steel corporation, with more than 100,000 stockholders, is always
cited as the supreme example of this "democratic" ownership. Very well.
Let us look at the Steel Trust. You don't have to take my word, for in 1911
the Steel Trust filed as an exhibit in the "dissolution suit" a table showing
exactly how its stock was distributed. At that time the corporation claimed
100,343 stockholders, 35.230 owning common stock and 65,113 preferred stock.
Take the common stock first-there were just 1,068 stockholders with 100
shares and over, but they owned $358,946,000, 70 per cent of the common stock,
while the 22,799 holders of less than 25 shares owned only 4 per cent.
Similarly, only 482 holders of more than 1.000 shares of preferred stock
held 38 per cent, while the 49.195 holders of less than 25 shares owned only
11 per cent. Taking all the Steel Trust stock, common and preferred together,
less than 1 per cent of the 100,000 stockholders owned 57 per cent of all the
stock.
I have examined for this investigation every stockholders' list made public
for three years, and have found that, taking them all together-big companies
and little companies, banks, railroads, and industrials-less than 2 per cent of
the stockholders, owning 1,000 shares and over, hold more than half of the
stock.
The ownership of land is equally concentrated. A few examples will suffice.
In New York. 99 families own one-seventh of all Manhattan land values.
In Chicago, 10 families own one-twelfth of all the land.
In Cleveland. 127 families own one-third of all the land.
Without going into further detail, my investigations show beyond doubt that
at least $10,000,000,000, nearly one-quarter of the entire income of the people of
the United States, goes to a mere handful of plutocrats, who, with all their
families, constitute less than 1 per cent of the population.
They can not, even with the wildest extravagances that fancy can suggest,
spend even the half of these countless millions. And yet they, who have shouted
loudest for preparedness, not only grudge the Federal Treasury the small per-
centage which it demands as income tax, but resort to the pettiest conceal-
ments, the most palpable evasions, and the meanest frauds, to rob the Nation
in its hour of greatest need.
The immediate step in national preparedness for the Wilson administration
is to uncover and end these scandalous frauds.
INCOME TAX.
47
CONGRESSMAN DEMANDS THAT M'ADOO PROBE INCOME-TAX FRAUDS.
[Interview by Frederick M. Kirby.]
I have just asked Congressman Edward Keating, of Colorado, why he has
introduced into Congress his resolution calling upon the United States Govern-
ment to investigate the charges of income-tax frauds just made by Basil M.
Manly for the newspapers served by the Newspaper Enterprise Association.
Here is what Keating said:
"I introduced my resolution largely because of my faith in Basil M. Manly.
Through his work with the Walsh Industrial Relations Commission, Manly
has demonstrated that he is an economist of the first rank and an indefatigable
investigator who, in his researches, would display neither fear nor favor.
"Manly declares that approximately $320,000,000 is being annually withheld
from the Treasury of the United States by income-tax frauds and evasions.
"You may discount Mr. Manly's figures by 50 per cent and still have a sum
which makes all other frauds which have heretofore been perpetrated in
Federal Government seem insignificant.
"Three hundred and twenty million dollars represents the total income of
about 600,000 American workingmen who have labored every day of the year.
"The Nation's pension roll is enormous, but with the sum which Basil Manly
says the millionaires of this country steal from the Nation every year we could
pay it twice over.
"With this sum you could take all the children out of industry and place
them in school and give the Nation a virile manhood and womanhood which
would render it invulnerable to the attacks of its enemies.
"If you wish to use the money to destroy your fellow beings, you could con-
struct 20 superdreadnaughts every year with the amount that Manly says the
millionaires are stealing from Uncle San.
"The American people are entitled to know the facts about this charge, and
therefore, I have introduced my resolution calling on the Treasury Department
for its side of the case. I will ask the Committee on Expenditures in the
Treasury Department to hold public hearings on the matter. In that way
Manly will have his day in court, and if his statements are questioned the
other side will be given ample opportunity to be heard."
(Thereupon the committee adjourned.)
1
INCOME TAX.
COMMITTEE ON EXPENDITURES IN THE
TREASURY DEPARTMENT,
HOUSE OF REPRESENTATIVES,
Saturday, June 17, 1916.
The committee met at 10.30 o'clock a. m., Hon. C. O. Lobeck
(chairman) presiding.
The CHAIRMAN. Mr. Manly, you may resume your statement.
STATEMENT OF MR. BASIL M. MANLY-Continued.
Mr. MANLY. Mr. Chairman, I had just made a general statement
in connection with the estimate of the national income of
$46,000,000,000, and I had then gone off into a comparison of that
estimate with the estimate of the national income of Great Britain in
order to show the reasonableness of the estimate.
The CHAIRMAN. Have you made any attempt to compare the wealth
and income of this country with that of other nations?
Mr. MANLY. I have only been able to do so with Great Britain,
which was the only country for which I could find figures on a basis
that would easily compare with our own. The amount of work
necessary in order to make similar comparisons with other countries
has made it impracticable. I have made a general statement with
regard to Great Britain, and that is contained in the record of my
last testimony. That statement simply shows that there is every
reason to believe that the income of the United States is four times
as great as the income of Great Britain. That is based upon this
general evidence-just summing it up-that we have more than
twice the population of Great Britain, and, taking our people from
top to bottom, each of them, as a class, will average approximately
twice as much income.
Mr. CARTER. Do you think they really do that?
Mr. MANLY. So far as money is concerned; yes, sir. Our level of
prices is higher. That was shown with reference to wage earners by
a very thorough investigation that was made by the British Board of
Trade three or four years ago in which they compared the same classes
of workmen in Great Britain and America. Of course, it was to their
interest to make the British wages appear as high as possible in com-
parison with American wages; but they showed that the American
wages were approximately twice as great, while our price level was
approximately 48 per cent higher than the British price level.
Mr. CARTER. That is to say, goods in the United States cost 48 per
cent more than in England?
Mr. MANLY. Yes, sir.
Mr. CARTER. You are speaking now of wage earners and you say
that the income of American wage earners is twice as great as that of
54080-16-
4
49
50
INCOME TAX.
British wage earners. Now, do you think that that proposition would
apply to people with larger incomes?
Mr. MANLY. I know it does apply to people with very large incomes;
that is, to very wealthy people. I put that information in the record
at the last hearing. I made a thorough examination of the estates
that were appraised under the British income-tax act over a period of
seven years and I compared them with the estates that we know about
in New York. That is the only place where we get an appraisal
of the big estates.
Mr. CARTER. Might it not be that the British people, like the Ameri-
can people, are not getting correct reports?
Mr. MANLY. When they die they get them pretty well.
Mr. CARTER. You mean under the inheritance tax?
Mr. MANLY. I mean the inheritance tax; not the income tax. Now,
during that period of seven years there was no fortune in Great Britain
that exceeded $75,000,000 in value.
Mr. CARTER. That is, no person died leaving a greater estate than
that?
Mr. MANLY. No person died who had more than $75,000,000,
whereas during last year in New York, for example, there have been
several. We will take one family, for instance, the two Harkness
brothers, whose fortunes exceeded $100,000,000, and there are a large.
number of others that could be mentioned. For instance, there is
no fortune in Great Britain that even approximates in value the
fortune of John D. Rockefeller.
Mr. CARTER. What information have you regarding the income
of the middle class? You have referred to the incomes of the very
wealthy and of the wage earners.
Mr. MANLY. I have not been able to make satisfactory comparisons
as to the income of the middle class, but if you take the professions,
the doctors and lawyers and people of that class, I think you will
find that the fees charged in Great Britain are apparently considerably
lower, but what the proportion is I do not know, and I do not think
that anybody else has any basis on which to determine that. I can
only compare the top and bottom.
Mr. CARTER. Do you think that the fees charged by doctors,
lawyers, and other professional men are greater in the United States
than in other countries?
Mr. MANLY. I think they are greater than the fees charged in Great
Britain. That is the only country with which I have been able to
make a comparison.
Mr. CARTER. Are they not about as great in Great Britain as in any
other country?
Mr. MANLY. I think so, surely.
Mr. CARTER. Let me ask you something else: Did you make any
investigation of the earnings of farmers in Great Britain?
Mr. MANLY. No, sir; I have not been able to do that. There is
data on which that could be done
Mr. CARTER (interposing). You do not know whether the farmers
of Great Britain receive as much income as the farmers of the United
States, or not?
