THE GIFT OF MAY TREAT MORRISON IN MEMORY OF ALEXANDER F MORRISON *4- Taxation and Taxes IN THE UNITED STATES UNDER THE INTERNAL REVENUE SYSTEM 1791-189S AN HISTORICAL SKETCH OF THE ORGANIZATION, DEVELOPMENT AND LA TER MODIFICA TION OF DIRECT AND EXCISE TAXATION UNDER THE CONSTITUTION BY FREDERIC C. HOWE, A.M., Ph.D. NEW YORK: 46 East i 4 th Street THOMAS Y. CROWELL & COMPANY BOSTON: 100 Purchase Street Copyright, 1896, By Thomas Y. Crowell & Company. C. J. PETERS & SON, TYPOGRAPHERS. J~OZO H S3^t PREFACE. The present essay is the development of an investiga- tion begun some years ago of an unimportant portion of our Internal Eevenue System. At that time the federal revenues were largely in excess of all current demands of the Treasury ; and the policy of the party dominant £ in the councils of the nation seemed to be towards the ^ gradual reduction, if not the permanent relinquishment, s of all of the internal or excise taxes. With the alterations of the customs schedule in 1894, however, and the diminution of collections from exter- O nal sources, it became apparent that further recourse to 5 inland objects would be necessary; and in view of the paucity of literature bearing upon the Internal Eevenue System, it seemed that a narration of the history of a department of our fiscal service, which produces at the present time upwards of one hundred and forty-five mil- •s lions of dollars, or nearly forty per cent of the total ^ collections of the federal government, would not be ° untimely or wholly devoid of interest. And the ex- periences herein recounted most clearly indicate how almost inexhaustible are the sources of taxation as yet untouched of which the Treasury may avail itself in case of need, and show an array of unused taxes and unopened resources unparalleled in contemporary bud- getary history. 2 u." < a .33S94 vi PREFACE. I desire to make acknowledgment of the assistance rendered in the preparation of so much of the following pages as covers the period of the Civil War to the learned researches of Hon. David A. Wells, the chair- man of the Revenue Commission of 1865, and the later appointed Special Commissioner of the Revenue. The student of this period must recognize his indebtedness to the work of this eminent economist and statistical expert, whose careful and scholarly investigations of almost every phase of the revenue experiences of the time, as well as the industrial aspects and influences of the same, are an inexhaustible fund from which to draw, and greatly alleviate the labors of those who may follow after him in a field which he has made completely his own. In that portion of the essay which relates to the taxation of distilled spirits, as well as the relation of the excise to prices, wages, and industry, I have made liberal use of his investigations, although I have taken the liberty of differing from some of his conclusions. I am further indebted to Professor Richard T. Ely of the University of Wisconsin for man}' kindly aids and suggestions as to the scope and character of the work, as well as for encouragement in its completion. I am also under obligations to Professor Charles H. Haskins of the same university, and Dr. Charles J. Bullock of Cornell University, for reading the manuscript, to whose kindly criticism and suggestions some important changes in the plan of the work are due. I am also greatly in debt to Professor David Kinley of the Uni- versity of Illinois for reading the proof-sheets. FREDERIC C. HOWE. Cleveland, Ohio, March, 1S96. CONTENTS Preface v Introductory. Constitutional evolution — p. 1. Financial development a reflection of same — p. 3. Growth of federal expenditure — p. 3. Present problems of the Internal Revenue System — p. 7. I. Early Attempts at Internal Taxation. The finances under the Confederation — p. 9. Provisions of the Constitution regarding federal taxation — p. 10. Direct taxes, meaning of, in Convention (note) — p. 11. Hamilton's proposals — p. 13. Taxation and the excise in the Colonies — p. 14. Aversion of colonists to inland taxation — p. 17. The duty on distilled spirits. Act of .March 3, 1791 — p. 19. Later amend- ments— p. 21. Unpopularity of Tax — p. 21. The Whiskey Rebellion — p. 23. Issue in reality but a phase of constitutional development — p. 24. Collections —p. 25. Act of June 5, 1794, and taxes on carriages — p. 26. The Carriage Tax Case — p. 27. Duties on Sales at Auction, Licenses, Snuff, Sugar, and Stamps — p. 28. Collections from same, 1795-1800 — p. 31 . The Direct or Apportioned State Tax — p. 30. Repeal of internal taxes — p. 34. Public opinion on the subject of taxation — p. 35. Administration and collections — p. 36. II. The Emergency System of the War of 1812. Condition of Treasury at the outbreak of the War of 1812 — p. 39. Attitude of Gallatin on inland taxes — p. 39. The taxes of 1813— p. 41. The policy of Secretary Dallas — p. 4:;. Opposition to same — p. 44. New taxes — p. 45. Close of -War — p. 46. Repeal of taxes — p. 47. Necessity of perma- nent inland taxes — p. 48. Collections — p. 49. vii Vlll CONTENTS. III. The Period of the Civil War (1861-1870). Characteristics of period from 1817 to 1861 — p. 50. Changes wrought by War — p. 51. Condition of Treasury in 1860 — p. 51. Proposals of Secretary Chase — p. 52. Act of Aug. 5, 1861 — p. 53. Proposals for new taxes — p. 54. Act of July 1, 1862 ; provisions of same and general character of measure — p. 57. Effect on revenues and condition of Treasury in 1863 — p. 59. Loan policy of the Administration a failure — p. 61. Fresh proposals from Secretary Chase — p. 61. War policy of Secretary Chase and criticisms of same — p. 61. Acts of March 7 and June 30, 1864 — p. 63. Opposition of manufacturers to general excise — p. 65. The proposed tax on sales — p. 66. Condition of Treasury at close of War — p. 67. Act of March 3, 1865 — p. 68. The productivity of the excise — p. 68. In- ternal taxes should never be wholly relinquished — p. 70. Financial problems at close of war— p. 70. The Revenue Commission and its recommendations — p. 72. Reduction of the public debt the main object of public solicitude— p. 74. Industrial condition of the country — p. 75. Reduction of taxes — p. 76. Revenues 1866 and 1867 — p. 77. Prices fail to follow reduction of duties — p. 78. Arbitrary condition of trade relations — p. 79. Lessons of period — p. 81. IV. Direct Taxes on Persons and Property. I. The Direct or Apportioned State Tax. Direct Tax of 1798 the model of later enactments — p. 82. Provisions of Act of Aug. 5, 1861 — p. 83. General consider- ation of Direct Tax as a federal measure — p. 84. Collec- tions under the tax — p. 85. Its operations in Southern States — p. 86. Congress adopts relief measures — p. 87. The Government in an anomalous position — p. 88. Act of March 2, 1891, refunding Direct Tax to the States — p. 89. II. The Income Tax. Provisions of Act of Aug. 5, 1861, as to income tax — p. 90. Modifications introduced by later measures — p. 91. Special income tax of 1864 — p. 93. Close of War and recommenda- tions of Revenue Commission — p. 94. Subsequent alterations — p. 95. Unpopularity of income tax — p. 95. Method of reaching corporations — p. 96. Collections on behalf of the Tax — p. 97. Territorial distribution of tax — p. 101. Gen- eral considerations — p. 102, CONTENTS. IX III. Taxes on Corporations. A. The Gross Receipts Tax on Railroads, Advertisements, Bridges, Canals, Express Companies, Ferries, Lot- teries, Ships, Barges, Stages, Steamboats, Telegraph and Insurance Companies, and Museums, Operas, Circuses, etc. The Gross Receipts tax on transmission companies especially suited to federal purposes — p. 102. Provisions of several acts — p. 103. Collections— p. 106. B. Banks, Trust Companies, and Savings Institutions. Provisions for taxing — p. 108. Collections — p. 109. National Banks — p. 109. TV. Assessed Taxes, known as "Schedule A." Unsuited for national purposes — p. 111. Rates imposed — p. 111. Collections — p. 112. Taxes on Successions, Acts and Transfers, Instruments, Commodities and Businesses. I. Duties upon Legacies and Distributive Shares of Prop- erty. A. Legacy and. Succession Duties. Provisions of Acts of 1862 and 1861 — p. 111. Incompleteness of collections — p. 115. Receipts — p. 117. B. Probate, Administration, and Inventory Duties, col- lected by means of Stamps. Early Stamp duties on legacies and successions — p. 119. Rates under Acts of 1862 and 1861 — p. 120. II. Taxes upon Legal Instruments, Commercial Trans- actions, and Commodities, collected by means of Stamps. Stamp Tax, general consideration of — p. 120. Legal provis- ions of Act — p. 121. Incidence and operation of — p. 123. Collections from — p. 121. in. The Duties on Sales at Auction, of Apothecaries, Butchers, Brokers, Confectioners, Dealers, Plumb- ers, and Manufacturers. Sales at Auction first dutiable in 1791 and 1812 — p. 126. As revived during Civil War — p. 126. Rates of — p. 126. Evi- dence and Recommendations of Revenue Commission, and Amendments — p. 127. Ad valorem Tax on Sales vs. the X CONTEXTS. General Excise — p. 128. Later Changes and Collections from — p. 129. IV. Special or License Taxes upon Occupations and Gainful Pursuits. Method of Assessment and Incidence of — p. 131. Popu- larity of Tax — p. 132. Provisions of — p. 133. Receipts — p. 134. VI. Indirect Taxes ox Consumption. I. Distilled Spirits. Universality in the Taxation of Distilled Spirits — p. 136. Consumption of, in the United States in 1860 — p. 137. Held to he especially suited for Taxation, from " inelasticity of the demand" — p. 138. Early "War Legislation — p. 138. Evils induced hy changes in the rates — p. 139. Speculation — p. 110. (1) The tax rates and the revenues — p. 142. Collections under the .82.00 rate disappointing — p. 143. Receipts, rates, and annual production from 1863 to 1S68 — p. 144. Results consequent on reduction of rate — p. 144. (2) Fraud and Evasion — p. 145. Influence of change in rate on production — p. 146. Evasion, examples of — p. 147. (3) Speculation — p. 151. U. Fermented Liquors. Early rates of taxation of — p. 154. Later modifications — p. 154. Phenomenal increase in consumption of — p. 155. m. Tobacco. Provisions of laws of 1862 and 1864 — p. 157. Assessments — p. 158. Changes in rates — p. 161. Collections — p. 162. Fraud and evasion — p. 163. Measure of 1S68 and improve- ments resulting therefrom — p. 164. Recent changes — p. 165. TV. The General Excise upon Manufactures and Prod- ucts. Burdensome nature of the excise and its effect upon indus- try — p. 166. Pates imposed and collections — p. 169. A. The Excise and Prices. Effect of taxes on prices — p. 172. Spirit of speculation and business uncertainty — p. 172. Study of prices largely con- jectural — p. 173. Opinion of Mr. Wells as to influence of excise in causing inflation of prices during the period — p. 173. Amount of taxes collected — p. 174. COXTENTS. XI B. The Excise and the Wage Earner. Effect of taxation on capital invested in productive enter- prises — p. 175. Result of uneven rise in prices — p. 176. Statistics of prices, wages, and consumption for the period — p. 177. General tendency of excise to enhance cost of living, but not wages — p. 180. C. The Excise and Industry. Difficulty of tracing the exact effect of the excise upon industry — p. 181. Prejudicial to some, to others a source of profit — p. 183. Statistics of patents granted — p. 184. War believed to have been paid for from currently created wealth — p. 185. Intensification of production — p. 185. D. Conclusion. The excise the product of unusual conditions — p. 186. Errors of Treasury Department — p. 187. Could the war have been conducted without recourse to the general excise upon manufactures and products? — p. 188. Collections therefrom — p. 189. Experience indicative of certain limi- tations upon the power of government to impose and collect taxes — p. 189. Subsequent improvement in the excise — p. 190. VII. The Administration of the Internal Revenue System. General objections to the excise — p. 191. Administrative details of the measure of 18(52 — p. 192. Administration vitiated by the "spoils system" — p. 191. Early years characterized by faulty administration — p. 196. Collec- tions in Southern States — p. 197. Changes in method of assessment subsequent to the war — p. 198. The Frauds of 1875 and the " Whiskey Ring " — p. 201. Present condition of the service — p. 202. Administration as it is to-day — p. 203. Special or license taxes — p. 204. Distilled spirits — p. 205. Fermented liquors — p. 20S. Tobacco, cigars, and snuff — p. 209. Oleomargarine — p. 210. Cost of col- lection — p. 211. VIII. Internal Taxation Under Peace Conditions, 1870-1895. Increase in governmental expenditure the characteristic feature of recent years — p. 214. The Internal Revenue System now a necessity — p. 216. Collections from internal sources in 1870 — p. 216. Distilled and malt liquors and xii COXTENTS.- tobacco especially fitted for taxation — p. 217. Changes introduced in 1868 in the rates and methods of taxing spirits and tobacco — p. 217. Subsequent modifications — p. 218. Condition of revenues in 1880 — p. 221. Abatement of taxes recommended by the Commissioner — p. 222. The reduc- tion in the Internal Revenue System — p. 222. Comparison of collections from tobacco in the United States and foreign countries — p. 22-1. Tables of collections on behalf of Dis- tilled spirits, Malt liquors, and Tobacco from 1863 to 1893 — p. 225. Recent Legislation — p. 227. Deficiencies of 1893 and 1894 — p. 228. Avenues for relief — p. 229. Secretary Carlisle's proposals in 1893 — p. 231. Act of Aug. 28, 1894 — p. 233. Provisions as to Income Tax — p. 233. Features of the law — p. 235. Consideration of the general advisability of the income tax — p. 236. Is demanded to equalize the burdens of the indirect duties as well as the inequalities of State and local taxes — p. 237. Constitutionality of the Income Tax — p. 242. Increase in the duty on distilled spirits, and new duty on playing cards — p. 252. Large increase in withdrawals of distilled spirits to anticipate the tax and losses to the revenue therefrom — p. 253. Collec- tions on behalf of the Internal Revenue System for the fiscal years 1893, 1894, and 1895 — p. 254. The incidence of the internal revenue taxes on Spirits, Beer, and Tobacco — p. 254. Consumption of the same as influenced by taxation — p. 256. Conclusion — p. 263. CONTENTS. APPENDICES. PAGE 269 I. Bibliography II. Schedule of Internal Revenue Duties, from 1862 to 1867 273 A. Corporations, on Gross Receipts and Personal In- come Taxes 273 B. Assessed Taxes, known as Schedule "A" . ... 274 C. Legacies and Succession Duties ....'... 274 D. Stamp Taxes on Instruments, Acts, and Evi- dences ~ to E. Licenses 270 F. Excise upon Manufactures and Products .... 2<8 III. Schedule of Duties on Objects now Taxable under the Internal Revenue Laws: — A. Rates of Tax on Spirits under the Different Laws which have been in force • 280 B. Acts imposing Tax on Fermented Liquors, and Rates of Tax 281 C. Date of Acts imposing Tax on Tobacco, and Rates of Tax 282 D. Date of Acts imposing Tax on Cigars and Ciga- rettes, and Rates of Tax 284 IV. Schedule of Articles and Occupations subject to Tax under the Internal Revenue Laws of the United States, in force Aug. 28, 1894 286 V. Table showing Receipts from Each Specific Source of Revenue for Fiscal Years, from Sept. 1, 1862, to 1871 290, 291 VI. Receipts from Several Sources of Revenue, from 1870 to 1895 292, 293 INTRODUCTORY. The history of the first century of our national life naturally divides itself into three periods, quite distinct, and characterized by political ideas more or less diverse. The first is the tentative, experimental period immedi- ately subsequent to the organization of the government under the new Constitution, when the nation, timorous of self and even more apprehensive of lapsing into state anarchy, gathered itself together for the work of unifi- cation ; when the government, endowed with unusual powers and blessed with guiding hands, possessed of the confidence of all, aimed, by the utilization of the powers entrusted to it, to strengthen the federal framework, and repair the evils engendered by the impotent Confedera- tion. Conscious only of new strength, and heedless, if not ignorant, of the hidden springs of State jealousy which it offended, the Federalist party was led into excesses, which the people, sensitive of any impairment of the prerogatives of the States, later resented at the polls. Nationalism attempted too much, and recoiled upon itself. The centralizing tendencies of Hamilton, looking to a high tariff, a federal excise, and a national banking system, all encroachments upon the powers of the States, were in advance of public sentiment, and militant federalism was forced to retire before the prejudices of State conservatism. The Union must be 1 2 THE INTERNAL REVENUE SYSTEM. conserved, all agreed, but its flight must not be too high. Increase of power was felt to be cousin-german to abuse of power; and democracy, in the minds of many, was only consistent with little government. This conservative attitude, with respect to the im- portance of the States, found frequent expression in the sentiments which controlled political thought and action during the long period which extended from the opening of the century down to the outbreak of the Civil War ; a period when the limitation of governmental functions to the smallest possible compass was the aim of the party in power, and "let alone" its conscious attitude towards internal affairs. It was a period of political segregation along economic lines, of extreme simplicity in manners and customs, of wide diffusion of comfort and wealth, and of little diversity in industrial life. During this period the financial policies were simple. A low tariff sufficed for all the needs of a frugal ad- ministration of affairs ; and, saving the temporary war duties imposed during the emergencies of 1812 and the few years following, no attempt was made to derive revenues from internal sources. With the outbreak of the Civil War, however, neces- sity enforced a more liberal interpretation of the Con- stitution, and the next few years witnessed a radical change in political ideals, till these were brought more into harmony with the broader, fuller national life upon which the country was entering ; for, just as the period antecedent to 1861 is characterized by restricted finan- cial operations, moderation in taxation, and deficit finan- ciering, so, since that time the pendulum has swung to the opposite extreme, and the tendencies dominant INTRODUCTORY. 3 during the past three decades have been towards the fullest possible utilization of constitutional powers, and the gradual increase in governmental activities. Revenues extraordinary have been extracted from the people, which have been disbursed with but little regard for economy. Instead of a tariff for revenue only, the machinery of taxation has been made to do service to special interests ; while in place of the tentative internal revenue system, so ungraciously sanctioned in cases of emergency by earlier administrations, a permanent excise has become a recognized portion of our revenue service. Of this constitutional development the history of our budgetary management is but the reflex. The position occupied by the customs and internal taxes is but the mirror of opinions prevailing as to the nature of the Union ; and it was not until the war had laid constitu- tional scruples at rest that the latter were discussed at all dispassionately, or escaped the realm of purely parti- san agitation. This constitutional development is reflected quite graphically in the revenues and expenditures of the Treasury, and it may not be impertinent briefly to con- sider them. Even in the early days of the Republic, there is no- ticeable a persistent tendency of expenditures to increase more rapidly than population. From 1792 to 1798 dis- bursements rose from $1,877,000 to $4,623,000. Ten years later they had further increased to $6,504,000, while by 1820 they had still further risen to $13,134,000. From this time on down to the outbreak of the war, even under the restrictive tendencies dominant in the Demo- 4 THE INTERNAL REVENUE SYSTEM. cratic party, expenditures rose from an average annual disbursement of $12,390,000, or $1.07 per capita, during the decade extending from 1821 to 1831, to an annual average of $24,740,000, or $1.61 per capita, during the succeeding one. During the next decade, while the total average annual expenditure increased nearly forty per cent, the per capita increase was but about one and a quarter per cent. From 1851 down to the entrance of the Republican party into power, -the average annual per capita increase was twenty-six per cent, while the total average annual expenditure grew to nearly fifty' eight millions of dollars. Marked though these exhibits are, they sink into in- significance in the light of later history. During the five years from 1861 to 1866 the expenditures, exclusive of interest charges and the public debt, reached the extraordinary average of $712,720,000 per annum, being $21.07 per capita in currency, or $14.32 per capita in gold, a rate of increase in currency of 920 per cent as compared with the average of the previous decade. This exhibit would have naught save an historic interest had expenditures returned to a normal peace basis, and the comparative frugality which characterized the seven decades of our history previous to the war again assumed sway. But such was not to be the case. The Constitu- tion had been bent to the breaking-point, and it would not resume its former rigidity. The ease with which heretofore undreamt-of resources could be acquired, and the apparent acquiescence of the people in governmental extravagance, induced a prodigality in the disposition of public funds which has gone on unabated to the pres- ent day. Moreover, the passion for spending money, INTRODUCTORY. 5 once acquired, is only relinquished at the mandate of an oppressed people ; and the apparent prosperity of all classes, and their acquiescence in the taxes, led to a continuance of the policy inaugurated by the war. For the fiscal year 1867, two years subsequent to the close of hostilities, the total expenditures, exclusive of boun- ties and payments on account of the public debt, was $ 191,564,677 (in currency), as compared with an average annual expenditure of fifty-eight millions ( in gold ) for the decade previous to the war, an increase of two hun- dred and forty per cent. This remarkable increase is manifest not only in the war, navy, and other depart- ments, but also in the civil list (156 per cent), foreign intercourse (35 per cent), miscellaneous (112 per cent), Indians (60 per cent), pensions (1,929 per cent), as compared with the disbursements for the fiscal year 1861. During the next five years the net expenditures for war purposes manifest a tendency to decline, with a less than corresponding increase for pensions and miscel- laneous purposes, the net expenditures in 1872 being $153,201,856. For six years more a spirit of econ- omv marked the use of public funds, although the gross annual expenditure was reduced but little. From this time on down to the present date the disbursements of Congress have been made with a prodigal hand, and upon few departments of the government has the restrain- ing hand of economy been laid. In 1878 the customs revenue began to increase at a phenomenal rate, which continued unabated down to 1893. The same movement is manifest in receipts from internal sources, despite the constant reductions in the rates. A troublesome surplus 6 TEE I STERNAL REVENUE SYSTEM. presented itself. Customs duties, instead of being low- ered, were raised ; and the abatements in the excise taxes gave but a temporary relief, soon compensated by the increase in the consumptive power of the people. An era of extravagant expenditure set in, only surpassed by the experience of the war. Disbursements for pen- sions grew from twenty-seven millions in 1878 to twice that sum two years later. During the next decade they increased to one hundred and seven millions, while by 1894 they had grown to one hundred and forty-one mil- lions. During the same period Indian appropriations were doubled, as were those for miscellaneous purposes and the navy department. Thus, for 1894 the total net expenditures were as follows : — For the civil establishment, including foreign intercourse, public buildings, collecting the revenues, deficiency in postal revenues, refund of direct taxes, bounty on sugar, District of Columbia, and other miscel- laneous expenses 8101,943,884 07 For the military establishment, including rivers and harbors, forts, arsenals, and sea- coast defences 54,567,929 85 For the naval establishment, including con- struction of new vessels, machinery, arma- ment, equipment, and improvements at navy-yards 31,701,293 79 For Indian service 10,293,481 52 For pensions 141,177,284 96 For interest on the public debt 27,841,405 64 For postal service 75,080,479 04 Total expenditures $442,605,758 87 One of the influences to which this extravagant expen- diture is attributable is the policy of surplus financier- INTRODUCTORY. 1 ing, induced by the redundant revenues subsequent to the resumption of specie payments ; and the party domi- nant in the councils of the nation, threatened with a per- manent surplus in the revenues, was under pressure to reduce the scope of the internal revenue system, and some few individuals, solicitous for the preservation of existing tariff arrangements, even advocated its entire abolition. But there is reason to believe that the future will see an even greater dependence upon the excise than at present. While the party but recently in power has not seriously imperilled the revenues, the reduction of the customs duties has already rendered necessary greater reliance upon inland sources. And in order that Ave may properly consider our present fiscal arrangements, with a view to possible alter- ations in the future, it is necessary to understand the past. While the abounding prosperity of the nation has rendered the people more or less indifferent to the weight of national taxation, as well as its incidence and diffusion, there are vital questions to' be solved in a just arrangement and distribution of burdens. Shall the amount collected upon inland subjects be increased or diminished ? Shall regard be had to the " poor man's luxuries," and whiskey, beer, and tobacco be favored by a light tax; or shall we consider the harmful social re- sults incident to such use, and levy rates so high as to prove a deterrent to consumption ? Shall the machinery of government be used as a means for the readjustment of the inequalities in the distribution of wealth by a graduated income and inheritance tax ; or shall special legislation be carried a step farther, and the system be used for the suppression of such articles as oleomarga- 8 THE INTERNAL REVENUE SYSTEM. rine and other products which enter into competition with protected products ? These are but a few of the questions which present themselves at a time when the fiscal relations are in an unsettled state. The teachings of the past will aid us greatly in their determination. TAXATION AND TAXES THE UNITED STATES UNDER THE INTERNAL REVENUE SYSTEM, 1791-1895. CHAPTER I. EARLY ATTEMPTS AT INTERNAL TAXATION. The immediate cause of the failure of the Articles of Confederation was a fiscal one, and lay in the jealous restrictions imposed by the nascent States upon the Continental Congress. All power to tax was denied the government. Congress, it is true, possessed ample au- thority to borrow money, but was intrusted with no power to provide for the repayment of the same, save by requisitions upon and recommendations to the indi- vidual States, which were pledged upon their public faith to obedience to the same. But this makeshift of State apportionments had early failed through the apa- thy of the State governments, relieved of the bond of common danger, and oppressed by the burdens of their own local indebtedness. At the same time a depreciated paper currency, issued for the conduct of the war, had undermined the credit of the government both at home and abroad ; and this, together with the failure of means to meet the recurring interest charges upon the public 10 THE INTERNAL REVENUE SYSTEM. debt, left no avenue of escape from impending bank- ruptcy, save through the adoption of a new framework of government, or the granting of enlarged powers to the Confederation. The former alternative was fortunately chosen ; and the Constitution of 1787 issued from the hands of the Convention liberal in its grant of that power which is fundamental and most essential to any form of sov- ereignty, namely, the power of taxation. By the provisions of this instrument the customs and excise taxes were intrusted to the new federation, while direct taxes were sanctioned, provided they were appor- tioned among the several States according to their re- spective numbers. Strange as it may seem, that section of the Consti- tution which empowers Congress " to lay and collect [Taxes, Duties, Imposts, and Excises" was enacted with- Jout opposition or discussion. From an examination of the debates of the Convention, it would appear that this provision, as reported by the committee of final revision, was taken without emendation from the resolutions said to have been introduced by Charles Pinckney ; and no exception seems to have been raised to its adoption. In fact, from the tone of the discussions and the dispropor- tionate amount of time devoted thereto, it would ap- pear that the Convention apprehended, as not wholly improbable, a continuance of the old plan of raising revenues by means of requisitions upon the States ; for we find considerable solicitude manifested, and several resolutions were introduced providing that all moneys to be raised for supplying the public Treasury by direct taxation should be assessed on the inhabitants of the EARLY ATTEMPTS AT INTERNAL TAXATION. 11 several States according to the number of their repre- sentatives. 1 The plan of direct taxation by apportionment Avas evidently adopted, with but little appreciation of its import, as a portion of one of the famous compromises of the Convention ; yet, even with this safeguard to its use, great apprehension was manifested lest it should be made use of by Congress to the prejudice of certain sections. Soon, however, it came to be viewed mainly 1 Unfortunately, the journal of the proceedings of the Convention throws but little light upon the attitude of that body to the internal revenue system, or as to what was to constitute "direct taxation." It appears that on the 11th of July there was a debate of some warmth involving the question of slavery; and on the day following Gouverneur Morris of New York submitted a proposition " that taxa- tion shall be in proportion to representation," which was passed with the insertion of the word " direct," so that it stood, " provided always that direct taxes ought to be proportioned to representation." — See 2 "Madison Papers," by Gilpin, pp. 1079-1081. On the 24th of the same month Mr. Morris said that " he hoped the committee should strikeout the whole clause. . . . He had only meant it as a bWdge to assist us over a gulf; having passed the gulf, the bridge maybe removed." He thought the principle laid down with so much strictness liable to strong objections. — Ibid., p. 1197. That gulf was the share of representation claimed on the part of the South for their slave population. But the bridge remained, and from thenceforth all parties seem to have avoided the subject; for, with one or two immaterial exceptions, it does not appear that it was again adverted to in the Convention, and the clause was silently incorporated into the Constitution as that instrument was finally adopted. Nor does it appear that on the floor of the Convention any attempt was made to define the words used or the exact con- struction to be placed upon them. Under the Confederation, requisitions upon the States were col- lected by State officials, upon such subjects and by such methods as were employed in the individual commonwealths. Congress came in touch only with the States, not with the citizen. This plan persisted in the Constitution in the provision relating to 12 THE INTERNAL REVENUE SYSTEM. as an emergency tax, to be relied on only in case of the inadequacy of the customs and the excise. Such is the opinion generally expressed in defence of the Con- stitution by pamphleteers of the day. 1 That the time would come when wealth would be geographically so distributed that such a plan would be grossly inequitable does not seem to have been antici- pated, nor is there any indication in the debates of the Convention of the later hostility to the excise or internal i revenue system. With the organization of the government under the new instrument, public opinion pointed unequivocally to Hamilton as the Theseus alone capable of freeing the chained resources of the country, and of bringing direct taxation, in so far as it substituted for the rule of uniformity, which prevailed in the case of the excise and impost, that of appor- tionment upon some specified basis; but as to what was included in the term " direct," within the intent of the framers of the Consti- tution, it is impossible to more than conjecture. As defined by the Supreme Court, in the several cases which have come before it for ad- judication prior to the late income-tax case, just as in the celebrated legal-tender decisions, historic grounds have been relied on so far as ascertainable ; but, in the light of the vagueness and poverty of such knowledge, the decisions have turned mainly upon a prior! mounds of reasonableness and public policy, the courts holding that a strict scientific interpretation of the term " direct " would be repugnant to reason, and would enfeeble the Federal Government, and have arbi- trarily assumed that the framers of the Constitution used the expres- sion inadvertently and without fully appreciating its consequences. For this reason the term acquired a legal meaning unknown to the phraseology of finance and economics. 1 See Alexander C. Hanson in " Pamphlets on the Constitution, 17S7-1788," edited by Paul L. Ford, p. 253. Also pp. 160 and 303 of the same. See, further, the assuaging remarks of Hamilton in the De- bates of New York on the Adoption of the Constitution, "Elliot's Debates," vol. ii.. p. 367. (Pub. by Lippincott & Co.) Also State Papers, Finance, vol. i.. p. 66, "Report on the Public Credit." EARLY ATTEMPTS AT INTERNAL TAXATION. 13 order out of the existing fiscal chaos ; and the new- secretary, when invested with office, speedily indicated his intention to utilize to the fullest the generous grant of power which the Constitution conferred, and at once introduced measures for the funding of the public debt, and the assumption of the debts of the States incurred for the conduct of the war, for the authorization of a national bank, as well as plans for an adequate revenue from the customs and the excise. Of these, the prob- lem of ways and means was by far the most pressing, and various forms of customs duties were at once proposed. Madison introduced a resolution providing for an impost somewhat similar to the one so warmly debated by the Congress of the Confederation in 1783 ; but it did not meet with Hamilton's approval, who preferred a general ad valorem duty on all impor- tations, with a modest excise system based upon wines and spirits, upon which objects he thought it would "be sound policy to carry the duties as high as will be consistent with the practicability of a safe collec- tion." x In all of these proposals the secretary studiously avoided innovations, save in so far as appeared necessary to accommodate the tried experiments of older countries to colonial conditions ; and his several reports bear evi- dence of considerable intimacy with the current financial theories of the day, while the resemblance which his suggestions on the excise bear to English precedents can hardly be considered accidental. In this latter regard the colonies were not deficient in examples ; for the greatest diversity existed in the revenue systems 1 State Papers, Finance, vol. i., p. 15. 14 THE INTERNAL REVENUE SYSTEM. of the various States, in all of which, however, the birthmark of their common British origin is apparent. This diversity has persisted to the present day, and it is only possible to understand the inextricable confusion and hopeless lack of scientific principles in State taxa- tion by reference to the economic and social conditions under which they came into being. Some form of raising funds for communal purposes doubtless existed from the earliest settlements ; and, save in a few in- stances, English forms and methods served as models. But political conditions were simple in the extreme, and the demands for revenue were met by devices cor- respondingly simple. With growth in the complexity of social conditions, however, recourse to internal sources was rendered necessary ; and the more palpable forms of property, as land, horses, cattle, stock in trade, house- hold plate and furniture, and other tangible and easily ascertained forms of wealth, were first chosen for taxa- tion. Land was, of course, the most important, as well as the chief, source of wealth, and in all the States save Vermont and Delaware bore the main burden of taxa- tion. Only about one-half the States assessed houses and slaves; while carriages were taxed in Connecticut, New Jersey, Pennsylvania, Virginia, and Kentucky, and processes of law in Maryland, Virginia, Kentucky, and North Carolina. Seven of the States clung to a uniform capitation tax, four imposed the general prop- erty tax upon all forms of wealth, while others specifi- cally indicated the articles to be taxed. To a limited extent, and under various disguises, the income tax was imposed. Vermont provided "for as- sessments proportional to the profits of all lawyers, EARLY ATTEMPTS AT INTERNAL TAXATION. 15 traders, and owners of mills, according to the judg- ment and discretion of the listers or assessors ; " while Massachusetts taxed " incomes from any profession, faculty, handicraft, trade, or employment." A similar tax is to be found in Connecticut, to be " proportioned to the estimated gains or profits arising from any, and all, lucrative professions, trades, and occupations, ex- cepting compensations to public offices, the profits of husbandry, and common labor for hire." Pennsylvania, the most restive of the States under taxation, met an early requisition of the Confederation by imposing a duty upon all profits arising from offices and positions of profit, trades, professions, and occupations. Similar taxes existed in Delaware and New Jersey, while in several Southern States rates upon certain species of property were estimated upon the incomes arising from them. 1 In a highly organized community, the desire to dis- guise the burdens which political life entails has led to their imposition upon exchange in the form of license charges, stamps, and various forms of the excise. But for many years what internal trade existed in the colo- nies was conducted almost solely by barter. Every household was a community unto itself. Its meagre wants were supplied on the spot. By slow degrees, however, through the introduction of money and the growth of manufactures and towns, markets were cre- ated, and the exchange of commodities was facilitated. 1 Cf "Taxation in American States and Cities," R. T. Ely, Part II., chaps, i. and ii. ; also " Robert Morris, The Financier and Finances of the American Revolution," W. G. Sumner, chap, iii., et seq. 16 THE INTERNAL REVENUE SYSTEM. Hand in hand with this development is noticeable an attempt to utilize the processes of exchange for the pur- pose of revenue, and at the time of the Revolution ex- cise taxes had been developed to considerable extent in several of the colonies. In Connecticut, not only all ardent spirits, but foreign articles of consumption gen- erally, had been the objects of an inland duty. In New Hampshire, rum, wine, and cider were taxable ; in New York, beer, wine, and liquors of all kinds sold at re- tail, as well as receipts from sales at auction. Spirits were also taxable in New Jersey and Pennsylvania. Five of the colonies were thus familiar with the taxa- tion of spirits in some form or other, but it appears that the taxes were very unpopular and costly of collection. By 1796 they had apparently been relinquished by all of the States, for no reference to them is to be found in Wolcott's report of that year. 1 In the majority of the Commonwealths the State tax was collected from the same objects as the local rates, while in a few the revenues from certain specified sources were reserved exclusively for the State govern- ment. In New York, Pennsylvania, and Maryland. however, the income derived from the sales of public lands and certain other independent sources relieved these Commonwealths from the necessity of any resort to taxation for purely State purposes. Prom this it will be seen that the proposals of Hamil- ton regarding excise taxes were drawn in great part from sources familiar to the people ; and the legislation which 1 For an exhaustive account of the revenue systems in vogue in the various States, see "Wolcott's Report, State Papers, Finance, vol. i., p. 414. EARLY ATTEMPTS AT INTERNAL TAX A TION. 17 followed therefrom was experimental only in so far as it applied to larger areas of territory, and emanated from a new and heretofore unrecognized authority. In one of his first reports, Hamilton had advocated a moderate tax upon spirits distilled within the United States from foreign as well as domestic materials ; x but Congress had declined to follow his proposals on ac- count of the alleged centralizing tendencies consequent on the creation of a large body of federal tax collectors. At the same time the sectional interests of the Southern States, with which Pennsylvania was closely identified, united their representatives in Congress in denunciation of the proposed measure, as one that was " odious, un- equal, unpopular, and oppressive." This aversion to internal taxes was partly traditional, partly the result of the absence of legal restraint in those isolated regions where the opposition was most intense. In the South, moreover, whiskey was looked upon almost as a necessity, and a tax upon its manufac- ture and sale no more defensible than one imposed upon any other product of the farm. In Pennsylvania, also, the feeling was most bitter ; and the legislature of that State instructed its representatives in Congress to oppose the passage of such a measure by every means in their power, while a memorial from Westmoreland County (Pa.) insisted, among other things, that to convert grain into spirits was as clear a natural right as to convert grain into flour. An excise " was the horror of all free states," said one vigorous speaker in the House ; it was " hostile to the liberties of the people ; " it would " convulse the government ; let loose a swarm of har- 1 State Papers, Finance, vol. i., p. 23, 18 THE INTERNAL REVENUE SYSTEM. pies, who, under the denomination of revenue officers, will range the country, prying into every man's house and affairs, and, like the Macedonian phalanx, bear down all before them." * It was further pointed out that the First Provisional Congress, assembled in Philadelphia in 1774, had ad- dressed to the people of Canada a memorial which had instanced the English excise as one of the evils atten- dant upon continued connection with the mother coun- try ; 2 as well as the provision for a long time insisted on in the Constitutional Convention of New York, which denied to Congress all power of inland taxation. 3 Both Madison and Hamilton, at an earlier date, had avowed themselves opposed to a federal excise ; but Hamilton, when he became Secretary of the Treasury, was led to alter his views from the inadequacy of the other forms of revenue. Already tonnage and customs duties had been provided for, which were estimated to yield $1,467,086, which sum was expected to be increased to $2,000,000 by the proposed duties upon spirits. 4 The estimated annual expenditures of the new gov- ernment included $630,101 for the civil establishment, while the accrued and accruing interest, with overdue public securities, aggregated $15,000,000 more. 5 It soon became apparent that the early revenue pro- visions were inadequate ; and two months after his first 1 Annals of Congress, vol. ii., p. 1844. 2 Journal of Congress, 1777, p. 62. 3 Elliot's "Debates," vol. ii., p. 331-411. * Hamilton estimated the latter duties capable of yielding $650,000, the annual production of spirits at this time being approximately 6,500,000 gallons. 5 State Papers, Finance, vol. i., p. 12. EARL Y A TTEMPTS A T INTERNAL TAX A TION. 19 report, Hamilton, at the request of the House, made a further proposal * on means for meeting the interest charges upon the debts of the States but recently as- sumed. In this report the secretary deserted his early and more tentative policy, and boldly advocated inland duties upon snuff and tobacco, carriages, sales at auction, stamps, and licenses for the practice of law and the priv- ilege of selling wines and spirits, from which combined sources he conceived that half a million dollars could easily be realized. 2 Again in December he reiterated his proposals regarding the fitness of spirits for taxa- tion; and three months later, 3 in the face of the most vigorous opposition, his proposals were substantially enacted by a vote of thirty-nine to nineteen. By the provisions of this Act graduated duties were; levied, which increased from eleven to thirty cents per gallon upon spirits distilled from molasses, sugar, and! other foreign materials, according to the proof of the article as measured by Dicas's hydrometer. Upon spirits distilled from domestic articles, as whiskey distilled from grain within any city, town, or village, the rates ranged from nine to twenty-five cents. For the collection of the duties elaborate provision was made, and administrative machinery created, which has served as a model for subsequent acts. The tax was required to be paid or secured prior to the removal of the article from the place of manufacture, and its collection was intrusted to the supervisors of the reve- nue. In order to obviate the objection frequently made, that the tax required increased capital in the distilling i On March 4, 1790. 3 By act of March 3, 1791, 2 State Papers, Finance, vol. i., p. 43. 20 THE INTEENAL REVENUE SYSTEM. business, an option was granted the manufacturer to pay the duty upon the removal of the spirits from the place of manufacture, with an abatement of two per cent thereon, or to give bond with approved securities for its payment within three months after release from the manufactory. The country was divided into fourteen districts, corre- sponding with State lines, in each of which a supervisor was appointed ; while each district was further subdi- vided into inspection surveys, with as many inspectors in each as were deemed necessary, whose duty it was to attend to one or more places of distillation. The methods adopted for checking illicit distillation were quite similar to those now in use. The local officer was required to mark and brand each cask in durable char- acters with progressive numbers, as well as with the name of the distiller and the quantity of spirits con- tained in the same. This was intended to prevent the re-use of packages, and the marketing of spirits without the payment of the duty. Upon stills located in the country districts the pro- ducer was permitted to pay " a yearly duty of sixty cents per gallon, English wine measures, on the capa- city or content of each and every such still, including the head thereof." And if any distiller felt himself aggrieved by the rates, he was permitted to keep a rec- ord of the quantity of spirits distilled and sold ; which record, when produced and verified before the officer of the survey, was to be accepted as true, and the tax assessed at the uniform rate of nine cents per gallon upon the verified output. The net product of the Act was further pledged to the foreign loans, and was to be EARLY ATTEMPTS AT INTERNAL TAXATION. 21 inviolably applied thereto, while any unappropriated surplus was to be used in the reduction of the public debt. Although the rate imposed was no higher than that collected by Pennsylvania a few years earlier, the pro- ducers complained that it was excessive and prejudicial to their business ; and to assuage this sentiment several amendments were made which reduced the rates twenty- five per cent upon stills with a capacity of four hundred gallons or more, granted country producers the option of taking out a license at the rate of ten cents per gallon on the estimated monthly producing capacity of the still, or of paying seven cents on the actual amount produced, or of paying fifty-four cents on the annual content of the still. But these alternatives were soon found prejudicial to the revenues ; for by the use of im- proved methods in production, and the forcing of the capacity of the still, distillers, by taking out a monthly license, were able to reduce the per gallon tax to about three cents, while a few years later, according to esti- mates of Mr. Gallatin, the gallon rate had been still further diminished to about three-fifths of a cent. 1 But despite these concessions on the part of Congress, the tax remained as unpopular as ever in the Middle and Southern States, where it was felt that it had been inspired by the commercial classes of New England, to whom the tariff was inimical, and who, it was alleged, were desirous of shifting the taxes upon the defenceless population of the interior. Especially strong was this sentiment in Western Pennsylvania and in the moun- tainous districts of Kentucky, Virginia, and North 1 Report on Finances, 1801, p. 314. 22 THE INTERNAL REVENUE SYSTEM. Carolina, where inadequate facilities for transportation rendered it necessary to transform grain into spirits be- fore it could be carried to an Eastern market, and where money was so scarce that barter was the prevailing means of exchange, and whiskey the recognized measure of value. It is difficult to appreciate the prevalent hostility to taxation without some reference to the political and social conditions of the time. The prescience of Ham- ilton had foreseen that nothing would so surely cement the new order of things as an invigorating financial policy, and his opponents were no less quick in suspect- ing his scheme of such ulterior purpose. The opposi- tion to the tax measures, as well as to the Assumption, Funding, and Bank Acts, was thus largely of a political nature. Party lines were just forming; and the Anti- Federalists found in these measures opportunity for arousing the latent hostility of the people to taxation in any form, and of turning the proposals of the Federalists to political advantage. The traditional aversion on the part of the colonists to excise taxation had not been abated by their long freedom from the visits of the tax-gatherer, and excise impositions were inseparably associated in their minds with arbitrary government. Anti-Federalist orators, therefore, found ready listeners to their utterances, particularly in the rural districts. This disaffection found avidious acceptance in the west, ern counties of Pennsylvania, and it required but little agitation to arouse the feeling into hostile opposition to the enforcement of the Act. Indignation meetings were held, and a committee of agitation in Washington County declared that any one who would accept any EA RL Y A TTEMP TS A T INTERNAL TAX A TION. 23 position under the law would be considered an enemy of society. A few weeks later a tax-collector was tarred and feathered, and various acts of violence were com- mitted on other officials. Concessions on the part of Congress, instead of abating the hostility, only rendered it more insolent. Correspondence committees were ap- pointed, resolutions of a revolutionary character were passed, and even secession was talked of. At last the hostility was fanned into armed resistance ; and although the Whiskey Insurrection, as it is known to history, was easily quelled, the hostility, though latent, was still cher- ished by the inhabitants, and the law but feebly executed, while the revenues derived therefrom were insignificant. Thus for the fiscal year 1793-1794, three years after the inauguration of the system, the aggregate receipts were but $344,453, or $50,000 less than the returns during the first year of its operation, and only about one-half of its estimated yield. The tax did not pos- sess the approval of the people, evasion was justified by public opinion, while the salaries of the revenue offi- cers were so inadequate that inefficient men were often intrusted with the administration of the law. The insurgents had the sympathy of a large portion of the Union ; and not a few representatives of the South openly expressed their approval of their acts, finding therein a vindication of their charges. The division in Congress was largely a sectional one, the Northern States being preponderatingly in favor of the measure, while the Southern ones, with Pennsylvania, were arrayed against it. The lines of separation were therefore polit- ical ; and while the constitutionality of the measure was '• not questioned, the same tactics and arguments were 24 THE INTERNAL REVENUE SYSTEM. adopted which were directed against the Assumption Bill and Bank Act. But the necessities of the Treasury were not the only motives which urged the secretary to adopt his fiscal policy. They may, in fact, have occupied a subordinate position in his mind ; for he doubtless felt the necessity of pre-empting the powers conferred upon the federal government before they should be assumed by the States themselves. It was eminently to be desired that the powers conferred upon the Union should be utilized before the opposition should be sufficiently organized to defeat them. If inland forms of taxation were once as- sumed by the States, it would be Avell nigh impossible to oust them, and reclaim the same for the federal govern- ment. 1 Moreover, the secretary fully appreciated the effect of bringing the national arm into daily contact with the people ; and even a bloodless war, with the con- sequent display of armed federalism which ensued, may not have been greeted by him wholly with displeasure. The contest was in reality but one phase of the great constitutional struggle which was to be the battle- ground for the next seventy years ; and while individual opposition partook ver3 r largely of the current aversion to visible taxes, in Congress the battle was a political one, fought along the lines which were rapidly cleaving the country into two great camps. The arguments pre- sented against the tax appear very weak and pusillani- mous at this distance, and are substantially reducible to four ; to wit, first, that the tendency of the taxes was to contravene the principles of liberty ; second, that their influence was to injure morals by inducing 1 Cf Hamilton's "Works," vol. iv., p. 231. EARLY ATTEMPTS AT INTERNAL TAXATION. 25 false swearing ; third, that they were burdensome to the public on account of the heavy and oppressive penalties ; and fourth, that their tendency was to interfere unduly with industry and the process of distilling. Hamilton disposed of these objections seriatim, and demonstrated their falsity, showing that the measure erred rather in leniency than severity, while it bore but little resem- blance to the English excise with which the opponents were wont to compare it, and which caused it to inspire so much fear in the public mind. But comparatively little relief was afforded the Treas- ury from this source. For the fiscal year 1793 the total receipts amounted to but $422,026.86, distributed accord- ing to assessment districts as follows : — Collections from Distilled Spirits for the Fiscal Year 1793. DISTRICT. New Hampshire Massachusetts Rhode Island Connecticut . Vermont . . New York . New Jersey . Pennsylvania 1 Delaware . . Maryland . . Virginia . . North Carolina South Carolina Georgia . . GROSS AMOUNT OP EEVENCE Fr.OM SPIEITS PRODUCED FEOM DOMESTIC MATERIALS. $ 209.78 990.61 43.20 3,330.71 564.54 860.00 14,975.40 1,691.89 14,708.62 76,268.30 12,734.81 7,547.00 640.46 $134,565.32 GEOSS AMOUNT OF REVENUE FEOM SPIEIT8 PEODDCED FEOM FOBEIGN MATEE1AL8. $ 3,413.89 185,208.91 46,795.57 8,082.36 27,204.15 999.84 4,099.30 6,438.12 2,021.90 8.10 3,189.38 $287,461.54 1 No returns were secured from Pennsylvania from the country districts, where distillation from domestic materials was mainly carried on. 26 THE INTERNAL REVENUE SYSTEM. The cost of returning this sum to the Treasury was something less than $70,000, or about 16.5 per cent, while the drawbacks allowed aggregated $60,000 more, so that the expense of netting $292,000 to the Govern- ment was upwards of 20 per cent of the gross amount, and 23.5 per cent of the sum actually secured. 1 Such a showing gave much countenance to the charges fre- quently made that the costliness of the tax of itself rendered it untenable. But its continuance was demanded by the exigencies of the situation. In fact, a proposition was at that time pending before the House for rendering dutiable car- riages, sales at auction, snuff, sugar, tobacco, licenses for selling wines and liquors, and a schedule of stamp duties, by which, if adopted, the revenues were expected to be augmented by about $600,000 ; 2 and these pro- posals, in the face of strong opposition on the part of the manufacturing interests, were finally incorporated into a measure bearing date of June 5, 1794. By the provisions of this Act the duty upon carriages was graduated from one to ten dollars according to the description of the vehicle ; but its operation was limited to carriages kept exclusively for pleasure, a provision which greatly impaired its collection. Subsequently, by the Act of May 28, 1796, the rates were consider- ably increased, and given the following permanent form : — Coaches driven by postilions $15.00 Chariots 12.00 Coaches (with panels) 9.00 1 State Papers, Finance, vol. i., p. 279. 2 Ibid., p. 276. April 17, 1794. EARLY ATTEMPTS AT INTERNAL TAXATION. 27 Coaches (without panels) $6.00 Two-wheeled top carriages 3.00 Other two-wheeled carriages 2.00 The tax was at once attacked as unconstitutional, on | the ground that the duty, unlike all other indirect taxes, was not paid once for all, but annually like any other tax on personalty or real property. Moreover, it was I paid originally by him on whom it eventually fell, in- I stead of by the producer, from whom it was to be shifted*-/ to the consumer. For these reasons it was held to be a direct tax instead of an indirect one, and consequently, according to the provisions of the Constitution, could only be assessed by apportionment among the States according to the distribution of population. From a purely administrative point of view the tax is to be classed as a direct one ; but Gallatin tried to evade the objection by asserting that it fell upon an article of expense rather than an article of income, 1 while the Supreme Court 2 sustained the constitutionality of the law on the ground that only land and capitation taxes were to be regarded as direct within the purview of the Constitution, and that it was inconceivable that the frainers of the Constitution should have contemplated a restriction of the federal powers of internal direct taxation solely to those two objects. 3 1 Writings of Gallatin (Adams), vol. iii., p. 95. 2 Hylton vs. the United States, 3 Dallas, 971. 