Mr. MANLY. I do not know. I know that the agricultural laborers
receive immeasurably less than in the United States. You have
practically two classes of farmers in Great Britain. You have the
and
ers
Fr.
I.
PR
TV
T
7
INCOME TAX.
51
big landed estates worked by tenants, and then a class of very small
farmers, or men who would be considered very small farmers in this
country.
Mr. CARTER. Farms of from 10 to 20 acres?
Mr. MANLY. Yes, sir; farms of from 10 to 20 to 30 acres. I have
not been able to make that comparison. I know that the yield per
acre is higher in Great Britain than here, and I know that the farmers
of Ireland and Scotland, who make up a large part of the farming
population of Great Britain, are impoverished, or they are what we
would consider impoverished. The story of the British farmer is the
story of people who are pretty much on the ragged edge. For in-
stance, they do not sell Ford automobiles to farmers very much.
The CHAIRMAN. The farmers here use Ford automobiles for eco-
nomic purposes.
Mr. MANLY. Yes, sir; but they do not sell any there. They have
not the capital to invest in automobiles, even though it might be
economy to own them in the long run.
The CHAIRMAN. While you are on this farming proposition, let me
ask you something: You have given a showing here of a gain of
$46,000,000 per year, and you also make a showing that that in-
crease or gain comes from increased values, whether of land or busi-
ness?
Mr. MANLY. Yes, sir.
The CHAIRMAN. Do you consider, then, that the farmer ought to
pay an income tax on the increased value of his land?
Mr. MANLY. Only when he sells the land and a profit has been
realized upon it, but not on what is known simply as the general level
of increase.
Mr. CARTER. That is not paid on anything.
Mr. MANLY That is not paid in any tax, except there is a British
tax which attempts to estimate that.
The CHAIRMAN. Do they attempt to estimate an income tax based
on increased values?
Mr. MANLY. It is not an income tax, but they have a separate tax
law which went into effect, I believe, in 1912, by which they attempt
to appraise the value of the land and then to base a tax substantially
on the yearly increase in the value of it.
The CHAIRMAN. But referring to this $46,000,000,000, in round
numbers, that you set out there, you claim that that is based on the
increased value of land or partly that?
Mr. MANLY. On the increased value of land which has been sold or
which will be sold during the year. If a farmer owns a farm that he
has been holding for 40 years, I do not say that he pays any tax on
that, although it may have trebled in value. He does not pay any
tax on that until he sells it or until he gets that increase in value.
The CHAIRMAN. But he has been paying county and State taxes
during all of that time.
Mr. MANLY. I am simply taking the law as it stands. I am not
arguing for or against the proposition, but I know that that is the
interpretation that has been placed upon the act by the Treasury
Department, as I understand it, and in Congress, at the time the act
was debated-
Mr. CARTER (interposing). Does the Treasury Department inter-
pret the law to mean that an increase in the valuation is income when
the land is disposed of?
52
INCOME TAX.
Mr. MANLY. The gain resulting is interpreted as income.
Mr. CARTER. If I had 100 acres of land last year valued at $40 per
acre, and I should sell it this year at $50 per acre, the law would con-
template an income on account of that land of $1,000?
Mr. MANLY. Yes, sir; the increase would be $10 per acre.
The CHAIRMAN. And on that I would pay taxes?
Mr. MANLY. On that income the tax would be based.
Mr. CARTER. I did not know that the law had been construed that
way.
Mr. MANLY. The law was so construed repeatedly.
The CHAIRMAN. What he has tried to show in his statement is that
the increase or income for the year is $46,000,000,000, the wealth of
the people being $200,000,000,000. According to that, the increase
in value is about 23 per cent, while the statistics of the Treasury
Department show that the increased values in each year in Great
Britain are from 8 per cent to 12 per cent.
Mr. CARTER. How do you get at that valuation? How would you
get at that valuation of the land?
Mr. MANLY. The way I had to take it was from the census reports.
The census reports give us the increase in the value of the land
in 1900-
Mr. CARTER (interposing). How does the Treasury Department
get at it?
Mr. MANLY. I do not know how the Treasury Department gets
at it.
The CHAIRMAN. Of course, they could get it from the Census
Bureau.
Mr. MANLY. Do you mean in individual cases?
Mr. CARTER. Yes. Suppose they go to tax Mr. Price on some
land. Suppose Mr. Price has 100 acres of land that has increased
in value, and the Treasury Department wanted to tax him on that
increase of value; how would they go about ascertaining the amount
of the increase?
Mr. MANLY. Suppose Mr. Price had 100 acres of land and sold it
for $50 per acre; what they would have to do would be to ask him
what he paid for it, and if he said $40 per acre-
Mr. CARTER (interposing). Perhaps he bought the land 10 years
ago.
Mr. MANLY. I do not know how far back they would go. There
has been no definite Treasury decision on that point-
Mr. CARTER. It would have to run for the current year?
Mr. MANLY. It would have to include the current year. I know
from the debates in the Senate that they contemplated taking it
over a longer period of time. Senator Cummins discussed that
question at great length.
Mr. CARTER. The income tax is only collected for the year which
has passed or the year for which the tax is due. Now, if Mr. Price
bought his land 10 years ago, a part of the increase in the value of the
land, or the most of it, would probably have occurred prior to the
time when the income-tax law was enacted.
Mr. MANLY. It would have to be apportioned so as to apply only
to the period during which the income-tax law has been in effect. As
I understand their decision, that increase of $10 per acre over a period
of 10 years would be taken as an increase at the rate of $1 per year, and
INCOME TAX.
53
the tax would have been in effect two years. Therefore they would
only be able to tax two years of increment as the income during the
operation of the tax.
Mr. CARTER. They would hardly do that, because it might have
had an increase of $20 per acre in value prior to the time that the law
was passed, and then the value might have decreased since then.
Mr. MANLY. I understand that that is the method. I am not
attempting to justify or criticize their method, but I understand that
that is the method. If they did not tax that as income, the real estate
speculators would go untaxed.
Mr. CARTER. The thing I was trying to find out was upon what
substantial basis could that proposition of taxing the increase in value
be placed.
Mr. MANLY. They do the same thing in the case of stocks, and it
works very much more drastically there for this reason-
Mr. CARTER (interposing). That line of demarcation is easily made.
The CHAIRMAN. They have got a line on stocks because they can
get the market value.
Mr. CARTER. Yes, on the day that the fiscal year began.
The CHAIRMAN. They can get the market value of the stocks.
Mr. CARTER. From the quotations.
Mr. MANLY. They can get the quotations, but that is only a general
indication of the price at which they might have been bought. They
do not allow any offset for loss, either. If you had bought stocks that
have appreciated in value, they take that appreciation in value as
the income, but if you bought other stocks that have decreased in
value, they do not allow any offset on that account.
Mr. CARTER. I can see how the appreciation in value might be a
proper thing to tax under an income tax law, because appreciation
in value is generally brought about by a man's own individual efforts
and the progress of the entire country. That is a very just thing to
do, but it seems to me that it would be a pretty difficult proposition
to arrive at any positive calculation as to the increase. No sale or
offer of sale or purchase might have been made during the fiscal year,
and, perhaps, no sale had ever been made, and it would be left largely
to the man who submitted the report-
Mr. MANLY (interposing). I do not know about the specific
method of appraising land. I asked them at the Treasury Depart-
ment how they handled that question, and my understanding was-
and I went into it pretty thoroughly-that that was the method;
that is, they would take what was paid for it and prorate the taxes
among the years to which the tax would apply. That is the way
I attempted to calculate the matter for this report.
The CHAIRMAN. You have stated in your reports that are now
printed in these hearings the amount of income tax that you estimate
should be collected each year?
Mr. MANLY. Yes, sir.
The CHAIRMAN. Just state that again.
Mr. MANLY. My statement was that on the basis of my estimate of
the national income and the distribution of the national income, the
total collections should approximate $400,000,000.
The CHAIRMAN. Does that include both the corporation tax and
income tax?
Mr. MANLY. Yes, sir.
54
INCOME TAX.
Mr. CARTER. That is your estimate of the collections?
Mr. MANLY. That is my estimate of the collections.
The CHAIRMAN. Did you look into the matter of whether or not
the taxes on the corporations are pretty fairly collected?