3 The real intent of this provision of the Constitution, like many others, will always he an open question. Prohably the two most authoritative persons in the Convention touching the Constitution were Hamilton and Madison, and they disagree. The hitter, in a letter of May 11, 1794, speaking of the carriage tax, said, " The tax on carriages succeeded in spite of the Constitution by a majority of 28 THE INTERNAL REVENUE SYSTEM. By the terms of the Act of June 5, 1794 a percentage tax, varying according to the description of the prop- erty sold, was also imposed upon all sales at auction ; * twenty, the advocates of the principle heing re-enforced by the adversaries of luxury." (2 Madison's " Writings," pub. by Congress, p. 14.) In another letter, of Feb. 7, 1796, referring to the carriage-tax case, at that time pending in the Supreme Court, he remarked: " There never was a question on which my mind was better satisfied, and yet I have very little expectation that it will be viewed in the same light by the court that it is by me." Ibid., p. 77. Hamilton also left some words upon the same subject, in a legal brief entitled " Carriage Tax," prepared for the Hylton ease, in which he appeared as counsel for the United States. In it he says, " What is the distinction between direct and indirect taxes? It is a matter of regret that terms so uncertain and vague in so important a point are to be found in the Constitution. We shall seek in vain any ante- cedent settled legal meaning to the respective terms. There is none. We shall be as much at a loss to find any definition of either which can satisfactorily settle the point." Hamilton's " Works," vol. vii., p. 848. There being many carriages in some States, and but few in others, he points out the preposterous consequences of levying and collecting the tax upon the basis of apportionment, instead of by the rule of uni- formity, and suggests that direct taxes be held to be only " capitation or poll taxes, and taxes on lands and buildings, and general assessments, whether on the whole property of individuals, or on their whole real or personal estate. All else must of necessity be considered as in- direct taxes." In the case arising under the carriage tax, the plaintiff in error insisted that the tax was unconstitutional because it was a direct tax, and had not been apportioned among the States as pre- scribed by the Constitution. The argument was heard by four judges, Wilson, Patterson, Chase, and Iredell, of whom the three first named had been distinguished members of the Constitutional Convention of 1787. Wilson had been on the committee that drafted the instrument in its final form, and had been its defender in Pennsylvania. The judges were unanimous in their decision, and the tax was held not to be a direct one in the meaning of the Constitution. Each judge delivered a separate opinion sustaining the tax. 1 The tax rates upon sales at auction were as follows: receipts from sales of lands, tenements and hereditaments, tools, stock, and EARLY ATTEMPTS AT INTERNAL TAXATION. 29 while the privilege of selling foreign spirituous liquors at retail was rendered taxable at the rate of five dollars upon every such place of business. Sugar and snuff were also included in the schedule, the tax upon the former article being laid on the ground that the pro- tection granted the industry by the tariff was a bonus for which the manufacturers could easily afford to pay the slight tax imposed. The tariff duties on sugar ranged from one and a half to nine per cent ad valorem, graded according to the value of the product; and the internal tax, which was assessed at the place of manu- facture, was placed at two cents per pound. The do- mestic manufacturers vigorously protested against the measure, asserting that their industry was so newly established and in such a struggling condition that the tax would prove ruinous to them ; but, despite their as- sertions, the industry steadily increased in importance, and maintained the market against foreign competition. The duty on snuff, at first a specific tax at the rate of eight cents per pound, was later assessed on the capacity of the mill, as measured by the mortars em- ployed in its production, in accordance with a suggestion of the secretary ; but it scarcely paid for the cost of collection and the drawback of six cents per pound allowed on exportation. It was soon seen to have been utensils, one-fourth of one per cent; while the receipts from sales of goods, chattels, and other personal property, were dutiable at one- half of one per cent. The administrative difficulties which surround such a tax render it difficult of collection, as its assessment depends wholly upon the honesty of the auctioneer. In addition to this, it was very unpopular; as it was imposed upon articles usually sold under the pressure of misfortune, although it did not attach to goods sold upon execution, bankruptcy, etc. 30 THE INTERNAL REVENUE SYSTEM ill advised, and was repealed, after having been collected but twice, namely, in 1795 and 1796. Three years later 1 taxes were levied upon the follow- ing legal instruments, and were collected by means of stamps : — Certificate of admission to practice in U. S. Courts . §10.00 Certificate of Naturalization 5.00 Any grant under the seal of the United States . . . 4.00 Any exemplified copy of same 2.00 Charter party, bottomry, or respondentia hond . . . 1.00 Any paper requiring seal of United States .... .50 Any instrument connected with the ~| From 10 cents to 75 cents, execution of a will ; any insurance I according to the charac- policy; all bonds, notes, bills, etc. J ter of the instrument. Everything considered, these duties were probably as satisfactory as any portion of the system, inasmuch as they are a perfectly legitimate charge for services ren- dered; while at the same time they are easy of adminis- tration, cheap of collection, and, with the exception of distilled spirits, the most productive form of revenue imposed during this period. But the aid secured from these taxes did not justify the sanguine hopes of the secretary and Congress, who looked for an immediate return of more than half a million dollars from the com- bined sources. The real collections will be found in table as footnote on opposite page. As early as 1791 a special Committee on the public credit had advocated a direct tax of $750,000 to be levied upon land, but Congress declined to follow the recommendation. 2 Two years later, the finances remain- 1 Act of Dec. 15, 1797. The Act was amended March 19, 1798, and Feb. 28, 1799. 2 State Papers, Finance, vol. i., p. 276. EA RL Y A TTEMPT8 A T INTERNAL TAXATION. 31 ing unimproved, and the prospect of foreign invasion appearing ominously on the horizon, the Committee of Ways and Means, " in view of the existing and approach- ing exigencies," repeated the recommendations of the former committee, emphasized as they were by the con- tinued inadequacy of the internal revenue receipts, and advised the imposition of a direct tax of §2,000,000, to be apportioned among the States according to the consti- stitutional requirements, and requested the secretary to present a report upon the subject at the next session of Congress. 1 In December of the same year Secretary Wolcott complied with the request, and included in his report a description of the various systems of raising revenue in operation in the several States. These varied so widely, both in the objects chosen for taxation, as well as in the methods of administration and collection em- ployed, that the secretary felt it would be imprac- ticable to co-ordinate any federal system with them. He therefore advised that any new direct taxes should ignore the State systems, and be wholly independent of 1 State Papers, Finance, vol. i., p. 409. EST. REV- ENUE. ACTUAL RECEIPTS. 1795. 1796. 1797. 1798. 1799. 1800 Carriages .... Stamps .... Sales at auction . Manufactured to- baccos and snuff, Sugar License . . . . 5 150,000 100,000 100,000 100,01)0 50,000 100,000 41,421 31,593 9,556 33,812 54,732 40,790 72,336 43,109 17,405 63,752 63,764 37,996 74,290 30,515 79,482 273,181 46,135 } 77,781 232,170 51,650 58,921 63,862 54,651 64,823 55,272 60,434 65,240 65,159 32 THE INTERNAL REVENUE SYSTEM. them. The suggestion was most unfortunate, for to its adoption is attributable much of the unpopularity of the tax. The public would not brook a system which en- tailed a new body of tax-officials, and created a new and possibly permanent system of direct taxation. In this report the secretary took occasion to review taxes upon capital, agriculture, and profits, as well as those upon houses and lands and the capitation tax, with the result that the first three were rejected by him, because to tax interest and profits would tend to drive capital from the country, while a tax upon agricul- ture would not be endured, because it discriminated against that industry. The capitation tax, on the other hand, although of wide prevalence among the individual States, would operate to raise wages, and thus discour- age industry, "contrary to the policy of the United States." Houses and land thus became the only avail- able bases of the tax ; the former commending itself to the secretary, because "there is no single criterion by which the comparative expenses of individuals can be so fairly estimated as by their dwellings," while slaves were to be included in the assessment, to be taxed at one uniform rate, on the ground that their exemption would be an unjust discrimination against Northern land-owners. Moreover, slaves were looked upon as fixtures in the eyes of the law, and part and parcel of the realty and inseparable therefrom. As against land no reasonable objection could be urged, and the secretary therefore proposed to render it taxable at a uniform ad valorem rate. 1 During the debates in Congress, the house-tax under- i State Papers, vol. vii., p. 440. EARL Y A TTEMP TS AT INTERNAL TAX A TIOX. 33 went considerable modification. The secretary, in his first report, had advised the division of all houses into three general classes ; but, as finally engrossed, the . measure provided for a division into nine classes, rated according to value, and assessable at an advancing rate as follows : * — HOUSES VALUED FROM - T ° BE TAXE ° AT «""»»««> EATE PEE DOLLAK OF VALTTE. $ 100 to $ 500 002 500 to 1,000 003 1,000 to 3,000 004 3,000 to 6,000 005 6,000 to 10,000 006 10,000 to 15,000 007 15,000 to 20,000 008 20,000 to 30,000 009 30,000 and upwards 010 In the assessment, houses and lands were to be valued separately, so that the tax upon the former became in effect not unlike the French Vimpot mobilier, or tax on rentals, as enacted by the Constituent Assembly of 1791. The greater part of the yield was expected to be pro- duced from this source; it being estimated that houses would return §1,315,000, slaves $228,000, while the bal- ance, $457,000, was to be raised from an ad valorem rate upon land. The burden of the tax was thus to be cast upon houses ; but, as a matter of fact, the return from this source was comparatively insignificant, the tax being shifted quite generally to land. Only one assessment was made under the law in 1801; and the collections proved inconsiderable, only $734,223 being 1 Act of July 14, 1798. This division differs from the suggestion of Secretary AYolcott, which provided for specific taxes from 50 cents per house on Class I. to $120.00 on Class IX. 34 TUE INTERNAL REVENUE SYSTEM. realized, although receipts from this source continued to form a budgeta^ item as late as 1813. The advent of the Democratic party to power in 1801 was signalized by the complete abolition of all of the taxes so laboriously established by Hamilton and his successor. Jefferson had openly stigmatized the excise system as an "infernal one," and likely to conduce to the dismemberment of the "Union, while the party of which he was the chief was avowedly pledged to its abolition. At the first session of Congress, the Ways and Means Committee reported against its continuance. Such an iniquitous system, said the committee, could only be justified by " imperious necessity," — a necessity which at that time did not exist, nor was it likely there- after to exist. Its repeal was further urged, first, be- cause of -the vexation and oppression" of many of the taxes, some of them being especially obnoxious to the people ; second, because of the essential " nature of an excise, which is hostile to the genius of r> free people ; " while, if further reasons were needed, its • retention was inadvisable because of its "tendency to multiply offices and increase the patronage of the Executive."' 1 At this time its administration supported four hundred officials at the public charge, while the cost of returning the re- ceipts into the Treasury was nearly twenty per cent, the charges for the fiscal year 1800 exceeding 8103,000. In conformity with the recommendations of the com- mittee, the excise and direct taxes were repealed early in 1802 ; 2 and from this time down to the outbreak of the War of 1812. no recourse to any form of internal revenue seems to have been contemplated by either party. l State Papers, vol. vii.. p. 735. - Act of April 6, 1802. }■:, t RL Y A TTEMP TS A T INTERNA L TAX A TION. 35 It is somewhat difficult to appreciate at this distance, in view of the multifarious agencies of government which interfere with the individual in the acquisition and enjoyment of his wealth, through the official inter- vention of the tax-gatherer, the well-nigh universal aversion which existed in the mind of the early citizen to taxation in any tangible form. Yet there is much to be said in extenuation of this hostility. It is to be remembered that our States did not spring full-grown into life. The taxing systems of to-day are the results of painful experimentation. At this period society, in any organized political sense, had scarcely emerged ; and the settlers, residing on isolated farms or in small communities, knew but little of, and cared less for, political association. To them the idea of the State meant but little. They had hewn their own settlement, and enforced the only law they knew, un- aided by that which in more advanced communities is man's chief servant, not only of protection, but of pro- duction as well. Any government, therefore, which assumed the form of taxation was to the pioneer an unmixed evil, and " hands off " was the sole demand of these children of the frontier. The direct tax espe- cially struck at the settler's home, " an Englishman's castle ; " and every citizen felt that he was defending his birthright in resenting the intrusion. The federal arm reached his distant retreat only in the form of the exciseman, a name of itself odious to one of English descent. Moreover, in shaking off the mother country the colonist felt that he had done with the publican forever, and for many years he had been free from his visits. The direct tax also provided for the measure- 36 THE INTERNAL REVENUE SYSTEM. ment of windows ; and visions of the hated window-tax arose in the settler's mind, — a name as odious to one of Irish descent, which nationality was predominant in west- ern Pennsylvania, as the famous Battle of the Boyne. Moreover, in any new and undeveloped country, money is scarce, credit has little or no existence, ex- change is confined to the simplest forms of transactions, and barter forms the common means of transfer. A duty payable in currency is likely to be a source of great annoyance, and is ofttimes difficult of payment. One cannot read the memorials addressed to Congress, without being impressed with the feeling that this inva- sion by the government was a real grievance, and, in the eyes of the people a new form of usurpation of the freedom so recently gained, and for which they had so valiantly fought. At the same time, the administration of the system was inefficient, and the officials frequently venal. Em- bezzlement was not infrequent, and fraudulent returns diminished the revenues. The inadequate compensa- tion offered failed to secure competent men for the ser- vice, and this tainted it with additional odium in the eyes of the people. For these reasons the excise proved much less productive than had been anticipated by its advocates. Thus the direct tax yielded but one-third what it had been expected to produce. The same was true of the other taxes, while the cost of collection was excessive. That a tax shall take and keep out of the pockets of the people as little as possible over and above what it turns into the treasury is one of the first can- ons by which its availability is to be judged ; and, meas- ured by this requirement, the excise was scarcely EABLY A TTEMPTS A T INTERNA L TAX A TION. 37 defensible. Thus, in 1795 it cost nearly twenty-five per cent * to transfer the proceeds of the levy into the Treas- ury; but from this time on, down to the repeal of the system in 1802, the cost of collection steadily dimin- ished, owing to the improvement in the methods of col- lection and the growing acquiescence of the people in the taxes. Thus, while it cost $84,973 to net to the Treasury $531,269 in 1795, in 1800, $993,659 was returned at a cost of but $103,785 ; while, during the War of 1812, the cost of collecting practically the same taxes was reduced to less than five per cent. 2 The experience recounted in this chapter is mainly interesting as indicative of the spirit of independence and resistance to federal encroachment which character- ized America of that day; for, from a fiscal point of view, the system was purely tentative. But it was upon this foundation that the excise systems of 1814 and 1862 were later erected ; and the taxes which aroused so much hostility in the days of the nation's infancy, at a later date came to form the groundwork of the system under which we are now living. The theory that luxuries are best fitted for internal taxation has been followed consistently from that day to this ; and distilled spirits have become the most productive, if not the most popu- lar, source of revenue upon the whole schedule of taxes. It required a severe training in patriotism, however, to secure this indorsement from the people, and the 1 The cost of collecting the duty on spirits of domestic production was 34 per cent, and of foreign production 14.5 per cent. This is an estimate made by Gallatin. 2 The cost of collecting the internal taxes in 1891 was hut 2.8 per cent. 132B34 38 THE INTERNAL REVENUE SYSTEM. early efforts of the Federalist party were wanting mainly in popular approval; and the persistency with which it clung to its policy, even in the face of almost universal hostility, was one of the main causes, as Hil- dreth has said, which brought about the downfall of that party. EMERGENCY SYSTEM OF THE WAR OF 1812. 39 CHAPTEK II. THE EMERGENCY SYSTEM OP THE WAR OP 1812. From the repeal of the system so laboriously con- structed by Hamilton and his successors, down to the War of 1812, no recourse to internal taxes seems to have been contemplated by the party in power. The govern- ment was frugally administered ; and the customs, re- ceipts from the sales of public lands, and the arrearages of the direct taxes, amply sufficed for all demands of the Treasury. The public debt, which had been temporarily augmented by the purchase of Louisiana to .$80,691,120, was steadily reduced, to the great improvement of the public credit, which at the renewal of hostilities ap- peared well-nigh impregnable. This gratifying condi- tion of the finances induced a false feeling of security in the public mind, which the reports of the Secretary of the Treasury did not tend to allay. As early as 1807, Gallatin scented the possibility of a controversy with one of the European powers, but quieted any feeling of apprehension by his own confidence in the existing forms of revenue, and in the efficacy of a purely " loan policy " in case of hostilities. Some extenuation of this optimism is to be found in the fact that at this time the revenues were producing upwards of fourteen and a half millions of dollars, while, according to his estimates, future disbursements would not exceed one-half that amount, owing to the temporary cessation of the appro- 40 THE INTERNAL REVENUE SYSTEM. priation in behalf of the sinking-fund. 1 One year later he reiterated this confidence, and says : " No internal or direct taxes are, therefore, contemplated, even in the case of hostilities carried on against the two great belligerent powers." 2 Even after the outbreak of hostilities, he maintained implicit confidence in the public credit as a basis of war financiering, and there is no evidence that he ever aban- doned this position. 3 In a financier so astute as Galla- tin such an attitude can only be explained on the ground of party expediency, 4 although even this hy- pothesis is little consonant with his usual independence of thought and action. By 1812, however, he had so far modified his opinions as to acknowledge the neces- sity of resort to some sort of internal duties, and was led to advocate, in addition to an increase of the customs revenue, a direct tax of three million dollars, as well as a resort to the excise sufficient to produce two millions more. 5 From this we are not to infer that the secretary had abandoned his former attitude. His faith in the loan policy still remained intact; the apparent change of attitude being due to the fact that customs revenues had fallen below the estimates of peace demands, and the new duties were to supplement ordinary expendi- ture, not to be used as a basis for the conduct of the war. But even these halting measures were only adopted in so far as they related to the customs. 6 The con- i Report cm Finances, vol. i.. p. 360. 2 Ibid., p. .".77. 3 " Public Debts," H. C. Adams, p. 114. 4 Scbouler, "History of tbe United States,"' vol. ii., p. 344. 5 State Papers, vol. viii., p. 525. 6 Act of July 1, 1812. EMERGENCY SYSTEM OF THE WAR OF 1812. 41 sideration of the excise was deferred by Congress until a later session. By the summer of 1813, the collapse of the loan pol- icy of the administration was complete; and a special session of Congress was called, to which the President appealed for immediate action upon the finances. Un- der this spur from the Executive, Gallatin's proposals were in part adopted, and several new sources of inter- nal revenue were opened up. Only those taxes ap- proved by the experience of former years were selected as the basis of the new excise system, but with this commendable modification, that they took into consider- ation State prejudices ; while the important limitation was added that they were to be considered as " tempo- rary war taxes," to continue in force but one year after the close of hostilities, and to be pledged to the payment of the interest on the public debt. Seven distinct taxes were imposed during this ses- sion of Congress, estimated to produce upwards of five millions of dollars. These were, first, a direct tax of three million dollars to be first assessed in 1814 ; * sec- ond, a duty upon carriages for the conveyance of per- sons, to be assessed at rates varying from two to twenty dollars, according to the description of the vehicle ; 2 third, a uniform duty of four cents per pound on all sugar refined in the United States; 3 fourth, a license tax upon distillers of spirituous liquors, to be assr according to the capacity of the still, the duration of its operation, and the material used in production. 4 In ad- dition thereto, stamp duties were to be levied upon all i Acts of July 22 ami An-.:'. 1813. " Art of An-. 2. 1813. 2 Act of July 24, 1813. ' Lets of July 24 and A.ug.2,1813. 42 THE INTERNAL REVENUE SYSTEM. legal instruments, bank-notes, bonds, and all evidences of obligations ; 1 a millage tax upon sales at auction, 2 as well as a further license tax upon retailers of wines and spirituous liquors. 3 Several modifications in the method of assessing the tax on distilled spirits were introduced, due probably to the suggestions of Gallatin, who, while acknowledging that there was "no more eligible object of taxation than ardent spirits," had strenuously objected to the earlier measures, because they bore unequally upon the differ- ent classes of producers. 4 Accordingly the rates upon spirits distilled from foreign materials exceeded those upon the domestic product ; while the small manufac- turer was further protected by an option to pay on the amount produced, or to take out a license for a limited period, and pay upon the capacity of the still. 5 The difference in rates upon spirits distilled from domestic and foreign products was due to the alleged perniciousness of rum as a beverage, and the desire to encourage the domestic industry. In the method of collection of the direct tax, decided improvements were also inaugurated. As we have seen, the objects taxable i Act of Aug. 2, 1813. 3 Act of Aug. 2, 1813. 2 Act of July 24, 1813. 4 State Papers, vol. viii., p. 525. 5 The schedule of assessments was as follows : — BATE ON DOMESTIC BATE ON SrlBITS SPIRITS PEB CAPACITY OF FBOM FOBEIGN ARTICLES PEE PEBIOD. STILT. FOB DIFFEEENT CAPACITY OF STI1.L FOR PERIODS OF DIFFEBENT PEEIOD8 OPERATION. OF OPERATION. 2 weeks 9 cents 1 month 18 cents 25 cents 2 months 32 cents 3 months 42 cents 60 cents EMERGENCY SYSTEM OF THE WAR OF 1812. 4o under the earlier measure were land, houses, and slaves, the collections being made under the supervision of federal officials. The same objects were designated under this measure, and the sums chargeable to each State and county were apportioned upon the basis of the census of 1810; but a new provision was intro- duced, permitting the States to assume their quotas, and collect them as they might see fit, and also to reap- portion the sums assigned the counties, where the fed- eral apportionment was deemed inequitable. If assumed by the States and paid into the Treasury within a cer- tain time, a discount was allowed ; if not, the excise officials were directed to proceed with the collection of the tax according to law. Every precaution was thus taken to allay the opposi- tion which the tax was expected to arouse ; but just as happened during the later period of the Civil War, the fears of Congress were ill founded. The patriotism of the people was underestimated; for the burdens of the tax were accepted with but little complaint, and paid even with enthusiasm. No assessments were made under the law until the following year (1814), when the resignation of Gallatin threw its administration into the hands of Secretary Campbell, who soon relinquished the portfolio of the Treasury to Andrew J. Dallas of Pennsylvania, an eminent financier, but unpopular with the House of Representatives. The new secretary found the finances in a most dis- couraging condition. The Treasury, as he himself says, " Was suffering from every kind of embarrassment." The recent suspension of specie payments by the New York and Baltimore banks, which had been largely 44. THE INTERNAL REVENUE SYSTEM. instrumental in the sale of the public securities, had vitiated credit, and dissipated public confidence. The bonds had fallen to eighty and finally to sixty cents on the dollar, while the diminishing revenues were further depleted by payments in depreciated bank-notes and treasury certificates. The estimates for the fiscal year 1814 showed a probable deficit of $31,000,000, and long before its close it became apparent that even with the revenue measures extorted from the last Congress it would be impossible to conduct the war longer on a credit basis. But Dallas grappled with the situation with characteristic energy, and recommended the immediate revival of the National Bank, which was an indispensable agent in marketing securities; and at his instance measures were at once introduced into Congress for the increase of the revenues by taxation. 1 His proposals, however, met with determined opposition from two sources. The Committee of Ways and Means was composed largely of slaveholders, who desired to cut off the tax upon that species of property; while the manufacturers of New England murmured loudty against any increase of the taxes upon their industries, which they maintained were in such a formative state as to be unable to bear additional burdens. 2 Jefferson, though retired from active participation in politics, still exercised a strong influence in the councils of his party, and with persistent determination endeavored to defeat these measures by substituting therefor a loan-policy 1 See State Papers, vol. viii.. p. 854, where Committee of Ways and Means, a few days subsequent to the confirmation of Dallas, makes an elaborate report on the subject of taxation. - Hihlreth, voL vi., p. 54:3. EMERGENCY SYSTEM OF THE WAR OF 1812. 45 of his own. 1 The inherent defects of his proposal, how- ever, prevented its ever coming up for consideration. 2 In January of the following year (1815), Dallas made a second report, although the one of the preceding October was still under consideration by the "Souse. In this he advocated an increase of the tax upon all kinds of legal instruments, the imposition of new duties upon the dividends of insurance companies and other corporations, as well as a tax of one dollar per barrel upon flour. It is also a matter of interest to note the first proposition for an income and inheritance tax. The report came at the darkest hour of the war. The political outlook was quite as gloomy as the fiscal one. Disaster after disaster had been met by the army, while a British fleet had penetrated even to the federal capital. And thus, defeated and disgraced everywhere, Congress was called upon to impose increased burdens upon a divided people, who had been led by their own teachings to look upon a tax-gatherer as a thief, if not as a burglar. During the closing days of 1814 new duties had been laid upon pleasure carriages; 3 while upon distillers of spirituous liquors the minimum tax had been increased to twenty cents per gallon, with the option added that a distiller could pay according 1 Jefferson to Madison. "Works," vol. vi., p. 391. 2 His hostility was very bitter; and in his correspondence we find him expressing himself as follows: "If anything could revolt our citizens against the war, it would he the extravagance with which they are about to he taxed. . . . The taxes cannot be paid. How can a people who cannot get fifty cents a bushel for their wheat pay five times the amount of taxes they ever paid before? Yet that will be the case in all the States south of the rotomac." — Jef- ferson to Short, Nov. 28, 1811, " Works," vol. vi., p. 398. 3 Act of Dec. 15, 1811. 46 THE INTERNAL -REVENUE SYSTEM. to the capacity of the still, or the amount of spirits actually produced. Licenses were likewise increased fifty per cent, as Avere the postal and many stamp charges ; while the duty on sales at auction had been raised one hundred per cent. 1 In addition, new taxes were laid in response to the secretary's report, and the general charge of the public debt applied to tliem, upon pig iron, iron castings, bar and rolled iron, nails, and candles at specific rates, while the manufactures from paper and leather, as well as playing-cards, vellum, hats, umbrellas, saddles, bridles, boots, shoes, beer, ale, tobacco, cigars, and snuff were rendered dutiable at ad valorem rates. Upon household furniture and person- alty above $200 a progressive tax ranging from $1.00 on the value of $400 to $100 on the value of $9,000 was laid, while watches were taxed under a separate category. 2 The direct tax was also increased to six millions annually, with the privilege of State assump- tion attached, as provided in Acts of earlier date. 3 But these measures were destined to be of little ser- vice to the Treasury; for scarcely had they received the President's signature, when peace was declared. Almost immediately a marked revival in the customs revenue was manifested, 4 while industry, confined for i Act of Dec. 23, 1814. 2 Act of Jan. 18, 1815. 3 Act of Jan. 9, 1815. This privilege of assumption was taken ad- vantage of by New York, Pennsylvania, Virginia, South Carolina, Georgia, Kentucky, and Ohio in the levy of 1813, and by New York, South Carolina, Georgia, and Ohio in the levy of the later date. In the other States, federal officers completed the assessment, and made the collections from the individual taxpayers. 4 The receipts from the customs in 1816 amounted to the unprece- dented sum of $36,306,874. EMERGENCY SYSTEM OF THE WAR OF 1812. 47 over a decade to domestic expansion, began [to recover itself. As legatee of the war, the Democratic party now found itself burdened with an indebtedness of one hun- dred and twenty-seven millions ; and Secretary Dallas, roughly schooled by experience, and appreciating more thoroughly than Congress the untrustworthiness of the customs revenue, favored the retention of a portion of the excise system sufficient to produce seven millions of dollars as a basis for any emergency which might arise in future. 1 To this opinion Congress deferred ■ by refraining from any immediate action upon the sub- ject. The people paid the taxes without complaint, the reorganization and payment of the public debt being a matter of the first importance. For two years after the close of the war the internal duties were permitted to remain upon the statute books, when Congress, moved by a message from the President, finally deter- mined that no more internal taxes should be collected, save those in arrears, after the year 1817. 2 The immediate result of this over-confident action was a deficit in the budget, amounting in 1819 to three million dollars, which had to be met by a temporary loan. 3 The deceptive increase in receipts from the customs was but temporary, and due to the abundance of English goods, so long deprived of their most lucra- tive market, which sought oui shores. In fact, had it not been for the arrearages of the direct and excise taxes, which continued to form a budgetary item as late as 1848, the deficiency would have been a recurring i State Papers, vol. ix., p. 1G. 3 Act of May 15, 1820. 2 Act of Dec. 23, 1817. 48 THE INTERNAL REVENUE SYSTEM. one, as the customs receipts seldom sufficed for the cur- rent needs of the Treasury. 1 From this time on, down to the outbreak of the Civil War, no recourse was had to internal taxes of any kind, though the Treasury suf- fered alternately from excessive or deficient revenues. The distressing embarrassments experienced from too exclusive dependence upon revenues from sources ex- ternal to the country, and the absence of machinery by which the internal resources of the nation might be immediately realized on, has taught the lesson, to be even more strongly impressed by the experiences of the Civil War, that a sound financial policy always provides in time of peace for the possibility of war ; and the ex- perience of the United States proves conclusively that customs revenues are so irregular that the means for immediately realizing upon the proceeds of current in- dustry should never be permitted to get out of run- ning order. The absence of such a system of internal taxation at the outbreak of the War of 1812 was a mat- ter of regret to Secretary Dallas, and certainly offers a lesson in practical policy ; for, had such a sjstem existed, the early movements of the Avar would have been greatly invigorated, the public credit might have been preserved unimpaired, while the pecuniary contri- butions of the people would have been rendered more effective. 2 Moreover, when Congress did take the mat- ter of inland taxation in hand, it did it so ungraciously 1 The receipts from the sales of public lands also formed a consid- erable item in the annual budget ; the revenue from this source alone in 1836 amounting to fourteen millions, while during the following year the receipts rose to twenty-four millions. 2 Cf. Report on Finances, State Papers, vol. ix., p. 2. EMERGENCY SYSTEM OF TUE WAR OF 1812. 49 as to inspire little confidence and to offer but little relief. Unwise taxes were levied, and false estimates made. For instance, the secretary estimated a return of $3,500,000 from manufactures, while, as a matter of fact, the receipts were only about one-sixth of that sum. From household goods two million dollars were expected, instead of fifty-one thousand actually turned into the Treasury. In all branches of the revenue the same dis- crepancies might be shown ; and especially true was this during the first two years of the system, when assis- tance was most needed. Throughout its existence the administration was sadly imperfect ; and but a portion of the taxes assessed were collected, as will be seen by the following table : — Taxes Accrued and Collected, with Cost of Collecting the Same for the Fiscal Years — ACCRUED AMOUNT cost or PERCENTAGE TAXES. COLLECTED. COLLECTION. COST. 1814 $3,262,1'. )7 $1,910,995 $148,991 7.8 per cent. 1815 0,242,503 4,976,529 279,277 5.6 per cent. 1816 4,633,799 5,281,121 253,440 4.8 per cent. 1817 3,002,000 3,000,000 180,000 6 per cent. 50 THE INTERNAL REVENUE SYSTEM. CHAPTER III. THE PERIOD OF THE CIVIL WAR. (1861-1870.) During the forty-six years which intervene between the events recorded in the last chapter and the outbreak of the Civil War, no recourse to internal taxation seems to have been contemplated by either of the great polit- ical parties; and, saving an occasional difference of opinion over the United States Bank and questions of internal improvements, the Democratic party was able to cling consistently to the heritage of *political ideals upon which it had come into power at the opening of the century. Persistent constitutional jealousies of the federal power defeated every measure for the betterment of the fiscal service. The second Bank of the United States fell before this hostility in 1836, and was treated as summarily as the excise had been twenty years ear- lier. Plans of expenditure for internal improvements were disposed of in a similar manner, while a vacil- lating tariff policy stimulated industrial activity one year, only to destroy it in the next. The policies of the various incumbents of the Treasury Department during this period differ only in detail. Economy of adminis- tration was the aim of the party in power ; and the restriction of governmental functions to the narrowest possible scope, the guiding principle of treasury manage- ment. THE PERIOD OF THE CIVIL WAR. 51 The era upon which we are now about to enter marks a clearly defined breaking away from such policies. For the first time in its history, American political thought shook itself free from the strict constructionist teachings which had animated all economic legislation for over two generations; for, just as the War of 1812 marks a more or less complete breaking away from an outgrown colonial policy, so the new order, inaugurated by a domestic struggle, developed financial and indus- trial conditions only commensurate with the new era of national life into which the country was irresistibly tend- ing. The Civil War was a formative period. It was an era of fiscal reorganization, in which old political ideas and the last vestiges of colonialism were being sloughed off, never to be Resumed again. The nation had achieved its majority, and the forces which had been gathering strength since the time of Jackson crystallized into per- manent form. At the outbreak of the Civil War the finances were in confusion. Under Cobb, the retiring secretary, things had been going from bad to worse. The tariff receipts had declined, and finally sank so low, during the period from 1857 to 1860, as to require supplemental loans to satisfy the needs of the Treasury. Public confidence had been dissipated in a like manner by the loose fiscal methods known to prevail, while industry suffered under all the evils incident to an unregulated bank currency. Through extravagance, incorrect estimates, and the re- duction of the tariff charges, the public debt had been increased to sixty-five millions, which only with some difficulty had been placed upon the market. Secretary Cobb, in his last annual report, 1 had forecast the impend- 1 Report on Finances, 1860, p. 7. 52 THE INTERNAL REVENUE SYSTEM. ing danger, and sounded a note of warning of the ap- proaching political crisis, which was to convulse the country for the next four years ; but nothing was done to check the tide of affairs until the advent of the Re- publican administration under Lincoln, when the work of reconstruction immediately began, and from out the ruins of the fallen regime was erected a fiscal order, probably the most extraordinary the modern world has known. From the opening of the extra session of Con- gress in the summer of 1861, down to the close of that decade, probably more revenue measures were passed than during the preceding seventy years of the country's existence ; while the amount of money extracted from the pockets of the people in the form of loans and taxes appears at this day almost incredible. From out the wreckage of the State banks was erected a magnificent national banking system ; while the tax legislation, wholly experimental in form, was of such vast propor- tions and so far reaching in its consequences, that the nation stood astonished at its resources and alarmed for the consequences of its acts. Accustomed heretofore to a degree of prosperity pre- viously unexampled in the history of nations, the United States had grown rich without having experienced the weight of national burdens, and likewise unconscious of its ability to sustain them. Providentially, the nation's power of endurance was to be tested only by degrees ; for had the immensity of the struggle upon which it was entering been apparent at the outset, the country would probably have shrunk from it in despair. To the extra session of Congress, convened at the call of the President in the summer of 1861, Secretary Chase THE PERIOD OF THE CIVIL WAR. 53 submitted measures which he considered necessary and competent to the " speedy and effective suppression of the gigantic rebellion." In it he estimated the probable annual needs of the Treasury at $318,519,518, a sum to be raised wholly by means of loans, while taxes were to be relied upon to meet the annual interest charges thereon, as well as to make up the current deficiency in the civil expenses. His financial policy was based exclusively on loans. No attempt was to be made to meet any portion of the extraordinary war expenditure by taxation, a decision which, like the projects of Gal- latin fifty years earlier, seriously imperilled the credit of the government. Of the revenue, the customs, wholly unreliable, was to be the chief stay, and was expected to produce fifty-seven millions, while a direct tax, to be apportioned among the States according to their respec- tive populations, was advocated, sufficient to produce twenty millions more. 1 In so far as Mr. Chase recommended that the extraor- dinary expenditure be met wholly from loans, Congress fully concurred ; but in the matter of taxation it pos- sessed opinions of its own. The plans advanced by the secretary for the direct tax were promptly discarded as unconstitutional, while the new tariff measure followed lines somewhat different from those laid down in the secretary's report. The apportioned State tax, as finally passed, was for twenty million dollars, which was to be assessed, upon free and slave States alike ; while an in- come tax of three per cent on all incomes over eight hundred dollars was attached to the measure. 2 1 Senate Ex. and Misc. Doc, No. 2, First Session, Thirty-seventh Congress. 2 Act of Aug. 5, 1861. 54 THE INTERNAL REVENUE SYSTEM. Even at this time the war was not taken very seri- ously, and the magnitude of the struggle which was to convulse the nation for the next four years was but little appreciated. For this reason the measures adopted were viewed as but temporary, and did not contemplate a continued or permanent deficiency in the revenues. In the closing days of the year, however, affairs began to assume a graver hue, and the character of the war to be more generally appreciated. Specie payments were suspended by the banks on Dec. 28, 1861 ; a few months after the government began its issue of demand notes, whose purchasing power steadily declined from the day of issue, while the prices of commodities as steadily rose. When Congress reassembled in December, the secre- tary was forced to acknowledge the inaccuracy of his earlier estimates. Instead of fifty-seven millions from the customs, as he had expected, he now felt constrained to reduce his estimate to thirty-two millions, while rev- enues from miscellaneous sources manifested a like fall- ing off. Neither the direct nor the income tax had as yet become operative, and little could be expected from them for some months at least. In view of these showings, as well as the fact that the public debt was piling up at the rate of two million of dollars a day, it seemed to the secretary advisable to increase the revenues to ninety millions, by a modifica- tion of the customs duties and the direct tax, and the inauguration of an excise system, modelled after that of the War of 1812, and based upon whiskey, tobacco, carriages, bank-notes, conveyances, legacies, and the like. 1 From these combined sources it was felt that 1 Report on Finances, 1861, p. 15. THE PERIOD OF THE CIVIL WAR. 55 every possible demand of the government could be met. A sound financial policy, as was soon to be demon- strated, demanded much more than this ; but Mr. Chase was still enamored with his " loan policy," and imbued with the widely prevalent belief in the early termina- tion of the war; while he feared, along with many others, that a vigorous resort to taxation would weaken the war spirit of the people, burdened as they were with the other consequences of the struggle. How greatly he underestimated the loyalty and will- ingness of the people to sustain him in his efforts, is seen from the tone of several memorials presented to Congress by various commercial and scientific associa- tions, praying that more adequate measures be taken for the prosecution of the war. The New York Cham- ber of Commerce advocated the raising of $214,000,000 from the excise by substantially the same methods which the English system employed ; while the American Geo- graphical and Statistical Society memorialized Congress to devise a system adequate to produce $268,000,000 from inland sources, with customs duties sufficient to increase this sum to ftSlSjOOO^OO. 1 Congress appreciated more clearly than did the secre- tary the magnitude of the struggle upon which the country was entering, and better understood the temper of the people. But no data existed upon which it might base its action, no reliable statistics of commerce and manufactures were available, and history offered little for guidance save the emergency systems of 1794 and 1814. The House, however, instructed the Committee of Ways and Means to prepare a bill adequate to produce 1 See Bankers' Magazine, vol. xvi., pp. 913, 705-727. 56 TEE INTERNAL REVENUE SYSTEM. at least one hundred and fifty millions of revenue, 1 and on the 12th of March, 1862, Mr. Morrill of Vermont in- troduced- a measure embodying the views of the com- mittee, which was thought sufficient to yield this amount. The extra session of the preceding year, which was so prolific of fiscal measures, had authorized loans amount- ing to $610,000,000; and these, if current expenditure continued unabated, would probably have to be increased to $950,000,000 before the close of 1862. The interest charges alone on this amount would reach from sixty to seventy millions ; and the' civil establishment would de- mand sixty millions more, while the military force to be maintained subsequent to the termination of the war would considerably increase this amount. Public inter- est, as well as a sound financial policy, demanded that all of these charges should be met from the proceeds of current revenue. Further than this, a vigorous applica- tion of the taxing power is always essential to a sound credit, especially if deficit financiering be long continued, as it was during this period. It is unfortunate that this most elementary principle of finance was not appreciated before the Avar had been in progress nearly two years, and the credit of the government had been so seriously impaired. Even at this time the Administration did not contemplate more than the raising of permanent expenditures by taxation ; all other expenditures were to be met by the further issuance of loans. In Congress the discussion upon the report of the committee wore on for three months. Amendments were offered to almost every section of the bill, while several entirely new measures were introduced. As i By Joint Resolution, Jan. 21, 1862. THE PERIOD OF THE CIVIL WAR. 57 finally engrossed, it provided in general for the following taxes : upon beer, ale, porter, and other malt liquors, one dollar per barrel ; distilled spirits, of first proof, twenty cents per gallon ; upon private persons or corporations carrying on trade, a special license tax varying according to the nature and amount of the business done ; while upon all manufactures, articles, and products, specific or ad valorem duties were levied, the general level of the latter being three per cent. Upon auction sales one- tenth of one per cent was imposed. Carriages, yachts, billiard tables, and plate were taxed according to descrip- tion, as in many of the State systems. Corporations were taxed according to various methods, the gross receipts tax being applied to railroads and transportation com- panies, while banks, trust, savings, and insurance com- panies paid upon dividends declared. Despite the opposition to the income tax, it was retained and made slightly progressive in principle, while the exemption allowed was reduced to six hundred dollars. Upon receipts from advertising, the same rate as upon rail- roads (three per cent) was imposed ; while stamps vary- ing in amount from two cents to twenty dollars were affixed to every transaction and to every bill of ex- change. Legacies and distributive shares of property were also taxed according to degree of consanguinity. 1 As will be seen, the measure was very diffuse. Few taxable articles or forms of wealth were permitted to escape. The committee had aimed, as Mr. Morrill said, 1 Act of July 1, 1862. The complete text of the measure, -which fills fifty-seven pages of the Statutes at Large, may ho found in vol. xii. of those publications, p. 432 et seq. The rates of taxes are to he found more fully explained in subsequent chapters. 58 THE INTERNAL REVENUE SYSTEM. to "avoid all extremes," and to "propose duties upon a large number of objects rather than confine them to a few, and thereby be forced to make them excessive in amount, and for that reason entirely unreliable." 1 Concurrently with the debates upon this measure went a discussion of the tariff. Compensatory customs duties were obviously demanded to equalize the internal taxes, as well as to conciliate the manufacturing inter- ests. The celebrated tariff measure of 1862 was there- fore passed, in presenting which to the House Mr. Morrill remarked : " It will be indispensable for us to revise the tariff on foreign imports, so far as it may be seriously disturbed by any internal duties, and to make proper reparation. ... If we bleed the manufacturer, we must see to it that the proper tonic is administered at the same time." 2 Created as these measures were, with but few prece- dents for guidance, with conflicting State interests to avoid, and with a people unfamiliar with federal taxa- tion to conciliate, • — a people taught to look upon the tax-gatherer, especially if he bore the credentials of the United States, as quite as invidious as the publican of old, — the fiscal legislation of this session was in a large measure successful, and not unworthy of admira- tion. Many grave errors were soon discovered to have crept into the measure, owing to the haste in engross- ing it and the novelty of its provisions ; while countless complications confused its administration, owing to the difficulty of properly interpreting its meaning. The more serious of the former were removed by corrective enactments, while the generous discretionary power i Congressional Globe, 1861-1862, p. 1194. 2 Ibid., 1196. THE PERIOD OF TUE CIVIL WAR. 59 granted the Commissioner of Internal Revenue enabled him to supplement and relieve the latter by his own rulings. Up to the passage of this Act, the policy of the Ad- ministration had been in a sense apologetic and concili- atory; and it was feared that such a drastic measure would arouse opposition to the continuance of the war. No such result followed, however ; in fact, the govern- ment was apparently strengthened by it, while public securities immediately became stronger. Trade was by this time recovering from the early effects of the war, and was rapidly expanding under the stimulus of an inflated circulation and the unusual government de- mand. Prices were also rising, the market was enlar- ging, and the demand for labor was constant, so that under these conditions the support of the war became a cheerful duty to the majority of citizens. Contrary to all expectations, the measure did not immediately affect the Treasury receipts. For the ten months of the fiscal year 1863, the returns from all internal sources were but $37,640,787, instead of over $100,000,000, as had been expected. This discrepancy between estimated and actual receipts the secretary en- deavored to explain by the newness of the law and the imperfections of its administration ; " but such care," he said, "had been taken to obtain correct premises, that it was hardly thought possible that the conclusions deduced from them could be wide of the truth." 1 Mr. Morrill had estimated the revenue for the first year of the operation of the act at $101,925,000 ; 2 but Secre- 1 Report on Finances, 1863, p. 3. 2 Congressional Globe, 18G1-18G2, p. 1194. 60 THE INTERNAL REVENUE SYSTEM. tary Chase, believing this an overestimate, had secured a competent statistician, who devoted himself for some time to "ascertaining, with the aid of practical men, conversant with business, the probable amount of rev- enue from each object of taxation," and, as a result of these calculations, he thought it safe to anticipate at least $85,456,303 from the excise, 1 a sum, as we have seen, more than twice the amount actually turned into the Treasury. This great divergence between actual and estimated receipts, the secretary thought, was due to the " imperfect execution " of the law, to the changes made in it by Congress, and to the nature of the system itself. By this time the war had been in progress nearly two years and a half, the public debt had reached the ex- traordinary amount of $1,098,793,000, and the public viewed with some apprehension any further resort to credit. But from this time on a turning in the tide is noticeable, and the receipts from the excise steadily in- crease in importance. Thus, while the receipts from this source for the quarter ending Sept. 30, 1863, were but seventeen and one-half millions, in the succeeding quarter they rose to over twenty-seven millions, while, for the closing three months of the fiscal year 1861, over thirty-seven million dollars were returned from this source. The full magnitude of the struggle had also become apparent, and the loyalty and spontaneity with which the nation had accepted earlier legislation imposing taxation led the Administration to contemplate even greater dependence upon this source in the future. 1 Report on Finances, 1863. p. 3. THE PERIOD OF THE CIVIL WAR. 61 The pure " loan policy " had failed beyond cavil, and must be abandoned. Sound financiering, as well as the public prejudice against an inordinate indebtedness, clearly demanded a more vigorous utilization of the taxing power. This fact is recognized by Mr. Chase in his December report, in which document he boldly ad- vances plans for the increase of the tax levy to one hundred and fifty million dollars from the excise alone. 1 In this report the secretary at lasts deserts his previous timid policy, and advocates plans somewhat commen- surate with the serious nature of the occasion. This portion of the policy of Mr. Chase has been the subject of much discussion. By many it has been con- tended that, had he manifested the same courage and independence in the earlier stages of the war that char- acterized his later recommendations, not only would the Treasury have been saved millions of dollars, but the moral effect of an adequate revenue upon the South and foreign nations might have operated to bring the war to a more speedy termination. Doubtless a more vigorous application of the taxing power would have had these effects; doubtless, also, the credit of the country would have been better sustained had taxation been more resolutely applied; but, to be sure that this would not have been a penny wise and pound foolish policy, it is necessary to estimate the effect of such a policy upon the industrial conditions of the country. As a matter of fact, all testimony seems to indicate that trade and industry during the first eighteen months of the war were most unsettled and abnormal. Capital was in a state of flux. Labor was seeking new fields, i Report on Finances, 18G3, p. 12. 62 THE INTERNAL REVENUE SYSTEM. while new industries were everywhere making their appearance, eventually completely to alter the appear- ance of the country. Successful financial management in time of stress demands that the first solicitude of a minister be the material well-being of the people. " A poor nation, a poor treasury," should be the guiding axiom of all Treasury management. In the early days industry would hardly have borne the burdens which it later accepted with comparative ease. It would have been embarrassed, possibly seriously crippled, by the sudden changes in the conditions of trade and produc- tion which such a weight of taxation entailed. But aside from the inability of the country to sustain such a drain, was it possible to have rendered the ser- vice more efficient and thus more immediately produc- tive ? As we have seen, the receipts for 1863 were but slightly in excess of thirty-seven million dollars from sources which the most conservative had believed capable of producing eighty -five millions. In 1864 these same sources yielded one hundred and nine millions ; while in the succeeding year two hundred and nine millions were covered into the Treasury, mainly from the same sources and at the same rates as obtained in the years preced- ing, for the Act of 1864 but slightly affected receipts in this latter year. These facts clearly indicate that the fault lay not so much with the inadequacy of the meas- ure as in the faulty administration of the system. In- creasing, as the receipts do, at a nearly geometric ratio for these three years, it is by no means certain that the law of 1862 would not have proved as productive in the long run as the later enactment; for, as the Revenue Commission of 1865 stated, the extravagant rates of the THE rEEIOD OF THE CIVIL WAR. 63 laws of 1864 and 1865 were in large part neutralized by the losses arising from evasion and fraudulent returns. Experience seems to teach that time, and time alone, is essential to perfect and render productive an intricate system of excise. In view, therefore, of the unsettled condition of indus- try, as well as the imperfect development of the fiscal machinery, is it not unjust to lay at the door of the Treasury Department the responsibility for the tardy productivity of the excise ? At the outside, receipts could hardly have been advanced more than nine months, even had Congress taken the subject of taxation reso- lutely in hand during the special session of 1861 ; and few will maintain that it was at that time in a posi- tion adequately to grapple with the problem. It would seem that the most that could have been done by the earlier sessions of Congress lay in the line of prepara- tion, and possibly in the affixing of certain taxes to the schedule which would have fallen on realized wealth and been more immediately productive. And this the secre- tary should have provided for. By 1863, however, things had changed greatly. Com- merce and industry had become accommodated to the changed conditions of production, and Congress was equipped with data which enabled it to proceed less ten- tatively and with more assurance of success. Early in 1864 the rates upon certain classes of luxuries, such as distilled liquors, had been increased, as were also the stamp and license taxes ; 1 but still the receipts from in- ternal sources were comparatively light, and the general acquiescence of the public in the earlier measures led the i Act of March 7, 1864. 