Mr. MANLY. I have no basis there except for two years, or only
the general statement of Secretary McAdoo in his annual report of
last year, in which he estimated that the evasions by corporations,
or, rather, as he puts it, the omitted taxes on the part of corpora-
tions, amounted to approximately $20,000,000, which would be the
tax at 1 per cent on an income of $2,000,000,000, or net earnings of
$2,000,000,000 in the case of corporations. I have also his statement
in this letter, in which he says that $8,400,000, approximately, of
omitted taxes has been collected during this year through the inves-
tigations of the revenue agents. That statement is contained on
page 14. I believe that he says in this letter, or he stated in an
interview with the press that was given out about the time this
letter was sent, that, in his opinion, a majority of the evasions that
had been detected had been evasions on the part of corporations.
In the New York office of the Internal-Revenue Bureau, or in the
office of the first district, I was told that the foreign steamship com-
panies had succeeded during the entire life of the income tax in
practically evading the entire tax. They stated that they were just
beginning an investigation of them at that time and expected to
collect very large amounts of omitted taxes. I was shown the
figures for
The CHAIRMAN (interposing). They were foreign corporations?
Mr. MANLY. They are foreign corporations. They are the big
steamship lines.
Mr. CARTER. Having offices in this country?
Mr. MANLY. They have offices in this country. The law specifically
provides for the taxation of these corporations upon the business that
originates on this side.
The CHAIRMAN. Do you think the department is making every
endeavor to collect them?
Mr. MANLY. That is what I said there, but I said that the matter
had gone over for a large number of years, so there was a great deal
of taxes that had accumulated that ought to be collected.
The CHAIRMAN. Since the passage of the corporation-tax law?
Mr. MANLY. Yes, sir; since the passage of the corporation-tax law.
For example, there was one English steamship company-they did
not give me the names, but simply told me the general facts-that
made returns to the Treasury Department for six years, from 1909 to
1914, inclusive, and those returns showed an alleged loss on American
business of more than $10,000,000, while the accounts of the Treasury
Department had shown that there was in fact a net profit on the
American business of more than $4,000,000. So there is a difference
there of $14,000,000 between a loss of $10,000,000 and an actual
profit of $4,000,000. Furthermore, that company which was not
paying a cent to the United States was paying $150,000 of British
income tax. It plies simply between England and the United States,
I was told, so that there ought to be at least an equal division.
The CHAIRMAN. Have you any information as to how many com-
panies would come under that class?
INCOME TAX.
55
Mr. MANLY. A very large number. It was stated to be true of
all the foreign steamship companies doing an international business
but I could not go to the facts in these cases, because the law pro-
vides for the keeping of these returns under cover. The general
facts told me are all I know. I know that more or less of the same
thing was true of the theatrical companies-that is, that practically
all of the theatrical companies had gotten out from under the taxes.
That is true not only of the corporation taxes but the taxes of the
individual actors and actresses. There was one company there
which reported a taxable income of only $17,500. When I was there
they had only gone through the profit and loss account, which is
simply a formulation of the account, and that account had shown
for that one company a taxable income of $157,000, and they had
no question but that a real examination of the accounts would dis-
close an enormously greater income than that.
The CHAIRMAN. In connection with that, I have received a letter
from Mr. Malburn, Assistant Secretary of the Treasury, inclosing a
copy of a letter from Mr. Charles J. Bullock, of the department of
economics of Harvard University, in which he states that these
larger companies are not evading the tax, but that people of compara-
tively small means are evading it. He says, "I have no doubt what-
ever that a great many people of comparatively small means, who
have a small amount of taxable income above the rather large
exemptions which the law allows, are evading the tax." Now,
according to your statement, it is these larger companies that are
evading the tax instead of the smaller ones?
Mr. MANLY. I think that must be true. I have Secretary McAdoo's
statement in his last annual report.
The CHAIRMAN. Do you think that the department is making a
more thorough examination of the corporation tax than they are
making of the income tax?
Mr. MANLY. I do, because it is so much easier to do it. Here is
the situation in regard to corporations. They now get a complete
list of every corporation in the United States and they have such a list.
They have gone to every State and have taken from the records of the
State every corporation that has been incorporated during a long
period of years, and they have followed that up and they get the
returns. Then it is an easy matter to put an examiner on the books.
The CHAIRMAN. There is a penalty for a corporation that does not
file before the 1st of March of each year?
Mr. MANLY. Yes, sir. That penalty has been very largely compro-
mised.
The CHAIRMAN. It was compromised for the reason that when the
law was first put in force, the corporations did not understand it,
and even many corporations that had a legal existance but had no
business, no profits, did not think it was necessary to make any
report, and a nominal fine was assessed against them. That cured
the situation for the following years, and they have made their re-
ports practically on the 1st of March or before the 1st of March.
The idea on the part of the Treasury Department was not to work a
hardship on many corporations that are formed for mutual coopera-
tion without the idea of making money, but still they would have
to make their reports or else pay a fine.
56
INCOME TAX.
Mr. MANLY. If I may, I would like to read this quotation from the
Secretary's report. On page 17 of the report of the Secretary of
the Treasury for 1915 is a quotation which bears directly on this point:
It is absolutely certain that the Government is losing, through inaccurate returns
and evasions of the law, a sum many times greater than the cost of the necessary field
force to investigate and check the returns and to bring to account those who are failing
to make returns as required by law.
Let us consider the matter of checking the returns: The total number of personal
returns for income tax for the fiscal year ended June 30, 1915, was 357,515. The total
number of corporation returns for the same year was 338,860. Of these returns the
preliminary examination in the office of the Commissioner of Internal Revenue has
shown that 5 per cent of the individual returns and 15 per cent of the corporation
returns reveal on their face that they require an investigation. Even this small per-
centage of the returns is largely in excess of the number the available field force now
authorized will be able to examine.
For the fiscal year 1915 there was a total of 295,723 personal and corporation income-
tax returns to be examined, and with the present force of 274 field officers, making
examinations at the same average rate as experience has shown that they are able to do,
it will require three and a half years for this force to complete the examination of the
transcripts that will be sent to the agents for examination in the present fiscal year.
With the accumulations of succeeding years this force, unless greatly enlarged, will be
unable to keep up with the essential work that must be done if we are to effectively
administer the income-tax law.
The Commissioner of Internal Revenue has informed me that, taking the total
number of agents' reports of examinations of personal returns for the months of June,
July, August, and September, 1915, as a basis for calculation, 63 per cent of the returns
examined showed that an additional average tax of $150.07 was due the Government
on each return. On this basis the 31,101 returns yet to be examined would produce
$4,667,327 additional tax.
Taking the total number of agents' reports of examinations of corporation returns for
the months of June, July, August, and September, 1915, as a basis for calculation, 63
per cent of the returns examined showed that an additional average tax of $78.95 was
due the Government on each return. On this basis the 264,622 returns yet to be
examined should produce $20,891,906.90.
The CHAIRMAN. What is the total per cent of collections?
Mr. MANLY. The collections on the corporation tax last year were
$40,000,000 in round figures. That would be a difference of 50 per
cent.
Mr. CARTER. $40,000,000 was the corporation tax?
Mr. MANLY. Yes, sir.
The CHAIRMAN. They estimate that about $20,000,000 more could
be collected.
Mr. MANLY. $20,000,000 more will be collected when they have
finished the examination.
The CHAIRMAN. Then it shows that their examiners have collected
a little over $8,000,000?
Mr. MANLY. Yes, sir.
The CHAIRMAN. So that there is still about $12,000,000 that might
be estimated to be due?
Mr. MANLY. I believe that $8,000,000 applies to both personal
taxes and corporation taxes.
The CHAIRMAN. And do you think the evasions are larger in the
matter of personal income tax comparatively with the corporation
tax?
Mr. MANLY. I am absolutely sure of it.
The CHAIRMAN. Have you any facts on which to base that estimate?
Mr. MANLY. Only interviews with the field men in New York City.
Further than that, I have the almost self-evident fact that in the first
place they can not locate the individuals who ought to pay income.
INCOME TAX.
57
tax with the same ease or with the same facility that they can the
corporations. They know every corporation in the country.
Mr. CARTER. The corporation officials have to make reports to the
directors.