64 THE INTERNAL REVENUE SYSTEM. secretary to recommend still further resort to taxation. In compliance with this recommendation, a bill was in- troduced into Congress which was most sweeping in its provisions. The discussion which ensued brought up the entire fiscal policy of the Administration, although the opposition mainly centred itself upon the general excise upon manufactured products. In general the bill followed the lines outlined by earlier legislation, al- though a general increase in rates was made. Thus the duty upon spirits, which had been 20 and 60 cents under the earlier laws, was increased to $1.50 and $2.00 per gallon under the new ; upon smoking tobacco the tax was more than doubled, while the tax upon cigars was advanced from a maximum rate of $3.50 per 1,000 to a maximum rate of $40.00 per 1,000. In a like manner, although not to such an extravagant ex- tent, license taxes were increased, while specific duties upon many manufactured products were doubled. The general ad valorem rate was increased from three to five per cent upon most articles included in the former schedule, while numerous new sources of revenue were ferreted out and taxed. 1 Nothing was omitted, from the raw product to the finished commodity. Often an article received a half- dozen additions ere it reached the consumer. And not only were all the constituent elements which entered into an article taxed, as the bolts, rivets, castings, trim- mings, and the like, of an engine, but the engine, when completed, was subject to an additional ad valorem duty upon its value ; while all repairs which increased the value of an article ten per cent were rendered dutiable J The date of the passage of the measure is June 30, 1864. THE PERIOD OF THE CIVIL WAR. 65 at a like rate. It was the most comprehensive measure in our history. The tariff duties were also revised to equalize the burdens upon the domestic producer. Speaking of the fiscal measures of this period, an observant Austrian writer has said : " The citizen of the Union paid a tax every hour of the day, either directly or indirectly, for each act of his life ; for his movable and immovable property ; for his income as well as his expenditure ; for his business as well as his pleasure. Stamps were affixed to the smallest agreement, and the most insignificant bill of exchange bore a tax ranging in amount from that on a small receipt to one of twenty dollars. Incomes were not only burdened by a regular tax, but also by an extraordinary payment, while to these must be added State, county, and municipal taxes of almost an equal amount." 1 The additional taxes imposed upon manufactured arti- cles by this act were received with unconcealed opposi- tion by the producing interests, who insisted that the tax was not diffused among consumers by being added to price, but was taken almost wholly from their profits. Whatever view we may take of the ultimate diffusion of taxes, it must be admitted that, in its early operations, an excise is difficult to shift, and may work decided dis- couragement and injury to industry. Certainly such was the case during the period now under discussion ; for, during the early stages of the war, industry suffered severely in accommodating itself to the changed condi- tions of trade and production. By 1864, however, prices had already begun their upward flight, and had become 1 " Finanzen und die Finanz-Gescliichte der Vereinigten Staaten von Amerika," Hock, p. 191. 66 THE INTERNAL REVENUE SYSTEM. so elastic as to respond readily to every change in the rate of taxation, or in the amount of the circulating medium. The manufacturers maintained an active op- position, and memorialized Congress to abolish the general excise altogether, and to substitute therefor a uniform tax upon sales. Such a tax, they maintained, imposed at the time of purchase, would be borne with greater ease by the people, and would not offer the same opportunities for evasion as a duty imposed at the place of manufacture. The Commissioner of Internal Revenue himself guardedly approved of the change, 1 the simpli- city and apparent ease of assessment commending it to him. Oddly enough, Adam Smith is quoted in defence of the tax ; while, as a matter of fact, if there is one tax which the author of the " Wealth of Nations " unequiv- ocally condemns, it is the tax upon inland commerce, to the freedom from which in England he attributes in large measure the prosperity of that country. Mr. Mor- rill was most strenuous in his opposition to the proposed change, which he said was contrary, not only to all the laws of trade, but to every sound principle of finance as well. Its administration would require the maintenance of an army of officials to guard the transportation and sale of goods, and would subject every manufacturer merchant, or shopkeeper to the continued presence of the tax-gatherer. It would obstruct trade, and be most difficult of collection, and would be in effect equivalent to the erection of tariff barriers about every transaction in the country. History has sanctioned these objections of Mr. Morrill, as well as the adverse vote of Congress upon the bill ; for, as Adam Smith has shown, it was 1 Report on Finances, 18G4, p. 60. THE PERIOD OF TUE CIVIL WAR. 67 the Alcavala, or duty upon domestic commerce, which aggravated the revolt of the Netherlands against the tyranny of Spanish oppression, and in Spain herself caused the ruin of her industries. 1 One of the most anomalous and indefensible provis- ions of the bill was the tax upon repairs, which, like all taxes upon improvements, tends to discourage provi- dence and economy. Further than this, it was well-nigh impossible to collect it, inasmuch as it is in so large measure self-assessed. It presumes that any increment of value is equivalent to new production, and should be taxed accordingly. The tax on repairs never proved productive, the receipts for the fiscal year 1866, the last of its operation, being but $848,391. The income tax was also assessed by irritating methods, which rendered it needlessly unpopular ; while the general excise upon manufactures and products insisted upon many need- less details, which aroused the opposition of the produ- cing interests. At the same time the penalties for fraud and attempted evasion were inadequate, and did not prove effective in preventing great loss to the revenue. At the close of the fiscal year 1864, Mr. Chase re- signed the portfolio of office, and his mantle fell upon the shoulders of Mr. Fessenden of Maine. As the new secretary confesses in his December report, the finances of the country were in a most discouraging condition. The balance remaining in the Treasury was less than nineteen millions of dollars; requisitions remained un- paid amounting to seventy-two millions, while certif- icates of indebtedness outstanding aggregated one 1 " Wealth of Nations," Book V., chap. ii. 68 THE INTERNAL REVENUE SYSTEM. hundred and sixty-nine millions. 1 Moreover, the pros- pect for the continued sale of bonds was far from flatter- ing ; gold had reached the pinnacle of its upward flight, while the pending election greatly depressed the money market. The condition of the revenues was, however, most reassuring, and during the coming months began to justify the hopes which had been earlier reposed in them, the excise alone not infrequently bringing in as much as a million dollars a day. From this time on to the close of the war the condition of the Treasury was much improved, the public securities regained credit, while the actual receipts from the various sources greatly exceeded the estimates. But, despite this gratifying showing, Congress, as a closing enactment to the long series of fiscal measures, saw fit to increase the rates of internal taxation, already oppressively high in many instances, by the law of March 3, 1865. By this measure every possible article which had escaped the scrutiny of the earlier Acts was sought out and taxed. The general ad valorem rates were increased twenty per cent, or to six per cent upon most manufactured articles ; and provision was made for the appointment by the secretary of a special Revenue Commission to inquire into and report upon " the best and most efficient mode " of raising the necessary rev- enue for the support of the government. This was the closing act of the war, but it did not become operative in time to afford any relief to the revenues. As a mat- ter of fact, aside from the invigorating effect of the resolute resort to taxation upon the credit of the coun- try, neither the excise nor the customs afforded the i Report on Finances, 1864, p. 19. THE PERIOD OF THE CIVIL WAR, 69 Treasury any great measure of support until the most urgent necessity for the same had passed. During the fiscal years 1861 and 1862, the receipts from the former source were practically nothing ; while in 1863 they rose to about $39,000,000, but little more than sufficient to meet the interest charges upon the public debt. Even as late as 1865, the receipts from this source, added to those of the customs, only exceeded the ordi- nary civil expenditure and the interest on the public debt by $160,000,000, while the total expenditures of the Treasury were $1,906,430,000. This relation be- tween the revenues and expenditure may be more graph- ically exhibited by the following table, expressed in denominations of millions : — Collections and Expenditure for the Fiscal T fears : - 1862. 1863. 1864. 1865. 1866. Miscellaneous Sources .... Total Revenue from Taxes, etc., Net Ordinary Expenditure, not including Interest Charges l . 49.05 1.79 1.0S 69.0G 39.12 4.50 102.31 110.21 52.08 84.93 210.66 38.11 179.05 311.20 67.77 51.92 456.38 112.G8 694.00 S99.S1 264.C0 811.28 1295.54 333.70 1217.70 1906.43 558.02 385.95 1139.34 The system was slow in attaining any degree of effi- ciency, owing to the newness of the provisions, the untrained officials to whom its administration was in- trusted, the constant tinkering and changes made in it by Congress, and the extravagance of many of the 1 By net ordinary expenditure is meant expenditure on behalf of war, the navy, Indians, pensions, and miscellaneous purposes. Gross expenditures includes the above as well as interest, premi- ums, and other payments on behalf of the public debt. 70 THE INTERNAL REVENUE SYSTEM. taxes, which were so high as to induce wide-spread evasion and fraud, often with the connivance and assist- ance of the officials. It may, in fact, be stated as a principle, that the experience of this period goes to prove that in time of peace the machinery for immediately realizing upon the currently created wealth of the country should never be permitted to get out of running order ; for had there existed in 1861 some form of internal taxes with which the people were familiar, and which was sufficiently elastic to permit immediate extension, the Treasury would not have suffered from the straits to which it ivas reduced, the necessity of resort to treasury notes might have been averted, and the war been more vigorously prosecuted. As it was, the internal system was of substantial ser- vice less from any real contribution afforded to the Treas- ury, than from the support which it gave to the credit of the country and thus to the conduct of the war. And as such the excise was well-nigh indispensable, as it was to the plans of reconstruction set on foot at the close of the war. And Congress, aided by the counsels of the Secretary of the Treasury, and the later appointed Special Com- missioner of Revenue, 1 now found itself confronted with the problem of how to raise the revenue demanded by the contemplated reduction of the public debt, the pay- 1 Mr. David A. "Wells, the chairman of the Revenue Commission appointed under authority of the Act of March 3, 1865, was subse- quently selected as Special Commissioner of Revenue under an Act of July 13, 1866, whose duties it was to investigate and from time to time "report, through the Secretary of the Treasury, to Congress, either in the form of a hill or otherwise, such modifications of the rate of taxation, or of the methods of collecting the revenues, and THE PERIOD OF THE CIVIL WAR. 71 ment of the interest charges thereon, and the mainte- nance of the civil establishment, including the war and navy departments, by means which should neither re- press industry nor check enterprise, and which, at the same time, should be so devised as to bear most heavily upon those most benefited by, and most capable of bear- ing, the taxes. The circulating medium was redundant, and consisted largely of inconvertible paper ; a large floating indebtedness had to be funded, while early loans now falling due were to be reissued, and the debt simplified and rendered manageable '; the Southern States were to be rehabilitated with Union vestments, and the wheels of commerce readjusted to changed economic conditions. A reduction of the currency to reasonable proportions was demanded by every consideration of public welfare, while the monetary vacuum in the South was to be supplied. A war tariff called for revision in harmony with the demands of expanding trade and en- larged commercial relations, while the obstructive taxes on raw materials, and the burdens of the inland duties, so prejudicial to that wide commercial activity so soon to follow, required immediate attention. At this time the total indebtedness of the country, floating and funded, approximated three thousand mil- lions, upon which the interest charges, funded at five and one-half per cent, amounted to one hundred and such other facts pertaining to the trade, industry, commerce, or taxa- tion of the country, as he may find, by actual observation of the law, to be conducive to the public interest." Tbe Special Commissioner made four annual reports, and his statistical investigations cover almost every aspect of the financial, industrial, and monetary dis- orders induced by the war, and form a mine of information to the student of the period. 72 THE INTERNAL REVENUE SYSTEM. sixty-five million dollars, while the civil establishment, with the war and navy departments added, demanded a hundred millions more. The customs revenue and mis- cellaneous sources were producing one-half that amount, so that a simplification of the inland taxes so as to render them productive of two hundred millions, would, it was thought, suffice for current expenditure and per- mit an annual sinking fund appropriation of fifty mil- lions of dollars. This, in effect, the secretary advised. 1 The special Revenue Commission, 2 provided for in the Act of March 3, 1865, began its investigations at once, and eventually did much to bring order out of the existing confusion. It travelled from city to city, heard representatives of the various industrial interests, and in January following presented the results of its investi- gations to Congress in a most voluminous and valuable report, which was made the basis of later modifications in the customs and the excise. The creation of such a commission Avas a novelty in congressional procedure, although it finds frequent precedents abroad, and since tliat time has been employed in this country in the tariff investigation. When composed, as this Commission was, of men apart from active participation in the affairs of government, and untrammelled by personal interests or a constituency to be gratified, and possessed of a practi- cal and scientific knowledge of the laws of trade and finance, such a method of dealing with questions de- manding special scientific knowledge possesses decided 1 Ileport on Finances, 18G5, p. 20. 2 The Commission as appointed consisted of David A. "Wells of New York, Stephen Colwell of Pennsylvania, and S. S. Hayes of Illinois. THE PERIOD OF THE CIVIL WAR. 73 advantages over the congressional committee system, frequently partisan and seldom wholly unbiassed. After reviewing the legislation of the period, as well as the various taxes imposed, the Commission recom- mended " the abolition or speedy reduction of all taxes which tend to check development, and the retention of all those which, like the income tax, fall chiefly upon realized wealth." " Diffuseness " was the all-pervading evil of the system, to which many of the industrial ills of the time were more or less directly traceable ; for by its operations it violated nearly every sound principle of finance, was most oppressive to the consumer, and in- jurious in its effects upon industry. A more "concrete" system was demanded by the conditions of the country, to obtain which desideratum the Commission made the following specific recommendations : First, that the rate upon distilled spirits be reduced to one dollar per gallon (not adopted) ; second, that the excise tax upon raw cotton be increased to five cents per pound (Congress raised the tax to three cents, and later abolished it alto- gether) ; third, that the principle of progression or dis- crimination in the income tax be repealed, that a uniform rate of five per cent be imposed on all incomes in excess of $1,000, and that no further exemptions for house-rent be allowed, or, if such exemption be allowed, that it be limited in amount to f 300 (adopted in 18G7) ; fourth, that all assessed taxes, save those on billiard tables, be repealed (not adopted) ; fifth, that the excise upon wearing apparel, repairs, pig iron, books, magazines, etc., coal, and crude petroleum, be abolished, while the general ad valorem and specific taxes upon goods, wares, and merchandise be horizontally reduced fifty per cent. 74 THE INTERNAL REVENUE SYSTEM. (Partially adopted by Acts of July 13, 1876, and March 2, 1867.) Only with some such alterations as these would the system of raising revenues from inland sources be " adapted to the age and our conditions ; the only one compatible with great fiscal results and with that large freedom of industry which alone can ever adequately supply the coffers of an enterprising, competitive, and free people." 1 The report further arraigned the appoint- ment, retention, and promotion of officials for other reasons than qualifications of merit and good behavior. With this method continued, the Commission felt that it would be idle to hope for an efficient and economical ad- ministration of the system. To this cause was assigned much of the inefficiency of the officials, as well as the wide-spread fraud and evasion of taxes. Men were not infrequently appointed wholly incapable of appreciating the duties of their office, while others were removed because, in the faithful discharge thereof, they had interfered with the private interest of wealthy and influential individuals. But Congress paid slight heed to these recommen- dations ; for the adjustment and speedy reduction of the public debt was the chief object of solicitude, not only on the part of the government, but of the people as well, who manifested an incomprehensible impatience at the thought of indebtedness ; and many wild schemes were afloat for its immediate payment, it being even proposed, under the elation of temporary prosperity, to extinguish it by voluntary contributions and have done with it forever. For this reason the recommendations 1 See Report of Revenue Commission, House Ex. Doc. No. 34, Thirty-ninth Congress, First Session, pp. 23-41. THE PERIOD OF THE CIVIL WAR. 75 looking to an abatement of the taxes found but little im- mediate favor, either within or outside of the halls of Congress. For some months the country enjoyed a reac- tion of enthusiasm and joy after the protracted years of despondency ; and just as France, a few years later, shaken by discord and faction, after the disasters of Sedan and the excesses of the Commune, collected her shattered energies, so the Union, reunited, vacillated for the moment, weak at heart, and then, with a mighty effort, indifferent alike to the false steps of the past or forebodings for the future, set herself resolutely at work to repair the breaches in her armor, and to develop the resources of her hidden power. No fact of our history demonstrates the wonderful recuperative power of the United States as does this ; for no people in modern times took from their pockets two hundred millions of dollars with which to reduce the public debt within twelve months after the close of a domestic struggle of four years' duration, no nation ever assimilated to itself nearly a million of men with so little friction or disturbance, and none has borne so uncomplainingly a system of taxation most oppressive in its incidence for the defence of a principle. The country was but wounded, and the sympathetic energies rushed to her recuperation in the vast industrial development which followed in the first few years subsequent to the termi- nation of the war. Immigration poured into the coun- try, following the great railroads westward, crops were bountiful, and the prices of farm products ranged high. An era of unparalleled railroad construction set in, and iron bands soon united the Atlantic with the Pacific. Labor was constantly employed at high wages, and the 76 THE INTERNAL REVENUE SYSTEM. South began to reassume the prosperity it had known before the war, while the prairies of the new West began to blossom as the rose. But this prosperity and overweening confidence were short-lived. During the war the withdrawal of labor and the consumption of the army in part compensated for the inroads of the State; but with the return of peace conditions were reversed. Production was stimu- lated in excess of demand, an unhealthy spirit pervaded all enterprise, prices were speculative and uncertain, and while in general the country bore every appearance of prosperity, industry was in a state of flux, and was under- going a process of readjustment in harmony with peace conditions. Hard times followed for many on the heels of diminished government demand, and the burdens of taxation soon became unendurable, while the inquisition and official penetration into business affairs induced wide- spread complaint at its continuance. So long as the war lasted taxes were borne willingly, and paid with patriotic pride ; but, with peace re-established, selfish interests reasserted themselves, and the critical eye of public opin- ion, diverted from graver affairs, soon perceived the evils innumerable which pervaded the fiscal administration. At the same time the revenues continued in excess of expenditures, while receipts from specific sources of tax- ation frequently exceeded expectations. The financial outlook being so reassuring, Congress, in the summer of 18G6, took the recommendations of the Commission seri- ously in hand, and in a rough way made them the basis of subsequent legislation. The Act of July 13, 1866, which rendered unmanu- factured cotton dutiable at the rate of three cents per THE PERIOD OF TEE CIVIL WAR. 77 pound, provided also for a horizontal reduction of twenty per cent of nearly all ad valorem duties, or to five per cent of the valuation of the article; while on many others, notably boots and shoes, clothing, and other articles of wearing apparel, the rate was reduced to two per cent. The taxes on coal, pig iron, books, and magazines were wholly repealed, as was the duty on crude petroleum a few months later ; while sensible relief was given the manufacture of sugar, cordage, steel, iron chains and cables, as well as railroad freights. From these abatements a reduction in the revenues of from fifty to sixty-five millions was expected. For the fiscal year 1866, the receipts from the in- ternal duties were $310,906,984. In 1867 they fell to $265,920,474. A comparison of these receipts indicates a loss of thirty-two millions from the abatement of the taxes on manufactures and products, of four millions on gross receipts of corporations, advertisements, etc., and of ten millions from banks, railroad companies, and other corporations ; or a total loss of forty-five millions. This exhibit is somewhat remarkable in view of the fact that the taxes abated or repealed by the Thirty- ninth Congress were estimated, on the basis of their productivity for the preceding year, as sufficient to occasion a loss to the revenue of one hundred millions. As a matter of fact, the real diminution to the revenues from these sources was not in excess of from sixty to seventy million, the losses being in large part compen- sated for by the greater productivity of a low rate, and the increase in the consumption of certain kinds of com- modities ; so that the Treasury showed a net gain of from fifteen to twenty-five million dollars for the year. 78 THE INTERNAL REVENUE SYSTEM. In the following session 1 the rate on cotton was re- duced to two and one-half cents per pound, while still further concessions were made to the producing interests in the exemption of ropes and twines, bar, sheet, and plate iron, castings of iron and copper, clothing, certain manufactures of wood, agricultural implements, oil of various kinds, pottery, salt, steel, and large numbers of articles of general and domestic consumption. The in- come tax was also amended in conformity with the rec- ommendation of the Commission by the increase of the exemption allowed to one thousand dollars, with a uni- form rate of five per cent upon all incomes in excess of that sum, while the gross receipts tax as applied to advertisements and toll roads was repealed. Cotton was relieved from taxation a year later ; 2 while the ex- cessive rate upon distilled spirits, i.e., two dollars per gallon, was retained until July of the same year, 3 when the rate was reduced to fifty cents. During the same session of the Fortieth Congress all taxes upon goods, wares, and manufactures, save those imposed on gas, illu- minating oils, tobacco in its various forms, distilled and malt liquors, banks, and those articles upon which the tax was collected by means of stamps, were repealed. 4 This action on the part of Congress was sudden and unexpected. Moreover, it was viewed as but experi- mental and possibly temporary in its duration. 5 As a consequence of this and other contributory agencies, i By Act of March 2, 18G7. 3 Act of July 20, 18G8. 2 Act of Feb. 3, 18G8. 4 Act of March 31, 1868. 5 This feeling was induced in part hy the recommendation of the secretary advocating a reimposition of the general excise on manu- factures, as well as an increase in the duty on sales. Report on Finance, 1868, p. 14. THE PERIOD OF THE CIVIL WAR. 79 prices failed to respond in anything like the degree anticipated by the reduction in rates. In the case of a number of articles, notably pig iron, manufactured lum- ber, and salt, the prices continued to advance ; " while in other instances, as in the case of agricultural imple- ments, sewing-machines, hoop-skirts, manufactures of silk, newspapers, and in fact most articles which are the products of monopolies created by patents, established custom, or other causes, the repeal of the internal tax, through the maintenance of former prices, has been only equivalent to legislating a bounty into the pockets of the producer." x The course of trade during these years of reorganiza- tion was more or less arbitrary, and characterized by the same phenomena which marked the early days of the war. Industry was slow in accommodating itself to the changing conditions of production, and commercial failures were frequent. In those cases in which prices responded to the reduction of the taxes, individuals were often ruined by being forced to unload upon a declining market goods produced or purchased at arti- ficially enhanced prices ; while in others the reduction or abolition of the tax was but a bonus granted to the man- ufacturer in the form of enhanced profits. Speculation was rife, and values wholly unsettled. To what extent this abnormal condition of trade and industry was at- tributable to the reduction of the excise it is difficult accurately to determine, but so able an authority as Hon. A. S. Hewitt has considered it so potent as to ascribe to it the financial revulsion of 1873. Within three years after the close of the war, the i Report Special Commissioner of Revenue, 1868, p. 23. 80 THE INTERNAL REVENUE SYSTEM. more important recommendations of the Revenue Com- mission had been substantially adopted, and all of the more discriminating and oppressive taxes had been re- pealed. No direct taxes "were now imposed on any manufactured product, with the exception of distilled spirits, fermented liquors, cigars, tobacco, gas, patent medicines, perfumes, cosmetics, and playing-cards, all of which articles are in the nature of luxuries. For some years longer the special license, stamp, cor- poration, and income taxes "were retained ; although the gratifying condition of the finances, and the continued excess of receipts over expenditures, had rendered a more speedy reduction possible. By 1870, however, the debt having been in large part refunded, 'and the re- ceipts from the customs, distilled and malt liquors, and tobacco manifesting a gratifying increase, all the taxes save those now on the schedule, as well as the income duty, certain stamp taxes on transfers, proprietary arti- cles, and some others, were repealed, including all ordi- nary taxes on occupations, saving those on brewers, distillers, and dealers in tobacco. The income tax was to continue two years longer, with the rate reduced to two and one-half per cent upon incomes in excess of $2,000, while liberal deductions were permitted for taxes, losses, interest and rent paid, and debts ascer- tained to be worthless. 1 Few decades in our history are more replete with in- terest for the financier than the one under discussion. Some of these phases have been examined in the pre- ceding pages, and it but remains to indicate briefly two deductions, one might say axioms, which may be drawn i Act of July 14, 1870. THE PERIOD OF THE CIVIL WAR. 81 from the experiences of the same. The first of these is, that time is a most essential requisite to efficiency in an excise system. A new bureau of administration, with its army of officials and a vast continent from which to gar- ner its resources, is a ponderously moving machine, and cannot achieve efficiency in a day or even in a year. For this reason the taxing machinery of a nation should never be permitted to get out of running order ; for, as has been said, the customs revenue is a most unstable basis upon which to depend for the revenues in times of emergency. As a second principle, it may be added that a moderate rate of taxation, assessed ivith due regard to existing conditions, will in the long run prove more productive and less prejudicial to the moral, social, and industrial interests of a nation, than one so excessive in amount as to encourage evasion, speculation, and fraud. The truth of these principles is in part verified by an examination of the excise receipts during the five years extending from the close of the war down to 1870, which coincide with the reduction of the system. During this period taxes were removed from subjects from which the aggre- gate receipts in 18GG had been approximately two hun- dred millions, yet the total loss to the revenue thereby was less than one hundred and twenty-five millions, 1 and this in a period of partial failure of crops and general disturbance of business relations. 1 According to the estimates of Congress, the sources abandoned might have been expected to reduce the revenue by the following amounts : — Act of July 13, 18GG by G5 millions. Act of March 2, 18G7 by 40 millions. Act of Feb. 3, 18G8 by 23 millions. Act of March 31, and July 20, 1SG8 ... by 68 millions. Total estimated reduction 196 millions. 82 THE INTERNAL REVENUE SYSTEM. CHAPTER IV. DIRECT TAXES ON PERSONS AND PROPERTY. I. THE DIRECT OR APPORTIONED STATE TAX. In the preceding pages, there has been traced the process by which the mass of revenue legislation induced by the war became incorporated into our fiscal order. In the following chapters it will be our aim to examine the several more important taxes in some detail, as well as the social and economic forces set in motion by them ; their influence upon industry, prices, and wages; and finally to determine from the teachings of the same the relative efficiency and availability of each in case of emergency. And first as to the direct or apportioned State tax, which, with the income tax, was the first of the many taxes imposed. In general, the method employed in the assessment and collection of the direct tax of 1798 served as a model for all subsequent experiments in deriving rev- enues from a tax apportioned among the States, of which, as we have seen, there were four, viz., in 1813, 1814, 1815, and 1861. The measure of 1798, which apportioned $2,000,000 among the States, offended local prejudices needlessly, and was for this reason extremely unpopular. Viewed, however, as a political measure, it had more to commend it. The tax was levied but once, being marked for the DIRECT TAXES OX PERSOXS AXD PROPERTY. 83 axe of the new administration, which came into power pledged to its repeal. State lines were wholly ignored by it, save in so far as they served as administrative divisions. Houses, lands, and slaves formed the basis of the levy, and an exemption of $500 was allowed. The later Acts evoked by the stress of the War of 1812 differ in some details from the earlier tentative efforts of the Federalists. Greater latitude was allowed the States in their collection, the States being granted permission to assume their quotas, which was an im- portant modification, while the stipulation of Con- gress that they should be but temporary and confined to war necessities rendered them more tolerable to the people. These earlier precedents formed the groundwork of the Act of Aug. 5, 1861 ; although, as we have seen, the recommendations of Secretary Chase did not fully comply with the constitutional provision, inasmuch as he suggested the exemption of the slave States from its imposition, thereby tacitly acknowledging their sever- ance from the Union. By the measure of 1861 the same privilege of assump- tion was granted the States as permitted in the earlier Acts of 1813 and 1815 ; in fact, earlier precedents were so closely followed that it was asserted in the House that the measure was an exact copy of a bill drawn up at an earlier date by Gallatin. 1 What commended the tax to the Committee of Ways and Means was the pressing de- mand for revenue, and the belief that the States would at once assume their quotas, and place at the immediate disposition of the government considerable revenue. It i Congressional Globe, 18G1, p. 307. 84 THE INTERNAL REVENUE SYSTEM. is this fact which renders the direct tax so fit an emer- gency tax. Moreover, it was familiar to the people through their State systems. But while such considerations as these may possibly justify such a tax as a temporary war measure, as a sort of bridge upon which a fiscal policy may be inaugurated and the capital and trade of the country accustomed to changed conditions, any attempt to meet heavy or long continued demands from this source would be inadvi- sable. Even admitting that the tax conformed roughly to justice a hundred years ago, when population was a rough criterion of the ability of the States to pay, it must be apparent that the unequal territorial distribution of wealth at the present time renders even an approxima- tion to justice impossible. Even in 1861 it was very unequal in its operations, and the imperative necessities of the occasion form the only justification of its pas- sage; but in view of the small returns therefrom, as well as the endless complications which its adminis- tration aroused, it is difficult to believe that occasions will again arise sufficiently urgent to warrant its repe- tition. The measure provided for a levy of twenty million dollars, to be apportioned among free and slave States alike, according to population. Only land and improve- ments were to be taxed, the enumeration to be taken on the first day of April, 1862. A minimum exemption of $500 was allowed each taxable, as in the earlier meas- ures. The Act further provided that expenditures made by the States in military preparations might be deducted in the adjustment of quotas, a provision which greatly reduced the assistance derived from the tax, the only DIRECT TAXES ON PERSONS AND PROPERTY. 85 service which it rendered being the support which it gave to the public securities. 1 All of the States, save Delaware, the Territory of Colorado, and the States in insurrection, assumed their apportionments, thus verifying the hopes of Congress and greatly simplifying the collection. In the two Northern Commonwealths which declined to assume the levy, tax commissioners were appointed, who at once proceeded with the assessment of the quotas as prescribed by Congress; while special provisions were made for its administration in the Southern States, where, in case the tax was repudiated, it became a first lien on all the lands in the State. As rapidly as Federal authority was extended to these sections, commissioners were appointed with plenary powers to distrain and sell real estate covered by the levy, the amount assessed to each individual being deter- mined by the proportion his estate bore to the taxable property of the Commonwealth. In order to alleviate the hardness of the law, liberal terms were granted on which land might be redeemed by the dispossessed owner; but, despite this privilege, large tracts in the South remained in the hands of the government, and many persons were ousted from ancestral holdings through no real fault of their own or disinclination to pay the taxes. Congress further provided that, of the proceeds de- 1 The receipts covered into the Treasury from the assessment of 18G2 down to the year 1870 were as follows : — 1S0-2 .... §1,795,332 1866 .... $1,974,764 1863 .... 1,485,104 1867 .... 4,200,234 1864 .... 475,104 1868 .... 1,788,146 1865 .... 1,200,573 1860 .... 7G5.G86 86 TIIE INTERNAL REVENUE SYSTEM. rived from the sale of these lands, one-fourth was to be returned to the State on the suppression of the Rebellion, to be used in such a way as the State might direct ; one-fourth was to be placed in a fund to be used for the promotion of colonization from the State to some tropical clime ; while the balance was to be turned into the Federal Treasury. 1 By the close of the war the tax had been partially collected in Florida, South Carolina, Virginia, Tennes- see, Louisiana, North Carolina, and Arkansas, from which States $ 632,994 had been obtained through the process of sales, while S420,661 had been collected by regular assessment at an approximate cost of thir- teen per cent. 2 Moderate though the taxes were, it was well-nigh impossible to collect them. Currency was scarce, the markets insecure, and production precarious and almost at a standstill, owing to the scarcity of labor and machinery. At the close of the war the distress in the South was well-nigh universal ; and the committee on reconstruction, in reporting the Fourteenth Amend- ment of the Constitution to Congress, recommended that any State, upon ratification of the same, should be al- lowed to assume its apportionment of the direct tax, and be granted ten years in which to make payment of the same. 3 Collection by distress had proceeded in many districts down to as late as 1866, when further proceedings were suspended by order of the President, in conformity with an Act of Congress. Pacific meas- ures were desired by all, and the inclination manifested i Act of June 7, 1862. 2 Report of Commissioner of Internal Revenue, 1865, p. 00. 3 House Reports, 1865-1866, Nov. 30. DIRECT TAXES ON PERSONS AND PROPERTY'. 87 by several of the States to accept the apportionment supported the recommendation of the committee. In conformity with this sentiment, a temporary extension of time was accorded the States until Jan. 1, 1869, 1 the special boards of tax commissioners were discontinued, 2 and the accounting and administration of the tax turned over to the Commissioner of Internal Revenue. These measures were passed without prejudice to the ultimate right of Congress to proceed with the completion of the levy ; 3 but since that time no attempt has been made to enforce payment, and until very recently Congress has studiously avoided considering the question, feeling doubtless that the negative injustice done the many was vastly preferable to equality secured to all by a reopen- ing of the subject and the consequent laceration of old sores. In 1883 the amounts of the assessment still outstand- ing were as follows : — From the Northern States, amount still unpaid . $ 455,228 From the States formerly in insurrection . . . 2,725,104 Total amount of apportionment unpaid .... $3,180,332 As seen in its true light, this neglect worked a gross injustice. It operated as a penalty upon the patriotism of those who had paid the tax, while an irreparable injury had been done those whose lands had been dis- trained and sold under the levy. An attempt was made to remedy this injustice, in part, by an Act passed in 1883 for refunding the surplus receipts from the sales of i Act of Aug. 3, I860. 2 Act of March 2, 1867. 3 The quotas apportioned the Southern States amounted to §5,153,891, of which sum hut little over §2,000,000 had been paid. 88 THE INTERNAL REVENUE SYSTEM. land, for which purpose $190,000 was appropriated. 1 But so long a time had elapsed, and so unintelligible were the records, that it was well-nigh impossible to identify those dispossessed, and only $04,000 was al- lowed on the claims presented. 2 Two avenues of relief from this anomalous position were open to Congress, either one of which was beset with considerable difficulty. Either the sums collected from the States could be refunded to them to be dis- posed of as they might see fit, or measures might be taken for continuing the collection of the levies in those States where the apportionment had not been paid. Both plans had adherents in Congress. Originally the tax had been construed as a lien on individual property, in which the States were only incidentally concerned as political divisions ; but, by the action of Congress sus- pending the collection, it had been expected that the States would accept their quotas, and, acting upon this hypothesis, sums due the States from the Federal gov- ernment had been credited to this account. The legal- ity of this position came up for adjudication before the Supreme Court ; and the action of the Treasury was held to be unwarranted, the determination of the Court being that the States were in no sense responsible for the apportionment, but that it must be collected from the individual citizens. 3 This decision relieved the States from all responsibility, and threw the Federal govern- i Act of March 3, 1883. 2 Report of Commissioner of Internal Revenue, 1891, p. 40. 3 U.S. vs. Louisiana, 123 U.S., p. 37. For a full exposition of this complicated matter, see Quarterly Journal of Economics, vol. iii., p. 450-461, by C. F. Dunbar. DIRECT TAXES ON PERSONS AND PROPERTY. 89 ment back upon its original position. But the pass- ing of three decades had seen many changes in the ownership of the land originally affected by the lien; and the present owners could not in justice be held responsible for the payment of the tax, while to search out the original debtors was clearly impossible. Another complication arose from the changes which had taken place in values, much of the land having deteriorated to such an extent as to be scarcely worth the amount of the tax. It was an embarrassing position. To proceed with the collection of the tax according to the determination of the Supreme Court was beset with almost insurmount- able difficulties, and would have resulted in monumental injustice; while, on the other hand, the relinquishment of the claims worked an equal injustice to those who, through loyalty or other motives, had paid the tax. Despite these circumstances, the lower House always opposed any adjustment looking towards a solution of the dilemma. Several distinct measures passed the Sen- ate, but failed to become a law through the apathy of the House ; and not until 1891, 1 through the pressure of local interests and the desire to relieve the plethoric condition of the public treasury, was legislation finally enacted which provided for the remission of all unpaid taxes, the return to the States of all sums collected by Federal or State authorities, and for the relief of those persons dispossessed of their lands. This was probably the most equitable adjustment pos- sible. To have completed the collection at this late day would have induced most crying injustice, while to have i By Act of March 2, 1891. 90 THE INTERNAL REVENUE SYSTEM. relinquished the claims entirely, and to have acknowl- edged the experiment to be a fiscal error already cor- rected by the lapse of time, would have been but a poor show of justice to the loyal States, as well as to those who in other sections had been forced to comply with the law through threat of distraint. II. THE INCOME TAX. It is a matter of some surprise, in view of the preju- dice which exists in the American mind against any tax which is at all inquisitorial in character, that Congress should have had recourse to the income tax in 1861, x when the apportioned direct tax was imposed, and be- fore any attempt had been made to open up the more available forms of indirect taxation. Possibly this may be explained, in part at least, by the prevailing belief in the early suppression of the war, and by the desire to devise a system which would be but temporary, im- mediately productive, and capable of extension in case of need. Mr. Morrill probably echoed the popular sen- timent when he said in the House that " the income duty was one of the least defensible " of the taxes pro- posed, but still worthy of retention because of the " con- siderable class of State officers, and the many thousands who are employed at a fixed salary, most of whom would not contribute a penny unless called upon through this tax." 2 By the provisions of the measure, a tax of three per cent was imposed on all incomes in excess of $800, from whatever source derived, save that upon any income de- i Act of Aug. 5, 1861. 2 Congressional Globe, 1802, p. 1796. DIRECT TAXES ON PERSONS AND PROPERTY. 91 rived from United States securities, one and one-half per cent should be levied. Upon the incomes, dividends, or rents accruing upon any property or securities in the United States, but held by citizens resident abroad, there was to be charged a discriminating tax of five per cent, save upon so much of the income as was derived from Federal securities. The tax was assessable on the first of January ; and in computing income, all national, State, and local taxes were to be first deducted. The duty was self-assessed upon schedules prepared for the purpose, and was based upon receipts for the preceding year, irrespective of their source. In case of failure on the part of the taxable to make such return, the asses- sor was empowered to estimate the income, and to add thereto ten per cent as a penalty for the default. The tax was assessed but once under this measure, when Congress, reassembling again in regular session, passed modifications which substantially repealed its provisions. 1 By these alterations the exemption was reduced from $800 to $600 ; the rates were rendered slightly progressive, incomes above $600 and below $10,000 paying three per cent on the excess above the former sum, those above the latter sum paying five per cent. The rates upon incomes from special sources remained unchanged. In order that the tax might be relieved of the objectionable feature by which publicity was given to incomes, collectors were instructed by the commissioner that returns of incomes should not be open to inspection by the public, a ruling which laid the tax open to all sorts of evasions, and subsequently induced its reversal by the commissioner, i Act of July 1, 1862. 92 THE INTERNAL REVENUE SYSTEM. These rates remained in force for two years, when, in response to the recommendations of the commissioner, 1 and the absorbing demand for revenues, the comprehen- sive measure of June 30, 1864, was passed^ by which the duties were considerably increased, and the rates ren- dered more strongly progressive. By this Act incomes between $600 and $5,000 were taxed at the rate of five per cent, those from $5,000 to $10,000 at seven and a half per cent, while all incomes in excess of the latter sum were rendered dutiable at the uniform rate of ten per cent. The Act further provided that any revenues derived from United States securities should be included in estimating incomes under the section, and that any net profits realized from sales of land were to be re- turned as income, while any losses incurred in the same way were to be deducted. In a like manner the house- holder was permitted to deduct the annual rental value of his homestead, whether occupied as tenant from another, or held in his own right. The measure speci- fied Avith great precision the methods for the computa- tion of annual gains, and required the assessor to secure from each taxable an itemized account of his revenue for the preceding year. In the case of the farmer the requirement was extremely burdensome ; for it demanded a minute return of all " incomes and gains derived from the increased value of live stock, whether sold or on hand, and the amount of sugar, wool, butter, cheese, pork, beef, mutton, or other meats, hay, grain, or other productions of the estate of such person sold." Such demands were somewhat onerous upon the citizen in- clined to make an honest return ; while, to those aiming 1 Report on Finances, 1863, p. 70. DIRECT TAXES ON PERSONS AND PROPERTY. 93 to evade payment, the privilege of deducting house- rent, wages, interest upon incumbrances, and expendi- tures for repairs, opened an avenue for evasion and fraudulent return ; and it occasions no surprise that, as a result, the tax was unpopular, the returns incom- plete, and the burdens unequally distributed. This measure had scarcely received the signature of the President, when Congress, by joint resolution, 1 imposed a special income tax of five per cent upon all incomes in excess of $600, which was collected in addition to the regular income duty of that year. It was assessed but once, in October, 1864, the war closing early in the year following, and produced $29,381,862, a striking com- mentary on the improvement in the method of assess- ment, as well as an indication of the loyalty and patriotism of the people. The classifications of the law of 1864 remained in force for but one assessment, when they were again re- duced to two, 2 and all incomes in excess of $5,000 were rendered dutiable at ten per cent, all below that sum and in excess of $600 being taxable at the old rate of five per cent. The war closed almost immediately after this latter modification had been made, and the imperative necessi- ties of the Treasury were in part relieved. Naturally, agitation for the immediate repeal of the tax at once commenced ; but Congress wisely preferred first to re- lieve those subjects most oppressed by the excise. In- dustry was shackled, and the laws of trade unsettled, by the duplication of taxes induced by the general excise. The income tax, on the other hand, fell mainly upon i July 1, 18G4. 2 Act of March 3, 1865. 94 THE INTERNAL REVENUE SYSTEM. accumulated wealth, and, in the mind of the Revenue Commission, would " probably be sustained with less detriment to the country than any other form of taxa- ation, the excise upon spirituous and fermented liquors, and tobacco, possibly excepted." * It is this impotency of the income tax to affect prices and industry, as well as its non-interference with the free employment of capital, which renders it such a fit emergency tax. It is, in addition, elastic, and capable of immediate and indefinite expansion in time of temporary necessity. Unfortunately, the report of the Eevenue Commission, so replete and satisfactory in other respects, offers but little information in regard to the operations of this tax. Its temporary retention was, however, advocated ; but the element of progressivity was deemed to be an unjust discrimination, and a " tax on the results of successful industry and business enterprise." The Com- mission therefore recommended the repeal of this dis- crimination, and the imposition of a uniform rate of five per cent on all incomes in excess of $1,000, which sum was held to be no more than the equivalent of $600 at the time when the tax was first imposed, inasmuch as the advance in the prices of all commodities had greatly enhanced the cost of living. The report further advised that deductions for house-rent be no longer allowed, or, if permitted, that they be limited to $300 ; for such excessive rentals had been permitted by the assessors in the past, that in Xew York alone the estimated losses to the revenue by reason of this permission exceeded $2,000,000 a year. 3 1 House Executive Documents No. 34, Thirty-ninth Congress, p. 27. * Ibid., p. 28. DIRECT TAXES OX PERSOXS AXD PROPERTY. 95 Congress acceded to the report in so far as it related to the raising of the exemption to $1,000, with a uni- form rate of five per cent upon all incomes in excess of that sum, while the proviso was added thereto that the tax should expire in 1870. l This latter provision w r as not observed, however ; for Congress, fearing a defi- ciency, later extended its operations for two years more, but with the exemption increased to $2,000. 2 It is of interest to note that under these later provisions the tax became even more unpopular than it had been before, as it assumed in the eyes of the payer the form of a compulsory tribute imposed upon large w T ealth. In addition to the exemption of $2,000, as well as all taxes paid, deductions were also permitted, as in earlier meas- ures, for all losses " actually sustained from fires, floods, shipwrecks, or that occurred in trade ; the amount of interest paid during the year, the amount paid for rent or labor to cultivate land," as well as any expen- diture incurred in repairs other than those for improve- ment. The effect of these provisions was greatly to impair the productivity of the tax. Thus, in 1871, the num- ber of taxables returned was but 74,775, while in the following year (the last of its operation) they fell off still further to 72,949 ; while the receipts for the same years were $14,434,949 and $8,146,686 re- spectively. The income tax has always been unpopular with cer- tain classes. It is indicted as invading the sanctity of the most private affairs, as being inseparable from in- quisitorial scrutiny into business relations, and an insuf- i Act of March 2, 1807. 2 Act of July 14, 1870. 96 THE INTERNAL REVENUE SYSTEM. ferable intrusion into those affairs of the individual which are in a sense sacred, and which in the past had been exempted from the visits of the tax-gatherer. It is further alleged that a tax which offers such oppor- tunities for evasion is a charge upon honesty and patri- otism, and a premium upon perjury. Unquestionably, the tax was exposed to widespread evasion, especially in the large cities. Such complete confidence was reposed in the individual that evasion was an easy matter ; and the instructions of the commis- sioner, early in 1S63, that the returns should be open for inspection only to officers of the revenues, simply fa- cilitated it. By a later ruling, however, all returns were thrown open to the public, " in order," as the commis- sioner said, " that the amplest opportunity may be given for the detection of any fraudulent returns that may have been made." 1 That this ruling had its expected result may be questioned; for it induced other evils, which probably offset any stimulus to honest returns. In order to facilitate the collection of the tax, exten- sive use was made of the principle of stoppage at the source. Corporations of a certain kind announcing dividends were directed to deduct the tax, and pay the same to the collector before the distribution of earnings to the stockholders. By this means a large portion of the tax was collected before the income reached the hands of the individual, while fraudulent returns were checked, and the necessity of supervision reduced to a minimum. It was estimated that the cost of returning this portion of the tax did not exceed one-fifth of one 1 Boutwell's " Direct and Excise Taxation in the United States," p. 259. DIRECT TAXES ON PERSONS AND PROPERTY. 97 per cent, a fact which led the commissioner to recom- mend that the system of stoppage be extended to all corporations for profit declaring dividends, 1 as later provided in the measure of 1894. How efficient this method was will appear from the fact that in 1865, when the total receipts from incomes was $32,050,017, nearly forty per cent, or $11,346,018, was turned into the Treasury from the earnings of banks, canal, rail- road, insurance, and turnpike companies, and Federal employees. 2 But despite the fact that the income tax was unpopu- lar, and the returns depleted by fraud and evasion, it proved one of the most satisfactory, from a purely fiscal point of view, of the many expedients hit upon by Congress. In 1865 it produced as much as spirits, both malt and distilled, and tobacco ; while in the year following it returned nearly forty per cent more than these com- bined sources. In the former year over fifteen per cent of the entire internal revenue receipts was derived from this source, in 1866 over twenty-three per cent, and in 1867 over twenty-four and a half per cent. As indicative of the distribution of wealth, as well as the variations of income, it is interesting to note the receipts from the various classes of payers during the years from 1863 to 1872. With the collections from corporations and Federal employees, they are as follows : — 1 Report on Finances, 18G3, p. 73. 2 The tax upon the incomes of Federal officials was collected by the disbursing officers, who withheld the duty in paying the salaries of employees. 98 THE INTERNAL REVENUE SYSTEM. S 3 CO CO CO CO CO o l> co t-; . in °5 t-; o CO in ■* CO © *& CO OJ 05 si >-2 CO GO CO L^ CO in m CO ca CO 00 ee° co_ " 25. cT LO" co- ^r in cT in co L0 in • • 8. CM " CO CM- o " CO_ co" CO 1-0 co- CM_ oT co- en ca ** t- C5 oa co E- co Cl 1 "3. <-T lo- co CM Cl_ CO rf to co co- o o co- co co t- rt o t~ m in CO CO C5 CO t- CO CO LO t- CO -r 05 t CO c C5 CM* d CM CO CM CM CO CO 1< ca CD* LO CI t- o CO CO » CO o co 00 o io °1 00 Ci CO, CO e& CO" t-1 co" t- co" co- in un t-^" [-^ S3 ~X © O LO C5 *f o co o m Cl CO CM l> CM Cl. t-^ di CO" "d<" ■*" cf co- cf CM CO L- CO co t- co oo ca CM o CO CO o ^ CO Cl ^ o -f T-l t- Cl ca <* t o CO CO o CO CC ca ■*' CM co' CO <* CO CM t-^ 10 tj m CM Q •^ ** CM CO ca CD 00 «& Cl * of cT CO- S ca_ d rn" CM_ 13_ uo CM co- 00 °i. CO CM, 00 co Z ©' 03 CO CO co o O CM co co 3! 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B o » o~ — a a o o^ I! a o> a jj a cS • ft a • o « • ft® a m a S 0> co ki o H 3 3 ►J o o E- o H 2 a gs * > s-a ss > > oi a £^ £3 p-3 C* 4 cia £o c CD O O fe ^ O O O C fi fi p^ £ ^ fe Ph Ph fe M DIRECT TAXES ON PERSONS AND PROPERTY. 