Mr. MANLY. Yes; I was just going to go into that. Further than
that, they have to make reports to their directors and stockholders.
They have to make public reports. A large percentage of the cor-
porations have to report to other departments of the Government.
The railroads have to report to the Interstate Commerce Commission.
All of the insurance companies have to file their reports and have to
submit to a separate examination.
Mr. CARTER. In other words, the actual income of the corpora-
tions is much more easily determinable than the actual income of the
individual?
Mr. MANLY. Unquestionably, I think.
The CHAIRMAN. Well, in your statement you have stated that you
could get at those personal income taxes through the courts settling
estates. For instance, you mentioned the Harkness estate.
Mr. MANLY. When a man is kind enough to die, then we can get
at it.
The CHAIRMAN. Would that be any help in the case of the living?
Mr. MANLY. It would not be a bit of help if the gentleman was
unkind enough to live. But let me go on with this comparison of
the corporation tax. Further than that, the incentive for failing to
report is very much greater in the case of individuals than in the
case of corporations. In the first place, the corporation transfers
this corporation tax to the consumer, to all intents and purposes.
It is simply a part of the expenses and it is passed on. Now, the
individual not only can not do that but he is taxed at a very much
higher rate on his income. Above $20,000, from $20,000 to $50,000,
he pays 2 per cent. When you get up to the $250,000 class he pays
6 per cent. When you get over a half million dollars he has got
to pay 7 per cent on his income. So that they have an enormous
incentive to evade taxes. A man with an income of half a million
dollars has to pay approximately $35,000 in taxes, which is 7 per cent.
That means a pretty large incentive not only to reduce the amount
in every way possible but in a number of cases to evade the tax.
Those are the general considerations which convince me that that
is true.
The CHAIRMAN. How would you remedy that condition on the
part of the Government?
Mr. MANLY. I would publish the income-tax returns.
The CHAIRMAN. You can not do that under the law.
Mr. MANLY. It can not be done under the law, but I contend that
the law authorizes the President to issue an order opening them to
public inspection. The Treasury Department now holds that the
President has not that power, although it earlier held that he did
have that power.
Mr. CARTER. Just state for the record, Mr. Manly, what advantage
that would be in ascertaining the tax.
way.
Mr. MANLY. Why, it would be, I think, of great value in every
For one thing, it would provide a real, effective public super-
vision over the whole matter of tax paying. In nearly every com-
munity among the class of citizens who pay income taxes a man's
58
INCOME TAX.
income, at least as far as the minimum amount is concerned, is
pretty well known. I do not think that a man would dare to evade
his tax, knowing that his neighbors, his bankers, his friends, etc.,
would be able to see on what income he paid his tax and would be
able to look at him with some degree of scorn. That is the funda-
mental basis. This is the only tax that I know of from which the
returns are kept secret. The personal property tax, or rather the
general property tax, in all cities is a matter of public record.
Mr. CARTER. Can not you see any reason why an individual would
prefer not to give his actual income publicity more than in connec-
tion with his other taxes?
Mr. MANLY. I could understand why he should prefer it for several
reasons, one of which being that it leaves him almost absolutely safe
from income-tax collectors. All he has to deal with then is one
income-tax collector. Otherwise he has got to deal with the whole
body politic.
Mr. CARTER. Well, there is a general tendency among people not
to want to give too much publicity to their incomes, kind of con-
sidering that a private matter, is there not?
Mr. MANLY. Yes, sir. But under the Civil War income tax, which
was an income tax very closely resembling this, the returns were made
public, and that resulted in the uncovering of enormous frauds.
Further than that, in 1870, when Congress fell into the hands of
about as frankly reactionary a group of legislators as ever occupied
the legislative seats, they provided that the income-tax returns should
not further be made public, and as a result of that the returns which
had been 94,887 in 1871, when publicity was prohibited, fell to
74,775. It fell off 20,000.
The CHAIRMAN. Well, there was some cause for that which does
not appear in the record here, but those of us who remember it will
remember that Chicago was one of the great collection agencies, and
always has been. They had the great fire of 1871 and Chicago's
income was wiped out. I do not know the number of those reported
for 1869 and 1870, but certainly for 1871 it wiped out the income of
Chicago and it made quite a difference in the tax at that time.
Mr. MANLY. Well, we have pretty limited figures on which to size
up that situation.
The CHAIRMAN. I know one thing that happened at that time.
My father was in central Iowa at that time, and I know that during
the winter of 1869 and 1870 wheat netted us 65 cents a bushel. I
do not know how far it went over into 1870, but I know it was a hard
year on produce prices. Corn that was brought there in 1870 and
1871 brought about 18 cents. I know that B. F. Almon had a lot
of corn along the Chicago & Rock Island line, and he went broke.
Mr. PRICE. These income-tax returns are known to the officials
who administer the law. If they are supplied with a sufficient force
to investigate whether or not those returns are correct, would not
that meet the question in just as effective a way as if they were
made public?
Mr. MANLY. No, sir; I do not think so, and for this reason: That
unless you are going to create so large a force that you would prob-
ably have an income-tax collector for each very small number of
men, you will not get that offect, because a man that is busy in this
sort of thing does not gather the general information that the public
INCOME TAX.
59
or the people of the community gather unless he has got just a small
number of people to attend to. Now, there are only 274 field men
for the whole United States. Suppose you double that number, you
will only have about 550 men for the whole country. If you triple
it, it will only be about 800. But if you are going to increase it large
enough to handle the business, it would be practically a condition of
espionage throughout the country. If you get one official in touch
with each small group of taxpayers, you are creating a mighty dan-
gerous thing in the American Government. You have already got
approximately 10,000 agents and inspectors and men in the Secret
Service under the Federal Government now.
Mr. PRICE. Are you not creating a very irritable condition, to un-
dertake to publish people's incomes?
Mr. MANLY. I think it would be irritable for a very short time, but
every move in that direction has been irritable. The newspapers
told us that when the law went into effect which required newspapers
to publish the names of the publishers and the names of their stock-
holders, under the post-office law, that you would produce a revolu-
tion and break down the American Government, and matters of that
sort. They now publish them, and I think it has had some good
effects upon the newspaper business. There has been some irritation,
but it was irritation chiefly to people who were doing things that they
ought not to have been doing.
Mr. PRICE. Now, these special agents have been able to collect or
to uncover something like $20,000,000.
Mr. MANLY. $20,000,000 in taxes.
Mr. PRICE. And $8,400,000 worth have already been collected.
Mr. MANLY. Yes, sir.
Mr. PRICE. Now, this is a comparatively new law, and it is growing
and it produced $80,000,000 for this year, with an estimated increase
of $30,000,000 next year, showing that the administration of the law
is becoming more effective all the while.
Mr. MANLY. It is becoming more effective now, I grant. I think,
in fact I am convinced, certainly on personal income-tax returns,
that that is only a very slight fraction of what the law ought to yield.
But here is another thing about the secrecy of the income-tax returns.
You leave them secret and leave nobody knowing what anybody's
income-tax return is and what his books show except the local collector
and local revenue agent. You have got taxes running up into the
thousands involved here, and I do not believe that you are going to
avoid pretty grave consequences in the way of the corruption of tax
officials. I think that is a very great question and it has a very great
bearing on this question of the secrecy of tax returns.
The CHAIRMAN. Well, we have some men now who are trying to
evade taxes. That is the intimation?
Mr. MANLY. Yes, sir.
The CHAIRMAN. Suppose we had publicity, would not some people
or some corporations-the people, at least-be inclined to show that
they had made a larger amount of money for the purpose of credit
if the returns were published?
Mr. MANLY. Well, I think——
The CHAIRMAN (interposing). I know there are cases of that kind.
Mr. MANLY. I do not see that that would be a very grave matter
to the Federal Government if a man marked up his income, not
60
INCOME TAX.
nearly as grave as the present situation in regard to personal income
taxes. In the second place, I do not believe a man will pay 1 per
cent on his income up to $20,000, or if he has got more than $20,000,
2 per cent, just to get his credit marked up a little bit. You have
got just about as big a deterrent force as you can get by means of
publicity.
Mr. PRICE. You state that you believe that there is over
$300,000,000 that should be collected annually under this law which
is not collected. I have not read your statement carefully, but have
you stated on what you base that estimate?
Mr. MANLY. Yes, sir; I have stated that in my testimony.