91) 3 ^ ri -, CO 05 — s ! . rt CO „ CI i-H lO CO CO CO CO O QO t l~ CO ■* CO q -r 10 q t> 00 iri d — ' d CO 1 - •c" o CM d 06 ■* -f* i< ■* Cl OS CO CO L- cs ~ ci r. »-l I- CO ro - 6© T* oa -s> ■* ©" -T CM 10 cc CO oo" °i o 00 o iS d" CO CO co" co co q t-^* t^* OS* 00" : H OS CO t? >~ -f 3S m i - CO CO CI O CO -*_ CM ^ r-T lO cs~ ^r '•£ '""' w co OS rH CM CM 3 CC CO t~ t^ uo 10 t^. C) CJ CN CO UO CO f- q ci iri iri d CM d 1-1 i-O »-H t^ CO -t* t- -fl 9^ ci CM CO o q co eo_ io_ CO CD l> to n< oo ■d w ci t-" eo" 00 0) CO CO — CO CO in t> ,_, o ■* co 00 in CO 00 CO CO i-l CO CO "CH CO cm' >-' s lO CO CD OS t£ -? CT -* CO CO N t& CO lO q io ^1 q w uo q 00 to or co d ^h" -jT -r to CO CO t~ s OS 1M OS CO •+ rl CM ei ca ■^ ■CO of -t>" <-/.. OS o lO OS >-H OS in l~ CO OJ 10 q q in L- ;-:' cm c-j ira d in 06 ci ■d CO CO -CH O CO •H CO CO m CO 1© 6 CC; CD_ of O Cl tC co •*_ CO_ t-^ CI -if i-T t-T CO of r^ 00 CO d 10 CO~ s * SI CI t- rH 00 OS f CO d w in \a o rt -f -f CI CI ^5 t- q CO q c; ti; q 6 CO ci co d C) d d CD CO 3 10 t~ t M CO CO ci 1- i- CO 1© CO q o «" co" co_ 06" q c> in 00 in" H CM lO co" LC5 CI C<1 CS OS CO of 1 8 1 t^" CO 50 CO i-l CO CO i-l OS Cl j, CO CO CO co q in °°. OO LO ci co" d co i-i ci 1-0 CD CO CO O CO -t< --H CO CO 10 CO €©■ q *~t CO o co_ co_ cs_ q CO OS o" t~ co" ci" i-T H q 1Q CO CO CO -* CM CO CO CO Cl" O a CD in" CD t> O £ c co o 5. lo" o 1 o> 1 -1 _ ■ + 3 ■a a a » 2 g< tB b 3 ° U y c: £ - CO 2 ■-> re rc. O O re CJ . 3 . o • « • • CD s » ® 11 -jT '"■ » ■a 73 CD a ' ci . a S • V . ^ • c ° i: cd '3 m a < : _ 1 o «& a ■« - /. $& m (& u u u 3! =--c3 a S w -n w cu £ 0) rj.CS h O gl Si go O H fc O CD o '^ o 01 93 > CD > CD CD C3 O o c 8.8 o O p4 Fm O O s h Fh fH fe Ph y. <^ 100 THE INTERNAL REVENUE SYSTEM. In explanation of the preceding table, it is necessary to remember that collections for the fiscal years of 1863 and 18G4 from personal incomes are under Acts of Aug. 5, 1861, and July 1, 1862, at rates given in the text (col- lections under measure of 1861 are not reported sepa- rately) ; those of 1865 are in part under Act of 1862 and part under Act of 1864 (the triplicate division of the Act of June 30, 1864, not being made in the returns). The collections of 1866 and 1867 are under Act of 1865 ; those of 1868, 1869, and 1870 under Act of 1867 ; and those from 1871 to 1873 inclusive are under Act of 1870. The collections from corporations up to 1864 are at three per cent ; afterwards at five per cent. As will be seen, the increased rates imposed in 1864 did not begin to yield largely until two years after their imposition, a fact not traceable to the slowness with which the duties became operative so much as to the fact that the returns given are for fiscal instead of calen- dar years. The new rates were not assessed until May, 1865, and returns were not required until early in the fiscal year 1866. This also accounts for the fact that the measure of 1861 did not begin to yield until 1863. It is further of interest to note that the receipts at three and five per cent under the law of 1862 bear approximately the same relation to each other as do the receipts under the later Act of 1864. This same parity is observable when we examine the returns of taxables. In 1866, from one hundred and eighty-five of the two hundred and forty collection districts, 190,189 returns were made of incomes over $600 and under $1,000; 162,513 of more than $1,000 and less than $5,000 ; while 31,009 persons acknowledged incomes in DIRECT TAXES ON PERSONS AND PROPERTY. 101 excess of the latter amount. Presuming this ratio to hold for the remaining fifty-five collection districts, the number of taxables returned for the year 1866 could not have been more than 500,000 at the utmost. At this time the population of the country approximated thirty- six millions, and estimating one taxable for every five persons, it appears that but one person in every four- teen and one-half taxables, or in seventy-two persons, received an income in excess of $600, a showing in- dicative of a comparatively high standard of living, as well as of a close collection of the tax. In a like man- ner, as indicative of the territorial distribution of the duty, it may be cited that from one collection district in New York the income tax receipts for the fiscal year 1867 were $5,496,233, while the total revenues collected for the same year from this source in the eleven States of Virginia, Texas, Tennessee, South Carolina, North Carolina, Mississippi, Louisiana, Ala- bama, Georgia, Arkansas, and Florida, were less than one-half that amount. 1 As confirming this territorial inequality, it is interesting to note that in 1869 Mas- sachusetts, New York, New Jersey, Pennsylvania, Ohio, Illinois, and California, although possessing but forty per cent of the total wealth and population of the country, paid upwards of three-fourths of the entire tax collected. Following the Act of March 2, 1867, which increased the exemption allowed to $1,000, the number of tax- 1 The collections on account of the income tax for the fiscal year 1867 from these States was as follows: from Florida, $14,197; Arkan- sas, $34,980.13 ; Mississippi, $00,740 ; South Carolina, $62,208.48 ; North Carolina, $62,450.58 ; Virginia, $204,623.41; Texas, $155.: 140.80; Ten- nessee, $396,327.86 ; Louisiana, $586,282.42; Georgia, $320,552.07 ; Ala- bama, $404,036.77; Total, $2,301,739. 102 THE INTERNAL REVENUE SYSTEM. ables returned manifested a considerable falling off, while the receipts were diminished by about one-half. During the four years of the operation of the revised rate, the average number of taxables returned was 267,210, of which number nearly sixty per cent paid taxes in excess of twenty dollars. As a crowning enactment of this long period of ex- perimentation, the limit of exemption was increased in 1870 to $2,000, with the avowed intention of relieving all save comparatively large incomes from its operation. At the same time the rate was reduced to two and a half per cent, at which point it remained until 1872, when the tax expired by limitation. From the experience of these years it is not possible to draw any absolute conclusions as to the availability of the income tax for Federal purposes, inasmuch as the measure of a tax lies largely in its fitness to conditions and the times ; and the defects of the duty during this period were largely administrative in character, traceable to the inefficiency of its administration. The entire ser- vice was , experimental, the men untrained, and the ma- chinery imperfect ; and, had the tax been never so well suited to our political and social conditions, its produc- tivity would have suffered greatly from this cause. III. TAXES ON CORPORATIONS. A. The Gross Receipts Tax on Railroads, Advertisements, Bridges, Canals, Express Companies, Ferries, Lotteries, Ships, Barges, Stages, Steamboats, Telegraph mid Insurance Companies, and Museums, Operas, Circuses, etc. With the possible exception of the taxes on distilled and fermented liquors, there are probably no subjects DIRECT TAXES ON PERSONS AND PROPERTY. 103 better fitted for taxation by the Federal government than certain corporations whose business is of an interstate character. Unsuited as they are for State and local taxation, from the difficulty of localizing the situs of their property, as well as from the character of their business, and circumscribed as the local divisions are by judicial decisions which deny to them the power to tax more than a limited portion of their earnings, such cor- porations are eminently fitted for taxation by the nation at large, to which none of these restrictions apply. 1 The plan of taxing according to gross receipts was by no means new at the outbreak of the war, and legislation but followed the approved practices of the States in se- lecting such a method of reaching this form of property. Aside from receipts from advertisements, the gross receipts tax was imposed upon a limited number of corporations by the measure of 1862. By its provis- ions, railroads, toll bridges, and steamboats were ren- dered dutiable at the rate of three per cent upon the gross receipts from the transportation of passengers, while ferry-boats and railroads propelled by other means than steam paid one and a half per cent. Returns and payments of the tax were required to be made monthly, under oath, by the proper official, and in case of neglect or refusal the collector was authorized to inspect the books of the company and make up his returns from that source, and add thereto a penalty of five per cent ; while any attempt to evade payment of the duty ren- dered the corporation liable to a penalty of $1,000. It 1 For an exhaustive account of the devices adopted hy the States in their efforts to tax this class <>f property, see Professor E. R. A. Seligman's " The Corporation Tax," in his " Essays on Taxation." 104 THE INTERNAL REVENUE SYSTEM. was further provided that the companies should have the right to add the tax to the fare of the passengers. Eeceipts from advertisements were dutiable at the rate of three per cent. At the same time a system of stoppage, in aid of the collection of the income tax, was provided, by which the income derived from bonds of railroads, or arising from dividends on stock, should be collected from the railroad itself, instead of from the individual directly, who Avas permitted subsequently to deduct the same in making up his individual return of income. The receipts from the gross receipts tax were at first insignificant, being but $1,661,273 in 1863, and twice that sum in 1864. But the manifold advantages of the tax becoming apparent, it was extended by later enact- ments to canal-boats and stage-coaches, 1 to apply to all receipts, whether from passengers or freight, with the rate reduced upon all transmission companies to two and one-half per cent, while the duty remained unal- tered on toll-roads, ferries, and bridges. 2 Express com- panies were added to the list at three per cent, as were telegraph companies at five per cent, and theatres, operas, circuses, and museums at two per cent in addi- tion to their regular license charges. The system of stoppage in aid of the income tax was also gradually extended to canal and slack-water navi- gation and turnpike companies, as well as to banks, trust, savings, and insurance companies. 3 The latter i Act of June 30, 1864. 2 By Act of March 3, 18fi3, toll-roads and bridges had been taxed at two per cent, and ferry-boats at one and one-half per cent. 3 Act of June 30, 1804. DIRECT TAXES ON PERSONS AND PROPERTY. 105 class of corporations were assessed upon their gross premiums, the rate subsequent to 1864 being one and a half per cent. With the close of the war and the confusion of com- mercial and industrial relations which ensued, it was deemed wise to retain the several taxes upon corpora- tions, along with the income, license, and stamp taxes, because of their inability to affect prices or industrial relations, as did the general excise. In 18GG, 1 however, the gross receipts tax was made uniform at two and one- half per cent upon all receipts of railroad, steamboat, ship, barge, canal-boat, or stage-coach companies, toll- roads and bridges ; telegraph lines were made dutiable at the former rate of three per cent ; while any corpora- tion whose gross receipts did not exceed $1,000 was wholly exempted. 2 At this rate the duty remained un- til 1870, when all the gross receipts taxes were repealed. 3 The receipts from railroad and insurance companies, from the gross receipts tax, as well as the taxes collected on account of the income duty, are shown in tabular form on the following page. The duty on dividends and interest payments was three per cent up to 1864, afterwards five per cent. The tax was thereafter imposed on all profits carried to the account of any fund or used in construction. Collec- tions from this source, i.e., profits, etc., are included in dividends, and were made on behalf of the income tax. i Act of July 13. 2 By Act of March 2, 1867, all gross receipts taxes were reduced to two and one-half per cent, while those on advertisements and toll- roads were repealed. 3 By Act of July 14. 106 THE INTERNAL REVENUE SYSTEM. Receipts from Railroads on behalf of Income and Gross Receipts Taxes. 1863. 1864. 1865. 1866. 1867. Duty on dividends . i 338,533 927,393 S 2,470,817 1 2,205,804 s j 3,379,262 Int. paid on bonds . 253,999 596,859 847,684 1,255,916 Gross receipts . . 1,106,817 2,127,249 5,917,293 7.614,448 4,128,255 1868. 1869. 1870. 1871. TOTAL. Duty on dividends . 8 2,630,174 3 2,831,140 S 2,898,802 S 1,121,439 1 1 21,416,738 Int. paid on bonds . 1,259,155 1,503,846 1,869,369 974,345 » 9,987,844 Gross receipts . . 3,134,337 3,255,487 3,732.209 1,637,911 32,654,008 1 Tbe totals of collections from dividends and interest paid on bonds are not exact, as tbey also include some collections for 1872 and 1873 which are not given in detail. Receipts from Insurance Companies on behalf of Income and Gross Receipts Taxes. 1863. 1864. 1865. 1866. 1867. Dividends and Addi- tions to Capital Stock i Premiums and Assess- ments $ 225,485 321,002 s 445,366 523,582 s 704,658 961,503 9 767,231 1,169,722 | 563,473 1,326,014 1868. 1869. 1870. 1871. TOTAL. Dividends and Addi- tions to Capital Premiums and Assess- f 605,489 1 ,288,745 f S47,6CS 1,323,330 1 926,519 1,324,454 s 243,205 445,547 5,6S9,070 8,683,902 Tbese collections are on behalf <>f income tax. The rate upon dividends was the same as upon rail- roads. That upon premiums was one per cent to July 1, 1864, payable quarterly, subsequently one and a half per cent, payable monthly. DIRECT TAXES ON PER SOX S AXD PROPERTY. 10\ ft o be o ft O F o o rt o o =« CD Cj o t- « o> h o a o ■# iq to v ci i- io » cT -f c ^' cf l-l © CO T-i O 1C c • © t- 10 CO CO CO CO .-; © CO CI LO © 1 L i -i "1 « s « pa cf — co" co" cf - i- -r co co r- ■* O CI " « rH CO IO t- O -J CO CO t> CI CO c ! « °° ->. « © ci S 9 "* * ®" « cf co co * o n h eo os _ iH CO ci co" t o" o" 0) l- l- o o "tClfJOClCOHCO O 1- O O K O N O O » _ — i- c; .; cs i- co o © co* co" i~ cf -»' -}•' cf ci co ci t> co co -*• 5 i> C CI C C, o C. I- O H co i- i- co o -r co co 3 "*i. ^ °i ^ «■* * "O ■? ci €^CI £; C? ICC? CO* -th" cT cT CO" co ci -j lo t- t- o co CIOc4lOOi3iiH w h. c-l lO -f t- CO CI CO CO CO 5 1.0 l~ -|l ■* M O r- 1 f! N o (. I> 1-0 CO CO CO CO 1- — S ■y- -. c l "1. rt <* w ci - CO S£ S3 i° "£ '"- " — i — —' n n I- O r< O O O CI CO LO © l-O © CO CI ~H CO o o o , co eo u5 co 25 35 ©" co" i- ©" CO cf -F :c CI Ci CO *H CI CI CI r r r r r r r r s 108 THE INTERNAL REVENUE SYSTEM. The tax was one of the most effective and successful sources of revenue devised, and produced during these years nearly fifty-five millions of dollars. B. Banks, Trust Companies, Savings Institutions. In the taxation of this kind of corporations, a mixed system prevailed. At first 1 no distinction was made between banks and insurance companies, and the tax was assessed at three per cent upon dividends and ad- ditions to the surplus or contingent funds. By later provisions, however, a distinction was made, and net profits were discarded as a measure of ability; and a mixed method, such as had been in operation in some of the States, was introduced. In 1864 the license duty was increased to $ 100 upon all banks having a capital stock of $50,000, with an increase of $2 for each addi- tional $1,000 increase of capital stock : while, in addition, there was added a duty of one twenty-fourth of one per cent each month upon the average amount of deposits for the preceding month ; a tax of like amount upon the average amount of capital employed ; and a duty of one- twelfth of one per cent each month upon the average amount of circulation issued by the bank, provided it did not exceed ninety per cent of the capital of the company, in which case one-sixth of one per cent upon any increase of circulation beyond the latter amount was imposed. In the case of banks having branch establish- ments, each branch was assessed separately ; but these duties did not apply to any of the banks organized under the new national banking Act, which made their i By Act of Julyl,18G2. DIRECT TAXES ON PERSONS AND PROPERTY. 109 returns to the comptroller, nor to any savings bank con- ducted upon the mutual plan. The receipts from banks, trust companies, and savings institutions, were as fol- lows : — Receipts from Banks, Trust and Savings Companies, for the Fiscal Years : — Dividends and Additions to Sur- plus Circulation Deposits . Capital . 7GG,G0G 1,577,011 2,056,996 780,723 1865. 3,9S7,210| 1,993,342 2,040,933 902,835 1866. 4,186,023 990,328 2,099,635 374,074 1867. 1868. 1869. $ 3,774,975 3,624,774 3,769,185 208,276 26,901 14,110 1,355,395 1,438,512 1,734,417 476,867 399,562 445,071 1870. Dividends and Additions to Sur- plus Circulation Deposits . Capital . 3,573,272 13,615 2,177,576 827,087 The duty on dividends was three per cent to June 30, 1864, after which date it was five per cent. This is more properly a collection on account of the income tax. Capital was first rendered dutiable in 1864. The rapid diminution in the receipts from circulation after 1865 is due to the conversion of State banks into national ones. The returns from national banks are not included in the above, but were collected by the Treasurer of the United States. In 1867 the comptroller made a careful statement of the taxes on national banks for the year 1866, from which it appears that they paid during that year over sixteen millions of dollars in United States and State taxes, as follows : — 110 THE INTERNAL REVENUE SYSTEM. Taxes paid by National Banks in 1866. To the United States government $8,069,937 To the several States 7,949,461 The amount of taxes paid to the several States was derived from specific returns of about fourteen hundred banks, the minimum rate in each State being calculated for those banks which made no returns. The taxes were payable semi-annually, upon out- standing circulation, deposits, and capital not invested in United States bonds. The amount of taxes collected by the Treasurer from Jan. 1, 1864, to Jan. 1, 1872, from these sources, was as follows : — On circulation 819,177,734.54 On deposits 18,611,945.72 On capital 2,453,025.17 The taxes on corporations were collected directly by the internal revenue office at Washington ; and the whole work, which was well done, was handled by less than fif- teen clerks, at an average annual cost of about $20,000. IV. ASSESSED TAXES, KNOWN AS SCHEDULE "A." The assessed taxes, as levied during the war, were viewed as duties upon expenditure, and correspond to the direct consumption taxes of the English system. Levied, as they were, mainly upon certain classes of luxuries, but little objection can be raised to them, were it but possible to secure a fair and equitable assessment. But the experience of our States has demonstrated this to be well-nigh impossible ; and while such taxes have always been more or less popular in this country, where the principle seems to obtain that equality in taxation DIRECT TAXES ON PERSONS AND PROPERTY. Ill is only consistent with universality in taxation, late years have tended to their elimination from the tax schedules of many States. In a federal system such taxes are especially objectionable ; inasmuch as they necessitate that inquisitorial penetration into private affairs which is borne only with impatience in local taxation, but which becomes intolerable when the tax- gatherer bears Federal credentials. Indefinite in their productivity and inelastic in character, they tend to extend the objects of taxation unduly, and combine almost all the defects of the excise with those of the income and direct land tax. As a rule, they are being abandoned by other countries. The schedule of assessed taxes subsequent to the amendatory law of 18G4 was as follows : — Billiard-tables kept for private use or hire . $10.00 Carriages for private use or hire, according to value, from 1.00 to 10.00 Pianofortes for private use, according to value, from 2.00 to 6.00 Gold plate for private use or hire, per ounce troy .50 Silver plate for private use or hire, per ounce troy .05 Watches, below $100 in value 1.00 Watches, above $100 in value 2.00 Yachts for private use or hire, according to value 5.00 to 100.00 These rates differ from the earlier measures only in the addition of gold watches and piano-fortes to the list of tax- ables, and in the fact that the rates are somewhat higher. The same improvement in the collection of the duty marked in other taxes is noticeable here ; but, at the same time, there are none which show more strikingly 112 THE INTERNAL REVENUE SYSTEM. how far from universal was the collection. As will be seen from the table given below, the revenues show a gratifying increase during the five years from 1863 to 1867, in the last two years increasing nearly one hun- dred per cent annually. Of the increase in 1866, gold watches produced $426,557, and pianofortes $403,572. The receipts were as follows ; — Receipts from Assessed Taxes for Fiscal Years: — ARTICLES. Billiard-tables .... Carriages Plate of gold and silver Watches, gold .... Pianofortes kept for use Yachts kept for use . . Imported spirits . . . Total 1863. § 10,730.S0 243,704.05 108,736.58 2,459.50 §365,630.93 1864. S 67,999.59 320,076.12 130,090.65 2,673.50 176,038.57 §696,878.43 1865. § 67,753.70 322,720.21 118,113.57 9,138.61 7,751.82 2,098.33 252,690.29 §780, 266.53 ARTICLES. 1866. 1867. 1868. Billiard-tables .... Carriages Plate of gold and silver Watches, gold .... Pianofortes kept for use Yachts kept for use . . Imported spirits . . . S 17,353.05 624,457.02 216,574.37 426,557.17 403,572.27 4,408.25 200.00 S 20,761.14 183,855.58 287,842.93 619,062.61 1,005,152.11 § 23,422.12 224,004.85 252,563.70 605,788.71 27,960.60 Total §1,093,122.73 §2,116,674.37 $1,134,339.98 ARTICLES. Billiard-tables . . Carriages .... Plate of gold and silver Watches, gold . . Pianofortes kept for use .... Yachts kept for use. ...... Imported spirits Total . . . § 22,805.92 184,035.00 204,733.13 471,286.68 10,792.73 §893,653.46 1870. J 25,775.56 190,711.45 198,115.89 492,839.19 1871. 13,487.70 83,005.13 90,145.84 190,221.78 §907,442.09 §376,860.45 Total. J 270,089.58 2,377,170.01 1,606,916.66 2,814,894.75 1,455,229.53 11,639.58 428,928.86 §8,964,868.97 DIRECT TAXES ON PERSONS AND PROPERTY. 113 Such a showing indicates that time is a most essential element in an efficient system of taxation; but, at the same time, it is difficult to believe that anything like a full assessment was secured at any time. The assessed taxes were among the least defensible of the taxes imposed during this period, the revenues derived therefrom being inconsiderable in amount, and the effect upon the public irritating beyond measure. Even more keenly than the income tax did the public resent this invasion into its private affairs, while the ease of evasion rendered it one of the most unequal of taxes, as well as a constant incentive to dishonesty and perjury. Although modified to some extent, it was not until 1870 that they were repealed. 1 i Act of July 14, 1870. 114 THE INTERNAL REVENUE SYSTEM. CHAPTER V. TAXES ON" SUCCESSIONS, ACTS AND TRANSFERS, IN- STRUMENTS, COMMODITIES, AND BUSINESSES. I. DUTIES UPON LEGACIES AND DISTRIBUTIVE SHARES OF PROPERTY. A. Legacy and Succession Duties. Taxes upon inheritances and bequests, or death duties as they are termed in England, may best be regarded as capitalized income taxes, paid once for all at the close of life on the accumulated possessions of the decedent. These taxes usually accompany the income tax, and have been so largely developed in recent times as to have become a recognized part of nearly every well-ordered scheme of taxation. Previous to the war, however, they were but little used by our States, and then only as imposed upon collateral inheritance. 1 By the provis- ions of the early Acts of Congress, only personalty in excess of $1,000, transferred by bequest or inheritance, was subject to the duty; and the rate was graduated according to the consanguinity of the recipient of the estate. By the later Act of 1864, however, its provisions were extended to real estate, and the following rates were established : — 1 The tax has existed in Pennsylvania since 1826, and in Maryland since 1844 ; but since that time it has been incorporated in the laws of many States. TAXES ON SUCCESSIONS. 115 Legacies or inheritances to — Lineal issue, or ancestor, brother or sister 1 . . . 1 per cent. Descendant of brother or sister 2 " " Uncle or aunt, or descendant of same .... 4 " " To great uncle or aunt, or descendant of same . 5 " " Stranger in blood 6 " << A minimum deduction of $1,000 was allowed the representatives, while estates devolving upon husband or wife were entirely exempt. The tax was a first lien upon the estate of the decedent, and was required to be paid before it passed into the hands of the repre- sentatives. In case of failure to make return, or on evidence of falsity in the same, the assessor was em- powered to proceed and make his own assessment, and distrain sufficient property to satisfy the tax. The rates were soon recognized as incommensurate with those imposed on other objects, which fact, together with the newness of the law, as well as the ignorance of the public and the assessors with its application, rendered it less productive than had been expected. So incomplete, indeed, was the assessment, that the Special Commissioner of the Eevenue estimated that but a frac- tion of the tax was collected ; 2 for instead of producing $4,000,000, as he estimated that it should have done, it turned into the Treasury in 1865 but $543,000. A similar tax was producing at that time in Great Brit- ain over $11,000,000. In New York alone, where the transfers of property by death amounted in a single year to $31,000,000, it should have produced, at the uniform rate of one per cent, $310,000, or two-thirds 1 In the case of realty the rate imposed upon the succession of brother or sister was two per cent. 2 Report, 1807, p. 40. 116 THE INTERNAL REVENUE SYSTEM. the amount collected for the entire country. Again, when it is considered that the entire wealth of the country changes hands once every thirty-two years (as- suming that period to be the lifetime of a generation), it is evident that a very small tax-rate ought to be pro- ductive of a very large revenue. Assuming $14,830,000,000 (the census estimate for 1860) to be the wealth of the country, and computing that it changes hands once in the course of a genera- tion, the tax should have produced $4,600,000 anually at the uniform rate of one per cent. As a matter of fact, only about two-thirds of the revenue collected accrued at this rate ; so that, had the duty been fully assessed, it should have returned to the Treasury up- wards of $6,000,000. From 1865 down to the repeal of the tax in 1870, the collections steadily increased in amount, owing to the growing familiarity of the public and officials with the law. In 1866 the receipts had risen to $1,170,977. During the four years next succeeding they steadily increased, until, in 1870, $3,091,824 was returned. The repealing Act of 1870 did not waive the claim of the government to any "taxes properly assessed or lia- ble to be assessed or accruing under the provisions of former Acts ; " and in 1875 the Commissioner of Inter- nal Revenue issued a circular, offering rewards to any informers who would mouse the probate records, and report cases of unpaid taxes. The effect of this rul- ing was to cause much annoyance to many innocent administrators, heirs, and legatees who had never heard of the tax, and to whom the duty, to which was added the penalty, was a great injustice. TAXES ON SUCCESSIONS. 117 The receipts from the tax were as follows : — Receipts from Intestate Succession. Consanguinity. For Fiscal Tears ended IlNK 30,— 1863. 1864. 1865. 1866. Successions — Lineal issue or ancestor, Brother or sister, or de- $24,043.88 $175,789.10 8,468.35 49,899.07 Uncle or aunt, or de- 1,166.75 1,902.02 Great uncle or aunt, or descendant of same . 6,272.34 1,460.63 17,104.06 Total $39,951.32 $246,154.88 CONSANGUINITT. For Fiscal Years ended June 30,— 1867. 1868. 1869. Successions — Lineal issue or ancestor, Brother or sister, or de- $455,188.55 $910,794.70 $852,487.82 scendant of same . . Uncle or aunt, or de- 104,381.81 222,386.63 182,167.38 scendant of same . . Great uncle or aunt, or 9,639.32 20,174.14 12,952.44 descendant of same . Stranger in blood . . . 7,780.86 59,579.C5 4,840.77 140,827.36 3,796.91 138,351.67 $636,570.19 $1,305,023.60 $1,189,756.22 CONSANGUINITT. For Fiscal June Ye w:s ended 30,— Total. 1870. 1871. Successions — Lineal issue or ancestor, Brother or sister, or de- $977,068.40 $751,176.79 $4,146,549.24 scendant of same . . Uncle or aunt, or de- 222,196.35 171,843.72 961,343.31 scendant of same . . Great uncle or aunt, or 32,775.00 16,511.66 95,121.33 descendant of same . Stranger in blood . . . 9,754,46 177,448.36 1,499.28 133,948.34 $5 29,132.91 679,531.78 $1,074,979.79 ,911,678.57 118 TIIE INTERNAL REVENUE SYSTEM. Receipts from Legacies. Consanguinity. For Fiscal Years ended June 30, — 1863. 1864. 1865. 1866. Legacies to — Lineal issue or ancestor, brother or sister . . Descendant of brother Uncle or aunt, or de- scendant of same . . Great uncle or aunt, or descendant of same . Stranger in blood . . . §25,869.10 11,332.63 634.56 2S5.7S 18,470.48 §176,917.33 37,64S.61 12,232.63 322.22 84,040.23 $298,756.48 87,081.04 25,840.81 16,460.79 78,612.73 $642,081.67 105,531.17 28,993.27 11,300.39 136,917.47 Total §56,592.61 §311,161.02 §506,751.85 $924,823.97 Consanguinity. For Fiscal Years ended June 30,— 1867. 1868. 1869. Legacies to — Lineal issue or ancestor, brother or sister . . Descendant of brother Uncle or aunt, or de- scendant of same . . Great uncle or aunt, or descendant of same . Stranger in blood . . . §783,126.52 177,394.46 32,075.56 15,012.71 221,135.71 §1,033,833.57 172,854.33 40,375.63 13,506.37 257,817.74 §858,428.84 142,406.46 42,549.01 20,6S0.03 180,772.67 §1,228,744.96 $1,518,387.64 $1,244,837.01 Consanguinity. For Fiscal Years ended Junk 30,— Total. 1870. 