Mr. PRICE. And how you arrived at it?
Mr. MANLY. Yes, sir. I would like to take that up in somewhat
greater detail and put into the record a statement which I have
prepared showing just exactly how I arrive at the estimate of the
national income at $46,000,000,000 a year. At one time we thought
of having this statement printed, but it never got past the proof
stage. This statement contains in detail the estimates showing just
exactly the official sources from which the figures were taken and the
method of handling those figures.
The CHAIRMAN. Well, the Government actuary does not agree
with you that it is $46,000,000,000. He claims it is only $20,000,-
000,000.
Mr. MANLY. Yes, sir.
Mr. PRICE. What information have you that the Government
actuary has not got?
Mr. MANLY. I think the Government actuary does not understand
the problem with which he is dealing. You see, he is an actuary.
Mr. PRICE. Then, if that be true, he ought to be fired.
Mr. MANLY. Well, he is an actuary. His job is to compute insur-
ance rates and percentage rates and matters of that sort. He is not
an economist, as is rather evident from some of the statements he has
made in his criticism of my report.
The CHAIRMAN. He said that the average income of the people of
the United States is $750 per annum to a family.
Mr. MANLY. On page 15 of the hearings before this committee he
said:
The total wealth of the United States for the calendar year 1914 may be estimated at
$200,000,000,000, based upon the census report of $187,739,071,090 as of 1912. From
this must be deducted the value of property from which it is impossible to derive
income that which is absolutely unproductive so far as money income is concerned,
such as the value of public buildings, Government reservations, parks, churches, and
religious property and institutions, products of all kinds, agricultural, manufactured,
imported, mining, etc., in the hands of the consumers awaiting consumption, etc.
Of course, the income from religious property does become income
taxable under the income-tax law as soon as it is paid to an individual
if it is more than $3,000, and if it is less than $3,000 it is income for
national purposes just the same. The products of all kinds awaiting
consumption are very largely held in stores, as the census report, if
he had examined it, would show, and constitutes the stock in trade
which is used by those stores to realize a profit. Those things are
going to be sold.
Further than that, he says that these items amounted to $50,000,-
000,000 for the year 1914 and that the value of the taxable real
INCOME TAX.
61
property for 1914 was something over $100,000,000,000. He goes
on to say:
This left $50,000,000,000 as the value of all other property, including live stock,
farm implements, and machinery, the property of manufacturing, mining, transpor-
tation, telegraph and telephone, shipping, canals, and other business concerns, to-
gether with the gold and silver coin and bullion in the United States, etc. A fair
return from the total value of the real estate would be $6,000,000,000. This deducted
from Mr. Manly's $46,000,000,000 total income would leave $40,000,000,000 as the
income to be derived from the remaining $50,000,000,000 of capital wealth, an average
return for the entire United States of 8 per cent per annum.
Now, let us see what the Government actuary does there. He
takes this $50,000,000,000 of what he calls non-income-producing
property that is, Government reservations, etc.-and subtracts that
from the taxable real property. That $50,000,000,000, however, is
either personal property or nontaxable real property, such as Gov-
ernment reservations, clothing, and matters of that sort, but instead.
of subtracting it from the total wealth of $200,000,000,000, he sub-
tracts it from the taxable real property, which has no bearing on the
situation, thereby leaving $50,000,000,000, when he ought to have
$150,000,000,000 left. I contend that a man who does that sort of
figuring is not in a position to criticize anybody else.
The CHAIRMAN. Then, you consider the most important weakness
in this existing law is that it is nonproducing?
Mr. MANLY. Yes, sir. I should like, with the committee's per-
mission, to put into the record this complete analysis of the whole
thing. It takes up all the questions brought up in this matter. I
would like to put that in the record, so that I may, at least, have my
cards down on the table.
The CHAIRMAN. In this statement you go into the details covering
the income for 1914?
Mr. MANLY. Yes, sir; and I show just exactly the official sources
from which every figure was taken, the method of computation, and
everything else.
The CHAIRMAN, Just from glancing at it, I think it is a better
statement than this statement you published in the newspapers,
because this apparently gets right down to the details.
Mr. MANLY. It is a better statement for this purpose.
The CHAIRMAN. The other is more of a publicity statement. I
see no objection to printing this.
Mr. PRICE. Do you want to submit that statement for the record?
Mr. MANLY. Yes, sir.
The CHAIRMAN. If there is no objection, it will go into the record.
(The statement referred to is as follows:)
NATIONAL INCOME IN 1914.
The national income in 1914 was approximately $46,000,000,000.
This figure is based upon a very careful computation of the national income in 1910,
national income was $36,570,000,000.
From 1904 to 1912 national wealth increased from 104 to 187 billions, or at an average
for which year we have relatively accurate and complete information. In 1910 the
rate of about 10 per cent per year. We know that national income increased at about
the same rate.
If this rate had continued through 1914 the national income in 1914 would have been
$51,500,000,000.
As a matter of fact, however, we know that neither wealth nor income was 40 per
cent greater in 1914 than in 1910. We do not know what the relative figures are with
62
INCOME TAX.
any great accuracy. We have one excellent index, however, individual deposits in
banks. This index, which very closely coincides with the index of increase in wealth
and income in earlier periods, shows that the increase from 1910 to 1914 was approxi-
mately 26 per cent.
An increase of 26 per cent over 1910 would make the national income in 1914 $46,-
078,000,000. In order to deal with round figures we will call the income $46,000,000,000.
Just what these figures mean and how they are arrived at are set forth in detail in the
following pages.
NATIONAL INCOME.
In estimating the national income we must necessarily deal with 1910, which is the
most recent year in which reasonably complete statistics are available. After we
arrive at the figure for 1910 it is a relatively easy matter to compute the approximate
figure for any other year.
There are several methods by which the national income may be estimated, but the
most satisfactory is that in which we deal with the sources of national income.
There is no more complex and difficult statistical problem than that of the national
income. Clear thinking and a comprehension of all the sources of national value are
absolutely necessary.
WHAT IS THE NATIONAL INCOME?
The national income is the sum of the incomes of the individuals who make up the
population. This sounds obvious, but it is very necessary to keep it clearly in mind,
as there are a great many cases where confusion is likely to arise as to whether an item
is a part of the national income or not. This is particularly the case with labor incomes,
which are apt to be deducted as an expense of an industry, unless it is clearly under-
stood that every dollar that is paid to an individual for service is part of the national
income, although it may be an expense for someone else.
For example, in dealing with transportation the addition to the national income is
the amount remaining after the payment of all expenses plus the amount paid out in
wages and salaries.
WHAT ARE THE SOURCES OF NATIONAL INCOME?
The sources of national income are:
1. Production of raw materials.
2. Manufacture-value added to raw materials.
3. Transportation-value added.
4. Light and power-net value.
5. Sale addition to values by distribution.
6. Construction of buildings, roads, etc.
7. Rentals.
8. Increment in value of land.
9. Increment in value of other property.
10. Banking services not previously included.
11. Insurance.
12. Professional service.
13. Domestic and personal service.
14. Speculation.
The meaning of these several heads seems reasonably clear, but there is one point
which needs explanation. Under each of the general heads raw materials, manu-
facture, etc.-no deductions are made for interest or any other form of banker's profits.
When we reach heading No. 9, "Banking," therefore, we have left to be separately
included only the value of services performed for individuals which are not deductable
from their incomes. Such payments for services include all commissions, fees paid
in connection with transactions, etc.
WHAT WAS THE AMOUNT OF THE NATIONAL INCOME IN 1910
Electric light and power.
Trade-wholesale and retail.
Construction.
The national income in 1910 was, in round figures, $35,750,000,000 distributed
among the following sources:
Raw materials..
Manufacture…..
Transportation..
$7,863, 600, 000
8, 529, 261, 000
3, 207, 042, 000
100, 000, 000
5, 464, 000, 000
1,500, 000, 000
INCOME TAX.
63
Land:
Value increment.
Rent of residences..
Business-value increment.
Insurance...
Banking services (not previously accounted for).
Professional services....
Domestic and personal services.
Total....
RAW MATERIALS.
Farm products (U. S. Dept. of Agriculture, Bureau of Plant Industry,
Circular No. 132):
Gross income (including labor)..
Less fertilizer..
Machinery and buildings..
DETAILS REGARDING THE SEPARATE SOURCES.
The following details are given so that anyone who desires may check both the
official sources of the data and the accuracy of the calculations:
Mining and quarrying (Reports of U. S. Census, 1900), value less
supplies and materials..
Forest products (Report of U. S. Forest Service)..
Less products of farms..
Fisheries (Report of U. S. Census Bureau)..
Furs (Estimate in Science, Mar. 28, 1913).
Manufacture (Reports of Census, 1910):
Value of products....
Cost of materials.....
Wages and salaries, approximately....
Value added by manufacture.
Electric light and power (Bulletin of U. S. Census, 1914):
Total income (1912)..
Expenses......
Transportation:
Railroads
$114, 882, 541
253, 029, 956
Street railways-
Income.
Salaries..
Wages..
$642, 386, 000
195, 306,000
Net revenue (Statistical Abstract. p. 291)... $1, 006, 146, 787
Salaries and wages (Statistical Abstract, 1911,
p. 286)....
1, 143, 725, 306
1912.
$253, 034, 161
26, 128, 786
174, 762, 153
453, 925, 100
Assume average rate of increase, 1910 equals..
$3,036, 000, 000
930, 000, 000
2, 150, 000, 000
522, 884, 000
20, 000, 000
1,750, 000, 000
1, 500, 000, 000
36, 572, 787, 000
112,696, 121
Assuming average rate of increase 1910 value added must have been approximately
$100,000,000.
1907.
$178, 435, 002
12, 909, 466
138, 081, 633
329, 426, 101
$6,337, 850, 000
367, 912, 000
5,869, 938,000
1, 491, 582, 000
447,080, 000
50, 000, 000
5, 000, 000
7,863, 600, 000
20, 672, 052, 000
12, 142, 791, 000
8, 529,261, 000
302, 115, 599
234, 419, 478
67,696, 121
45, 000, 000
$2, 149, 872, 093
404, 125, 500
64
INCOME TAX.
Transportation-Continued.
Telephones and telegraphs (calculations based on assumption
that one-half of revenues are not previously included as busi-
ness expenses)--
Income...
Wages and salaries.
1912.
$57, 710, 206
121, 005, 535
178, 715, 741 133, 447, 084
Assume average rate of increase (1), 1910 equals..
Water transportation (approximate) (Report of U. S. Census, 1906)
(Income plus wages and salaries.)
Local livery cabs and trucking (estimated).
1907.
$50,929, 486
82, 517, 598
(Labor cost at least $238,000,000.)
Express (one-half net revenue and wages) (Reports of Interstate
Commerce Commission).......
Value added by trade....
$80, 304, 122
200, 000, 000
350, 000, 000
TRADE-WHOLESALE AND RETAIL.
No information exists regarding the amount or profits of commerce and trade in the
United States, with the exception of a small amount which may be derived from the
corporation-tax returns. Even this is, however, very inconsiderable.
CONSTRUCTION.
22, 741, 000
3, 207, 042, 715
We know, however, from English statistics that in Great Britain the average value
added by trade is about 33 per cent.
From our general knowledge of American and English business methods we would
expect the percentage to be even higher in the United States.
However, we may accept it as at least a very conservative figure, particularly as it
receives a certain amount of confirmation from an investigation made by the National
Dry Goods Association covering 24 States, which showed for the dry goods business
average gross profits of approximately 30 per cent.
[Quoted: Keeping up with Rising Costs, Wheeler Sammons, 1915.]
We know that in other businesses the rate of gross profit is somewhat higher than in
the dry goods business.
Using the figure of increase, we find:
Raw materials...
Manufactures...
$7,863, 600, 000
8, 529, 261, 000
3)16, 392, 861, 000
5, 464, 287, 000
Reports of Geological Survey covering 50 principal cities show average annual
construction 1911-1914 of $687,542,354.
The population of these cities in 1910 was 20,188,500 or 21.8 per cent of the total
population and 47 per cent of the urban population (i. e. in towns of over 2,500).
Building operations over a period of years are known to be practically parallel with
the growth of population. Since the rate of growth of cities of less than 100,000 has
been even more rapid than that of cities of over 100,000 (Census Abstract, 1910, p. 60),
we are at least conservative in applying the statistics of building operations to all
classes of towns and cities on a population basis. On this basis we may estimate the
total amount of building in cities and towns of 2,500 and over at $1,460,000,000 per
year.
For towns of less than 2,500 our data are even more inexact, but since such towns
have about one-fifth as many people as the total urban population we may estimate
the amount of building in the same proportion, or $292,000,000.
Farm buildings from 1900 to 1910 increased in value $2,768,812.032, or an average
of $276,881,203 per year, and means that during the latter part of the period the
annual increase must have been about $350,000,000. We know that with modern
buildings, such as are on farms, repairs, and replacements are at least equal to half
the cost of new construction, or $175,000,000. We may therefore safely estimate the
annual value of buildings on farms at $525,000,000.
INCOME TAX.
65
The total annual value of building operations is, therefore, roughly:
Cities over 2,500.
Towns under 2,500.
Rural.....
Building..
Other.....
Total......
2,277, 000, 000
On the value of other forms of construction data are lacking, except that the census
of occupations (1910) shows the employees in other forms of construction to be roughly
10 per cent of the number engaged in building operations. On this basis the value
of other forms of construction would be, in round figures, $225,000,000 a year.
The annual value of all forms of construction would therefore be:
$1,460, 000, 000
292, 000, 000
525, 000, 000
RENTAL.
$2,277, 000, 000
225, 000, 000
Total....
2,502, 000, 000
Information collected from a large number of contractors shows that on an average
of many kinds of construction the cost of materials forms about 40 per cent of the total
cost. The annual value of all forms of construction above the cost of materials would
therefore be, roughly, $1,500,000,000.
There is no way of estimating the national income that is paid in the form of rental
for land, natural resources, and buildings.
In all the computations we have, therefore, considered the rentals that are paid
by farmers, manufacturers, and merchants as included in the gross value of their
receipts and omitted its deduction as a separate item.
The same is true of the rental of office buildings and for business and professional
purposes.
This leaves only the rental charged persons for nonproductive occupancy of urban
residences.
Although no satisfactory statistics are available, the data do exist upon which we
may arrive at a reasonably correct and conservative estimate.
The census for 1910 shows 9,499,765 urban families.
The 1910 census gives no data on the percentage who rent their homes, but we
may conservatively use the proportion of renters shown for urban families in 1900,
knowing that the proportion has increased rather than decreased.
In 1900, 63.7 per cent of the urban families rented their homes. This would make
in round figures 6,051,500 renting families. The data available for urban families
indicate that the average dwelling consists of approximately four rooms and rents
for an average of about $2 per room per month. This is $16 per month per family,
$192 per year, or a total of $1,161,888,000 per year in rent.
Exclusive of taxes, which will hereafter be deducted in a lump, about four-fifths
of this amount is net income $929,510,000.
INCREMENT IN LAND VALUES.
From 1904 to 1912 taxable real property increased in value from $55,510,000,000
to $98,362,000,000 (U. S. Census-Estimated Wealth, 1912), or in round figures,
$43,000,000,000 during the eight years. This was at an average rate of $5,300,000,000
per year.
In order to estimate the "value increment" in land values the following basis is
used:
The land in farms increased on the average $16.83 per acre from 1900 to 1910, while
the total increase per acre for all farm property was $22.27. Land value increase
was therefore approximately 75 per cent of total increase.
There are no figures covering city land generally, but valuable figures are available
for three cities-New York, Boston, and Los Angeles.
In New York (all boroughs) the total value of real estate increased during 10 years
(1906-1915) $2,370.273 542, while value of improvements increased only $925,296,487,
or 39 per cent of total real estate increase. The increase in land values was 61 per
cent of total real estate increase.
For Boston (1901-1910) the figures are: Total real estate increase, $193,951,600;
improvements, $69,092,000, or 35.6 per cent; land value increased 64.4 per cent of
total.
54080-16- -5
INCOME TAX.
66
In Los Angeles county (1901-1910): Total real estate increase, $864,922,400; improve-
ments, $89,131,745-33.6 per cent; increase in land values, 66.4 per cent of total.
We will therefore surely be conservative if for the country as a whole we estimate
that two-thirds of the total real estate increase has been solely an increase in land
values as distinct from improvement.
On this basis two-thirds of the increase in the value of real estate in the United
States during the eight years between 1904 and 1912 was increment in the land
values. This would be (two-thirds of $43,000,000,000) $28,667,000,000, as constituting
the increase in land value alone.
This $28,667,000,000 during the eight years represents potential income which
might have been realized at an average rate of $3.586,000,000 per year.
For income-tax purposes, however, only income actually received from land sales
is taxable, so that only in the case of land sold during the period would income
actually be assessable. Now, we have no way of knowing just how much land is
actually sold. We might perhaps be justified in taking the position that since all
land is eventually sold, the income from all such sales will some day be realized,
and the longer the delay the greater the ultimate income.
We know, however, that there is a great deal of land which does not change hands
during a lifetime.
In order to be on the conservative side, therefore, we will assume that only three-
fourths of the land value (not the acreage) would be realized on during a period of 10
years. The few available statistics for Ohio, for example, indicate that this is very
conservative.
On this basis we may estimate the average realized income from increment in land
values as three-fourths of $3,586,000,000 per year, or $2,689,500,000.
This was the average increment for the eight years 1904-1912. We know, however,
that during the latter years of the period the increment was much more rapid than
It would appear that in 1910 the rate of increment was
during the earlier years.
about 20 per cent higher than for the average of the period. This would make the
average increment roughly $3,000,000,000 per year.
INCREMENT-BUSINESS VALUE.
This item refers to the appreciation in the value of business property, over and
above any new investment, which is regularly realized upon in the sale and transfer
of businesses or in their recapitalization.
1910-1914.
1905-1909.
1900-1904.
1895-1899..
Some insight into the amount of increment in business values may be gained from
a study of stock-exchange values over a period of years.
This is certainly a gross understatement because when a stock attains a condition
of solidity and permanency it ceases to be an "active" security.
From the records of the New York Stock Exchange we find that the average price
of all securities sold for each five-year period of the past 20 years has been:
95.82
90.28
74.24
68.76
There has therefore been a steady increase in the value of the securities listed on the
stock exchange, which embrace all the important railroad, industrial, and public-
utility stocks.
The real significance of these figures comes, however, when we examine the average
increase.
The average price in 1910-1914 was 21.58 points higher than for the period 1900-1904.
The increase in value per year was therefore 2.158 points.
This is confirmed by a comparison of the increase of 1905-1909 over 1895-1899, which
was 21. 52 points or an average increase of 2.152 points per year.
We are therefore conservative in calculating that the increment in value of business
properties is at the rate of 2.15 per cent.
The total value of business property outside of real estate is approximately $100,000,-
000,000. The annual increment in the value of business property is therefore at least
$2,150,000,000.
INSURANCE.
The income arising from this source is, in the case of commercial companies, con-
sidered to be the total income, less the amounts paid to policy holders. Practically
all expenses of insurance companies are either salaries and commissions or rents.
Salaries and commissions are, of course, the source of the incomes of agents, etc., and
8
C
a
INCOME TAX.
67
should not therefore be deducted. Since no allowance is made in our computation
of total income for incomes derived from business rentals, no deduction for rents
should be made.
Life ordinary and industrial:
Total income...
Paid policyholders.
In the case of fraternal companies the only additions to income are considered to
be the amounts paid in salaries and commissions to agents and for management.
The total amount of income derived from insurance for 1910 was $719,398,006,
which was distributed according to the character of the insurance as follows:
Insurance.
Net.....
Fraternal orders: Paid agents and for management...
Casualty, surety, etc., companies:
Income..
Paid policyholders.
Net..
Mutual accident and sick benefit companies:
Income...
Paid for claims..
Net....
Accident and health, stock companies:
Premiums received..
Losses paid……………..
Net..
Liability insurance companies:
Premiums received..
Losses paid.....
Net....
Total....
BANKING SERVICES.
$781, 011, 249
387, 302, 073
PROFESSIONAL SERVICES.
111, 041, 748
41, 465, 472
11, 938, 130
5,278, 953
31, 176, 464
12, 372, 256
31, 084, 771
14, 046, 302
$393, 709, 176
16, 896, 788
69, 576, 276
6, 859, 177
18, 804, 208
17, 038, 379
719, 398, 006
This item relates wholly to services performed by banks for which they receive
fees, commissions, and by transactions with individuals and businesses the expense
of which has not been included in the items already discussed.
There is no definite information with regard to the amount paid for such services,
but they have roughly been estimated at $20,000,000 a year. It may be too high or
too low, but it is so small as compared with the total that any error would make little
difference.
The income attributable to professional services is of two kinds: (1) Salaries and
wages; (2) earnings on fee basis.
After making proper deductions for professional persons employed in the public
service, we find that in 1910 there were 1,176,000 professional persons, of whom approx-
imately 680,000 were on a salary basis and 496,000 on a fee basis.
As a result of a detailed analysis with the use of all available statistics it seems
that the average salary of professional people was not more than $1,250. This is per-
haps too high, but it is not very far from the truth. This makes the total income of
salaried professional persons about $850,000,000.
It is practically impossible to estimate satisfactorily the earnings of the 496,000
professional people who are on a fee basis, but it seems probable from interviews with
a large number of professional people that their average earnings are about 50 per
cent higher than people on a salary basis. This would make the average earnings
about $1,800 and the total earnings of the 496,000 about $900,000,000.
Thus the earnings of all professional people are in the neighborhood of $1,750,000,000.
68
INCOME TAX.
DOMESTIC AND PERSONAL SERVICE.
The total number of persons engaged in domestic and personal service in 1910 was
3,772,174. This includes every class of service from bootblacks and domestic servants
to hotel and saloon keepers.
Satisfactory data regarding their earnings are lacking, but after careful analysis
with the use of all available data we estimate their average earnings at about $400
a year, which makes their total income approximately $1,500,000,000.
The CHAIRMAN. Where does the department get its statistics?
Mr. MANLY. There are a very large number of bureaus, of course, in
the Government service that are purely statistical bureaus and which
have very able statisticians in them.
The CHAIRMAN. Are they in the Treasury Department?
Mr. MANLY. I do not know of any reason for the Treasury Depart-
ment having them. I can not speak of that, because I do not know.
The CHAIRMAN. There is the Bureau of the Census.
Mr. MANLY. The Bureau of the Census would unquestionably-
The CHAIRMAN (interposing). The Department of Commerce would
probably have the best ones?
Mr. MANLY. I think the Department of Commerce ought to have the
best, and the Department of Agriculture would have them in their
particular field. Just incidentally, I would like to call attention to
one other statement in the Secretary's letter on page 15, as follows:
The department has communicated with the Bureau of Census, the Bureau of
Labor Statistics, and the secretary of the American Statistical Association in an effort
to obtain statistics as a basis for an analysis of Mr. Manly's figures. The secretary of
the American Statistical Association advises that-
"No one has ever succeeded, so far as I know, in determining, even approximately,
the national dividend of this country.'
23
I do not know what he meant by that, but that statement, at least
displays ignorance of a book published last year which has been very
widely noted throughout the country, entitled "The Wealth and
Income of the People of the United States." That book was pub-
lished by Prof. W. I. King, and it attempts to do just exactly what he
says has not been done, and bears directly on that question. Further
than that, there are many other attempts of a similar nature that have
been made. For example, an estimate of the income of farmers was
made by the Department of Agriculture, and I used it as a basis for
my calculations."
The CHAIRMAN. Have you any criticisms to make in regard to the
administration of the law?
Mr. MANLY. Only this, that I was very greatly impressed-and I
discussed it with a number of the employees in the Treasury Depart-
ment with the lack of centralization of responsibility in the admin-
istration of the law. The revenue agents are under an entirely
different administrative division from that of the administrators of
the income-tax law itself. The matter has to pass through a different
set of hands, and even in the office itself the head officials that is,
the men with brains in the department-have their time so largely
taken up with routine work, such as signing letters or in rendering
decisions, that they have virtually no time left to work out an
effective administration of the work. I think they are doing the
best they can, and I think that every man I met was in dead earnest
about the administration of this tax law; but I do not think that the
organization that exists there-and that was confirmed by a great
INCOME TAX.
69
many of the men with whom I talked, and I talked in confidence,
because I wanted to get their ideas without any feeling on their part
that they were-
The CHAIRMAN (interposing). Do you think that you would be
familiar enough with the administration there to put in concrete
form, if not too lengthy, your ideas as to how the law ought to be
administered?
Mr. MANLY. I would be.
The CHAIRMAN. That would be helpful.
Mr. MANLY. I would be loath to do it with any degree of assurance,
because that was not really the matter I was giving my principal
attention to, but I would be glad to do it with the understanding
that it was simply a matter of suggestion.
The CHAIRMAN. This committee wants to get suggestions along
that line, so that they can recommend to Congress some measure
that would be helpful in the administration of the law under which
this income tax is being collected.
Mr. MANLY. I would like to put in just these two principal sug-
gestions: First, that the revenue agents who administer the income-
tax law-and they are kept entirely separate from the others-
should be very much more definitely and directly under the officials
who administer the income-tax law, instead of being isolated under
the chief of revenue agents; second, that some additional men, paid
well and very carefully selected, should be put into the Internal
Revenue Bureau and in the income-tax division, whose principal
duty would be the training of revenue agents and inspectors, and the
devising of methods of determining the amount of the taxes. I
think they ought to be made a different division. I think they need.
a man there who is a high-grade auditor, or the best auditor they
could get for a reasonable compensation, who would go around and
teach the revenue agents how to audit books and detect attempts
at evasion. There ought to be a man of that class, or a high-grade
man-
Mr. PRICE (interposing). Don't they have that now, as a matter
of fact?
Mr. MANLY. I do not believe they have; they did not have when
I asked them about it last summer.
Mr. PRICE. I think they have such an officer or such a department.
Mr. MANLY. They have auditors, but they are the auditors of the
Treasury Department who are engaged in auditing the accounts of
the different Government departments. I do not think they have
any man there who is free to do that sort of thing. They ought to
have a man of that class or grade.
Mr. PRICE. I think they have that now. I think when they em-
ploy new revenue agents, they come here and are instructed for some
time as to their duties and as to how they should go about them.
In fact, I know that to be true.
Mr. MANLY. I know that they are making every attempt to do it,
but the man who comes here does not get field instruction in the
office, and what he needs is instruction in the field. He gets theory
in the office, and I think he probably gets that in good shape, but
you ought to have a man to help him out in the field when a corpora-
tion is causing trouble. There ought to be somebody to help the
man when he is up against it.
70
INCOME TAX.
The CHAIRMAN. Don't they have assistant revenue agents of high
grade at the various collecting points to instruct the field men?
Mr. MANLY. They have revenue agents of high grade in the different
divisions.
The CHAIRMAN. At the immediate points of collection?
Mr. MANLY. At the immediate points of collection; but their time
is very largely taken up with administrative work, as I understand it.
However, as I have said, these are simply suggestions that I have
talked over with some men in the department who thought they were
about what was needed to be done.
The CHAIRMAN. That is what we want to get at.
Mr. MANLY. I am not putting them forward with any degree of
insistence, because I do not believe I am in a position to do it.
Mr. PRICE. You suggested one change in the law. You stated that
it would be more effective if publicity were given the income-tax
returns. Can you suggest any other changes in the law?
Mr. MANLY. Yes, sir; I would be glad to do so. The rest of the
changes are changes in which I am in substantial agreement with the
Secretary of the Treasury; that is, an increase in the number of reve-
nue agents and the size of the office force, and the payment of better
salaries for, at least, the high-grade men.
Mr. PRICE. The Secretary of the Treasury has made that recom-
mendation.
Mr. MANLY. He has made that recommendation. Then, another
important change that ought to be made would be to require a return
to be made by everyone whose gross income is over $3,000. At the
present time it is only required when the net income is over $3,000.
Mr. CARTER. Would you base the income tax upon the gross
income?
Mr. MANLY. No, sir; that would be simply to get the returns in
for examination, and that is necessary for this reason: Even though
the Treasury Department can prove that a man gets in more than
$3,000, they can not examine his report unless they can prove that
his expenses do not exceed a certain amount.
The CHAIRMAN. I received this letter from Mr. Malburn, Assistant
Secretary of the Treasury, inclosing a copy of a letter from Mr.
Charles J. Bullock, of the department of economics at Harvard Uni-
versity, and I think it would be well to insert it in the record.
(The letters referred to are as follows:)
Hon. CHARLES O. LOBECK,
MY DEAR MR. LOBECK: I am sending you a copy of the letter which I have received
from Prof. Bullock, of Harvard University, commenting on the articles of Mr. Manly
on the income tax.
Very truly, yours,
TREASURY Department,
Washington, June 13, 1916.
House of Representatives.
WM. P. MALBURN, Assistant Secretary.
HARVARD UNIVERSITY, DEPARTMENT OF ECONOMICS,
June 12, 1916.
DEAR SIR: I have received your letter of June 8 inquiring for any "information or
suggestions" concerning the statements recently made by Mr. B. M. Manly about
supposed evasion of the Federal income tax. I have seen Mr. Manly's various state-
ments, and have examined them with some care. Concerning them I may say:
1
INCOME TAX.
71
no
1. Mr. Manly grossly overestimates the amount of the annual income of the United
States. There are no "statistics" in the proper sense of the word concerning the
national income. All that we have are estimates which can be only approximately
correct, which means that any of them may be several billion dollars out of the way.
Mr. Manly's estimate of $46,000,000,000 is the wildest kind of guesswork. It is so
wild in fact as to discredit him as a statistical investigator.
2. There are in the United States no "statistics" concerning the distribution of
incomes among individuals or classes of individuals. All that is possible here is
estimation, and Mr. Manly's estimates are most improbable. One of his most impor-
tant errors is in overlooking the fact that all the so-called net income accruing to the
capitalist classes, a great share-I should guess at least one-third-is really eaten
up by losses, renewals, and depreciation, so that the disposable income of these classes
is much less than is usually supposed. On this particular point I have noticed a
pertinent comment by A. A. Young in the May number of the Quarterly Journal of
Economics, page 581.
3. I have made constant inquiries ever since the income tax went into operation
concerning the way it has worked, and I have been in a position to derive information
from lawyers, accountants, and bankers who have had much to do with the law of
1913. From all these classes of people I have learned that so far as they could see
their clients and customers are complying honestly with the law. Of course they
say that their clients and customers want to take advantage of different opportunities
the law affords for reducing their taxes, but this is not illegal and does not imply that
they are misstating or concealing the true condition of their affairs. My information
has been gained in New York City and in Boston. I have heard the matter discussed
very often at conferences held to discuss matters of local interest, such as proposed
income-tax legislation in Massachusetts, and I have yet to find a responsible lawyer,
accountant, or banker who tells a different story. I am in a position to know pretty
well what the attitude of Boston business men toward the income tax is, and I am
confident that the law is being substantially complied with by most people of means.
4. What I have said in the foregoing paragraphs relates particularly to men of
means, whose affairs are known to lawyers, accountants, and bankers. I have no
doubt whatever that a great many people of comparatively small means, who have a
small amount of taxable income above the rather large exemptions which the law
allows, are evading the law. This is not strange because the original provisions of the
law about returns are not wholly easy to understand, and it is what happens under
otherwise well administered income taxes. The tax dodger who makes the most
trouble is the small tax dodger. Wealthy tax dodgers are comparatively few because
wealthy people can not afford to take a chance with such a severe law as the Federal
Government has enacted. I think that evasion by persons of moderate means would
be greatly reduced if the law were amended so as to provide in the plainest possible
terms that every person having a gross income from all sources in excess of, say, $2,500
or $3,000 should annually make a return of his whole income. It would also be helpful
to provide the Internal Revenue Department with a sufficient force to cover the
internal-revenue districts properly. In Massachusetts conditions are not, I think,
worse than in other States; and I know that in this State the internal-revenue staff
has never been large enough to cover the ground as it should be covered.
Very truly, yours,
CHARLES J. BULLOCK.
Hon. WILLIAM P. MALBURN.
(Thereupon, at 12.05 o'clock p. m., the committee adjourned.)

Gaylord Bros,
Makers
Syracuse NY.
PAT. JAN. 21, 1908
UNIVERSITY OF MICHIGAN
3 9015 07788 9254
HJ
4652
A22
1916
U.S. Congress. Hous
Committee on ex-
penditures in
Treasury dept..
Income tax