1871. Legacies to — Lineal issue or ancestor, brother or sister . . Descendant of brother Uncle or aunt, or de- scendant of same . . Great uncle or aunt, or descendant of same . Stranger in blood . . . $1,022,834.88 232,251.13 28,217.77 11,907.71 377,371.44 §874,940.37 216,356.56 38,640.13 13,366.56 286,771.72 §5,716,794.82 1,182,856.39 249,565.37 102,842.56 1,041,910.19 §1,672,582.93 $1,430,087.34 §8,893,009.33 TAXES ON SUCCESSIONS. 119 B. Probate, Administration, and Inventory Duties collected by Means of Stamps. In addition to the taxes upon legacies and successions assessed upon the value of the property transferred, certain other charges collected by means of stamps were assessed upon the administration of the estate of the decedent. Probably the first reference to in- heritance taxes in the United States is to be found in the report of a special committee on finance, which recommended to the House of Representatives, in 1794, the imposition of graduated stamp duties upon inven- tories of the effects of deceased persons, receipts for legacies of personal property according to the value thereof, as well as upon the issuance of letters of ad- ministration, and the probate of wills. 1 Three years later, among other duties upon legal in- struments, there were levied the following taxes to be collected by means of stamps : 2 — Upon receipts for legacies and shares of personal property : — Between $ 50 and $100, a tax of $0.25 Between 100 and 500, a tax of 0.50 For each additional 500, a tax of 1.00 Shares under $50 were exempt, as were those of wid- ows, children, and grandchildren. The Act continued in force four years, and was re- pealed in 1802, along with the other internal taxes. During the war of 1812 no taxes upon inheritances were levied, although Secretary Dallas, in the closing 1 State Papers, Finance, vol. L, p. 277. 2 Act of July 6, 1797. 120 THE INTERNAL REVENUE SYSTEM. days of the struggle, reported a plan to Congress for their imposition. By the Act of July 1, 1862, the following stamp duties were imposed upon the probate of wills or let- ters of administration : — "Where the estate does not exceed $ 2,500, a tax of $ 0.50 Where the estate exceeds $ 2,500 but not 5,000, a tax of 1.00 W T here the estate exceeds 5.000 hut not 20,000, a tax of 2.00 Where the estate exceeds 20,000 but not 50,000, a tax of 5.00 Where the estate exceeds 50,000 but not 100,000, a tax of 10.00 Where the estate exceeds 100,000 but not 150,000, a tax of 20.00 By the Act of June 30, 18G4, the above duties were increased to $1.00 on any estate below $2,000 ; while for every $1,000, or fraction thereof in excess of $2,000, an additional 50 cents was charged. In addition, all bonds, receipts, or other legal documents connected with the administration of an estate, were also taxable. II. TAXES UPON LEGAL INSTRUMENTS, COMMERCIAL TRANSACTIONS, AND COMMODITIES, COLLECTED BY MEANS OF STAMPS. Like the impots de timbre of France and the stamp taxes of England, the stamp tax does not designate a separate tax as such, but merely denotes the mode of collecting taxes upon certain acts, instruments, or commodities by means of stamped government paper. Modern society has accepted this method of making collections as at once the easiest, and as offering- great conveniences for apportioning a tax according to value. At the present time, substantially all internal revenues TAXES ON LEGAL INSTRUMENTS. 121 are collected by this means, although during the war the use of the term was restricted to the duties upon acts, instruments, and the transfers of property, as well as to the method employed in taxing certain kinds of commodities, as patent medicines, cosmetics, drugs, and playing-cards. Since 1868 the duty upon tobacco, malt liquors, distilled spirits, and licenses has been collected in this Avay, as the use of stamps has not only simpli- fied the administration, but has been found to deter evasion by rendering it easily discoverable. The experience of the government during the period under consideration seems to indicate that these taxes were among the most satisfactory hit upon by Congress in its search for sources of revenue ; for they were not only productive from the start, producing ten per cent of the revenues in 18G3, but were found to be very elastic, and susceptible of indefinite increase as business became adjusted to their use. Inexpensive to collect, they bore mainly upon those whose transactions were frequent, and, in the case of legal and commercial trans- actions, were a payment for a privilege enjoyed. In- dustry was not greatly disturbed by them, nor were prices ; for they were specific in amount and easily com- puted. They were imposed upon written or printed instruments, or the commodity itself, and derive their name from the fact that the stamp bore upon its face the amount of the duty paid. By the law of 1862 these taxes were imposed upon a great variety of articles and proceedings, which may be divided into three general classes, as follows : (1) taxes on legal instruments, as writs, deeds, contracts, mortgages, conveyances, leases, manifests, probates, pow- 122 THE INTERNAL REVENUE SYSTEM. ers of attorney, etc. ; (2) those upon commercial pro- cesses, as checks, drafts, and foreign and inland bills of exchange, bills of lading, parcels by express, bonds, certificates of stocks, insurance policies, charter parties, etc ; (3) taxes upon commodities, as patent medicines, perfumer}', cosmetics, playing-cards, and other products which could be more easily assessed by this means than by the general ad valorem or specific taxes. In the majority of cases, the tax was essentially proportional, and was assessed either according to the amount of the consideration specified in the instrument, or to the value of the commodity itself. For example, the fee for recording a mortgage ranged from fifty cents on a consideration of $500, to $15 on $20,000, while the duties upon commercial processes and manufactured products conformed to a, rough ad valorem rate. For- eign bills of exchange were taxed at a lower rate than inland bills, although both were proportional ; while telegraph despatches, express packages, etc., were taxed in a like manner. The rate upon patent medicines, cosmetics, playing-cards, perfumery, etc., was four per cent. To insure observance of the tax, penalties were imposed for failure to affix a stamp ; while an even more efficient check to evasion lay in the invalidity of the instrument itself and its inadmissibility as evidence. In order to prevent the re-use of stamps, the person affixing the same wrote across the face his initials and the date of use. Under certain regulations persons were permitted to prepare and use their own stamps, and were allowed a commission thereon. Later laws modified these provisions but little. Eates were made more uniformly proportional, while a number TAXES ON COMMERCIAL TRANSACTIONS. 123 of new articles, notably matches and photographs, were included in the schedule. As a rule, the taxes were so inconsiderable in amount as to be but little objection- able ; but in the case of mortgages they were rather oppressive. Declared payable by_the person in whose favor the instrument was drawn, the tax amounted to a one mill charge, repeated every time the mortgage was renewed ; and, inasmuch as such instruments are frequently made under the pressure of distress, a tax at such a time is most inconvenient, and may cause some hardship. Discounts were also granted large purchas- ers of stamps of five per cent upon quantities between fifty and five hundred dollars, and of ten per cent upon quantities in excess of that sura. In this provision lay a great injustice, which later tended to the stimulation of combination in production ; since small manufacturers were frequently unable either to advance the tax or to take advantage of the discounts, which w r ere sufficiently large to be of themselves a remunerative profit to the large purchaser. As a consequence, they were fre- quently forced to the wall, or into combination with other producers, as was the case of the match monop- oly, which for years controlled that industry in this country, and which is said to have been rendered possi- ble, and later fostered, by this sort of special legisla- tion. Yet another objection may be urged against these taxes because of their interference with industry; for while it cannot be asserted that the tax was in many instances a serious check to trade or commercial trans- actions, still it was an irritant, insisting, as it did. upon the affixing of a stamp to every check or receipt, and upon every bill of exchange a graduated tax. To this 124 THE INTERNAL REVENUE SYSTEM. extent it interfered with credit transactions, and ren- dered trade less spontaneous and free than it otherwise would have been. When interfering with the minutiae of trade in this way, such taxes may well be the cause of complaint; in so far as they are applied only to transfers of consid- erable amount by deed or other instrument, but little objection can be made to them, inasmuch as they then assume the form of a fee, and are a partial concession to that school of advocates who view taxes as a payment for services rendered. The stamp tax was from the start productive, easy of assessment, and very elastic. From its inauguration in 1863, down to the partial repeal subsequent to the close of the war, the receipts steadily increased in amount, owing to the growing familiarity of the public with the law, until in 1867 it produced $16,094,718, which sum the secretary estimated could be further increased to $20,000,000 without material alteration in the law. 1 All things considered, it was one of the most satisfac- tory experiments of Congress, but from the administra- tive point of view it had possibly most to commend it. Upon this point the commissioner, writing in 1863, says: "Among the most satisfactory branches of our excise law must be reckoned that which levies stamp duties on documents and evidences. This tax is of all others the most cheaply and easily collected, and most cheerfully borne; and, in the future development of our system, it is the one from which most advantage may yet be expected from a gradual and judicious extension." - i Report on Finances, 1869, p. 12. 2 Ibid., 1863, p. 70. TAXES ON COMMERCIAL TRANSACTIONS. 125 The receipts for the several years of its duration were as follows : — 1863 . . $4,140,175 1868 . . $14,852,252 1864 . 5,894,945 1869 . . 16,420,710 1865 . . 11,162,392 1870 . . 16,544,043 1866 15,044,373 1871 . . 15,342,739 1867 . . 10,094,718 1872 . . 16,177,320 These receipts include collections from acts and in- struments, as well as commodities. During the years of 1863 and 1864, the measure was by no means uni- versally observed ; and the later marked increase in re- ceipts can only be traced to the growing familiarity of the public with the provisions of the law, as the increase in rates by the Acts of 1864 and 1865 was not material. In 1864 a duty on matches, which lingered long after the war as a memorial, was imposed, and produced up- wards of a million of dollars during the first year of its operation. From the returns, it appears that six-sevenths of the entire consumption consisted of two-cent bank-check and receipt stamps, the several stamps upon proprietary articles, and the duty on matches ; while one-third of the total receipts in 1865 was derived from bank- checks, receipts, and matches, two and one half millions being derived from the two former sources alone. Large as the return from matches appears, it was considerably depleted by the large quantity produced and stored in anticipation of the tax. From 1865, down to the complete repeal of the tax, the observance of the tax improved, and the law was all but universally observed. 126 THE INTERNAL REVENUE SYSTEM. III. THE TAX ON SALES AT AUCTION, OF APOTHECARIES, BUTCHERS, BROKERS, CONFECTIONERS, DEALERS, PLUMBERS, AND MANUFACTURERS. A tax was first imposed upon property sold at auction at the instance of Hamilton, in 1794, who probably bor- rowed the idea from a similar tax imposed in England by Lord North in 1771 for the conduct of the war against the American Colonies. This tax continued in existence until 1800 ; and while the receipts therefrom continued to increase in importance, they never amounted to more than one-half the yield originally estimated. The tax was revived under the emergencies of the war of 1812, and remained in force for several years. Evasions of the tax were notorious. Assessments were voluntary, and the collection of the tax depended wholly upon the conscience of the auctioneer, to whom was intrusted the duty of collecting it. The tax was revived in 18G2, 1 and was levied at the rate of one-tenth of one per cent on the gross amount of receipts from sales at auction of real estate, goods, chattels, or securities. Keturns were required monthly, under oath ; but all sales under judicial proceedings were declared exempt. Two years later 2 the rate upon auc- tion sales was increased to one-fourth of one per cent, and was extended to brokers and bankers at the rate of one-eighth of one per cent on sales of merchandise, produce, or goods ; and of one-twentieth of one per cent on the par value of all sales of stocks and bonds, gold and silyer bullion, foreign exchange, and promissory i Act of July 1 . - Act of June 30, 1864. TAXES ON COMMERCIAL TRANSACTIONS. 127 notes. These taxes were in addition to the regular license fees. From evidence taken by the Revenue Commission, it appeared that the rates upon brokers' sales were heavier than the business would bear, and widespread evasion was the result. 1 In conformity with its suggestions the rates on receipts from such sales were reduced to one cent on every hundred dollars of the amount of such sales, while an improvement in the method of assess- ment was introduced in the requirement that upon every contract or sale there should be affixed a stamp in value equal to the amount of the duty. By the same measure the rate on sales at auction was reduced to one- tenth of one per cent. 2 The result of these changes was to reduce receipts from the latter source by about one- half ; from the former sixty per cent. Although the taxes on sales were acknowledged to be notoriously evaded, constant pressure was brought to bear to have the method extended to all sales of goods and merchandise, as a substitute for the general excise upon manufactures and products. In the early days of the war the Chamber of Commerce of New York advo- cated such a measure, while the manufacturers of the country generally favored it. In 1864 the commissioner advocated a moderate resort to the tax on sales as a means for meeting a deficiency in the revenues, although he admitted that it was unsuited as a fixed portion of the system without important change. With it extended so as to include all sales of merchandise, at the rate of one-half of one per cent, levied the same as the taxes 1 Report of Revenue Commission, p. 33. 2 Act of July 13, 18(36. 128 THE INTERNAL REVENUE SYSTEM. upon brokers and wholesale dealers, he estimated that $55,000,000 could be collected, a conclusion reached in the following manner : Prom the most reliable statistics available, it appeared that the value of all the products of the country for the year 1863 was $3,800,000,000. Assuming that, on an average, they would be sold four times before reaching market, and that three-fourths of the annual production was exchanged, it appeared that the annual sales of manufactures and products aggre- gated $11,000,000,000, upon which a tax of one-half of one per cent would yield $55,000,000. The advan- tages of such a tax were thought to be numerous. It would be immediately productive of a considerable sum, and would cause but little disturbance to industry. Pay- able out of mone}" received, and at the time of receiving it, it would be easily borne. The seller would add the tax to the price, and anticipate the demands of the gov- ernment ; and the purchaser, if he bought to sell again, would reimburse himself from the consumer. The tax also commended itself to the commissioner by the facility of its assessment and collection. 1 But the advantages claimed for the tax by the com- missioner were, in reality, the main objections to it. Experience demonstrated the difficulty of securing any- thing like a fair return from those classes of business already subject to it, and the history of similar experi- mentation in our States but confirms it. If confined to manufacturers and producers, and levied but once, it would be no more objectionable than an ad valorem rate upon production ; but when repeated at every op- eration and transaction from the time an article first 1 Report on Finances, 1864, p. 60. TAXES ON COMMERCIAL TRANSACTIONS. 129 entered the market to the time of its final consumption, it becomes not unlike a barrier to all trade, checking that freedom of exchange so essential to large industrial life, and requiring in its assessment a multitude of officials and the most scrutinizing inquisition of business affairs. It would, moreover, be a breeding-school for perjury, and open the door for evasion on every hand. Such a tax can only be collected when limited to a few taxables, and even then should only be imposed as a last resort. Happily, the changes urged by the manufacturers at the suggestion of the commissioner were not made, although the application of the tax was considerably extended. In 1867 it was provided that apothecaries, butchers, confectioners, plumbers, and gas-fitters, whose annual sales exceeded $25,000, should pay one dollar for every $1,000 of sales in excess of said amount, in addition to the special license tax ; while in 18G8 certain classes of manufacturers, whose products were not otherwise taxed, were assessed at the rate of $2.00 per $1,000 on sales in excess of $5,000. These duties, like those on auctions, were self-assessed ; yet they yielded considerable reve- nues; the duty upon dealers producing $4,002,655 in 1868, and on manufacturers $3,863,113 in 1870. The last assessment of these taxes Avas made in 1871, and the receipts therefrom during the nine years of its operation were as shown on the two following pages. IV. SPECIAL OR LICENSE TAXES UPON OCCUPATIONS AND GAINFUL PURSUITS. In the taxation of business corporations, occupations, and gainful pursuits, federal legislation followed the methods in vogue in the majority of the States of assess- 130 THE INTERNAL REVENUE SYSTEM. Receipts from Sales. Occupations and Transactions. Foe Fiscal Years ending June 30— 1863. 1864. 1865. s s 141,231.58 410,175.92 596,474.24 2,202,792.92 432,343.23 420,457.23 64,003.87 Brokers' — Cattle Sales of stocks, bonds, etc. . . . Sales of foreign exchange . . . Sales of gold and silver .... Dealers', in liquors, on sales of other Plumbers' and gas-fitters' Total 64,003.87 141,231.58 4,062,243.54 Occupations and Transactions. For Fiscal Years endh g June 30 — 1866. 1867. 1868. s •s 240,248.03 203.56 07,674.23 415,169.97 ( 006,599.22 2,369,464.70 1 1,489.79 186,727.50 5,796.71 110,858.96 286,438.4G 231.33 67.76 4,002,655.99 1,642.54 503,251.35 Brokers' — Cattle Sales of stocks, bonds, etc. . . . Sales of foreign exchange . . . Sales of gold and silver .... 870,080.00 1,429,829.77 152,417.56 1,046,704.23 Dealers', in liquors, on sales of other 4,002,282.91 3,999,360.31 4,595,909.04 TAXES ON COMMERCIAL TRANSACTIONS. 131 Receipts from Sales (continued). Occupations and Transactions. Apothecaries' Auction Butchers' Brokers' — Cattle Commercial Sales of stocks, bonds, etc. . . . Sales of foreign exchange , . . Sales of gold and silver .... Confectioners' Dealers' Dealers', in liquors, on sales of other merchandise Manufacturers' Plumbers' and gas-fitters' Total For Fiscal Years ending June 30 — 1,940.16 175,078.52 10,822.60 120,718.20 301,579.03 2,366.39 4,081,696.19 9,055.51 3,501,962.66 1,619.77 8,206,839.03 1870. 4,094.46 160,884.43 11,200.62 131,803.76 339,784.16 2,196.70 4,023,100.05 299,575.97 3,863,113.05 1,641.77 8,837,394.97 812.52 49,421.83 2,649.76 49,709.96 123,430.59 329.48 1,264,566.19 87,438.09 2,070,910.18 373.48 3,049,642.08 inent by a specific lump sum, instead of upon the net earnings, rental paid, or gross sales. This plan, which has been discarded long since by the majority of Euro- pean countries, has the evident advantage of simplicity and ease of assessment ; but in this simplicity there inheres so much that is arbitrary and unjust, that it is doubtful if there is to be found a tax more unfair to mercantile classes than this. 1 In evidence of this state- ment, it is only necessary to indicate the incidence of such a tax ; for, instead of its being a duty proportional to the amount of sales, and thus susceptible of diffusion 1 Cf. " Taxation in American States and Cities," p. 2fifi, in which Dr. Ely indicts the tax as " a most vicious one from every point of ■\ lew," 132 THE INTERNAL REVENUE SYSTEM. among the consumers, it is in effect a fixed and arbitrary- requisition, imposed as a condition precedent to the privilege of doing business. By such a plan the large producer or merchant pays the same duty as his neigh- bor selling one-half or one-third the amount of goods, and is thus able to distribute the amount over a larger surface, or to assume the tax altogether, and crush out the less fortunate competitor. 1 Such at least is the ten- dency of a tax assessed by such methods. That its in- justice was not a source of complaint at this time is not due to the principles of assessment employed, but rather to the fact that the rates of duty were comparatively low, and an inconsiderable burden upon even the small- est dealer. In fact, it was one of the most popular of the taxes, judging from the evidence of the Special Commissioner of Eevenue, who, writing in 1867, said : " It should be clearly borne in mind that all our revenue experience during the last five years has conclusively shown, that, with the exception of stamps, there is no class of taxes which are paid so readily and promptly ; are collected with so little trouble and- expense by the government officials, and impede to so small a degree the industry and development of the country as the so- called license taxes." 2 In a like manner Mr. Morrill viewed them as the least offensive of the excise taxes, the only possible exception to them being the " novelty " of imposing a tax upon any lawful occupation ; but even this objection vanished, he said, when it is considered that a license is not so much a permit for carrying on i See "Shifting and Incidence of Taxation," p. 168, by Professor E. R. A. Seligman. 2 Report of Special Commissioner of Revenue, 1867, \>. 4J. TAXES ON COMMERCIAL TRANSACTIONS. 133 business, as it is a recognition of the trade and a desig- nation of the premises in which the industry is to be transacted. 1 With such indorsement, it is not surprising that the system was very diffuse. At the time of its greatest extension all classes of corporations and persons carry- ing on trade were taxed, while persons conducting dif- ferent pursuits in the same place, or the same pursuit in different places, were taxed upon each establishment separately. By the provisions of the law any person or corpora- tion carrying on business was required to register, and to furnish to the assessor any information requisite to the affixing of the tax. In the majority of cases this was a simple matter, as the rate was uniform upon all persons in that trade. The prevailing rate of duty was $10, imposed upon professional men, retail dealers gen- erally, and brokers. Banks paid a license of $100 ; dis- tillers, maltsters, brokers, and wholesale dealers, of $50 ; hotels from $5 to $200, according to the rental value of the premises occupied. 2 Later amendments aimed to render the duties roughly proportional, although no at- tempt was made to levy an exact percentage tax on sales, as was frequently proposed in Congress. Thus banks, in addition to a stamp-tax of $100, were as- sessed $2.00 on each $1,000 of their capital stock in excess of $50,000. Wholesale dealers, pawnbrokers, peddlers, and others also paid in proportion to annual sales. From an administrative point of view, and in the 1 Congressional Globe, 1802, p. 1195- 2 Act of July 1, 18G4. 134 THE INTERNAL REVENUE SYSTEM. light of results attained, the tax had much to commend it, for none was easier of assessment, and in none was evasion more difficult. Moreover, the revenues were considerable and rapidly increased in amount, the bulk of the receipts being returned from bankers, brokers, wholesale dealers, hotels, liquor dealers, and manufac- turers. In 1866 the total receipts from all classes were $18,015,743, of which amount $12,596,059 was collected from these six sources, while the thousands of retail dealers, professional men, peddlers, agents, etc., returned less than one-half that amount. The total receipts from this source during the years from 1863 to 1870 were as follows : — 1863 . . $ 6,824,178 1867 . . $ 18,103,615 1864 . . . 7,145,388 1868 . . . 15,966,313 1865 . . . 12,598,681 1869 . . . 16,420,710 1866 . . . 18,015,743 1870 . . . 16,544,043 The marked advance in receipts in 1865 and 1866 was due to the increased number of persons subject to the charge under the Act of 1864, to the advance of the duty upon several kinds of business, and the re- assessment of wholesale dealers. Moreover, by 1866 the tax had been extended to the greater portion of the South. At the termination of the war, it was pro- posed that the license taxes be continued, and extended as much as possible, in order that the general excise upon manufacturers and products might be more read- ily relinquished. This suggestion was followed in some instances ; and the system was retained up to 1871, when the last assessment was made. As indicative of the relative productivity of different TAXES ON COMMERCIAL TRANSACTIONS. 135 occupations, the following table compiled for the fiscal years 1865, 1866, and 1867 is of interest. Receipts from Special Taxes for Fiscal Years : — 1865. 1866. 1867. Apothecaries .... Assayers Auctioneers .... Bankers Brewers Brokers of various sorts Claim agents .... Dealers, — Retail Wholesale .... Retail liquor . . . Wholesale liquor Distillers, — Coal-oil, etc. . . . Spirituous liquors . Apples, grapes . . Hotels Insurance agents . . Lawyers Manufacturers . . . Peddlers Physicians and surgeons Rectifiers §32,872.43 10,883.08 80,515.18 846,086.58 77,747.00 5S1.450.2S 50,782.29 1,G06,77S.53 3,513,104.76 2,205,866.38 400,692.91 16,024.8S 46,661.22 13,236.35 415,279.05 21,009.88 190,377.25 635,115.51 459,298.60 302,847.30 48,781.52 §43,712.86 12,889.19 89,724.42 1,262,649.05 105,412.23 673,260.30 70,637.39 1,949,017.04 5,428,344.86 2,807,225.59 801,531.32 17,350.12 81,295.06 20,239.31 580,021.56 104,866.83 264,836.75 1,043,030.78 079,013.63 425,596.66 61,300.91 $55,447.42 12,211.24 98,0S4.86 1,433,715.79 238,155.14 598,854.94 84,627.49 2,047,S00.77 3,SS0,281.13 2,960,683.73 982,134.94 21,809.32 174,445.71 57,332.15 663,656.32 148,647.85 357,648.41 1,296,487.27 708,113.28 549,308.64 80,470.06 136 THE INTERNAL REVENUE SYSTEM. CHAPTER VI. INDIRECT TAXES UPON CONSUMPTION. I. DISTILLED SPIRITS. The well-nigh universal experience of foreign states, the more recent history of our own excise, as well as the demands of social, economic, and fiscal considerations, unite in admitting distilled spirits to be a most proper object for taxation. First imposed in England by Charles II., taxes on spirits have since become one of the most considerable sources of revenue in nearly every civilized State. At the present time nearly all the German States, Bussia, France, Great Britain, Italy, Austria, Spain, Belgium, The Netherlands, Turkey, Den- mark, and Portugal tax this article in some form or other, 1 while in the United States the internal taxes alone on whiskey produce nearly one-third of the entire revenue from the customs and inland duties. 2 Saving the tentative efforts of Hamilton, and the later " temporary war taxes " of 1814 and 1815, the distiller had been relieved from the visits of the tax- gatherer in this country from the time of the adop- tion of the Constitution down to the Civil War, and 1 Vide " Finanz Archiv, 1887, Die Brantweinsteuer," Dr. J. Wolf, p. 320, in which the author gives the historical development of the tax, as well as the existing systems in various countries. 2 In 1894 the total receipts from the customs and the excise were $278,929,762, the internal tax on whiskey producing $85,259,252 of this amount. INDIRECT TAXES UPON CONSUMPTION. 137 the industry grew in importance, freed from all re- strictions, until the production of whiskey was one of the chief industries of the nation, and the still, like the cider-press of a later day, became an almost necessary appendage to every farm. So universal, in fact, was the consumption of whiskey, that in 1860 it was computed by the census returns that over ninety millions of gallons were produced annually in the United States, of which no more than three millions were for foreign export ; while the cost of production was so low, that the ruling price for the five years preceding the war was but twenty-four cents' per gal- lon. It is by no means to be inferred that all of this product was for personal consumption. 1 In the prep- aration of many patent medicines, it was utilized as the stock or body of the article ; while so important was its use in the production of a certain burning fluid that it has been estimated that in 1860 over twenty-five million gallons of alcohol were consumed in this way. The cheapness of the article made its use possible in a variety of domestic industries, while in the preparation of varnishes, imitation wines, per- fumery, hair tonics, etc., it was a prime ingredient. One of the reasons why such commodities as dis- tilled spirits, tobacco, and malt liquors find such favor in the eyes of financiers is what Professor Marshall calls the "inelasticity of their demand." Consump- tion does not vary with price, it is said, as it does in 1 In 18C>5 the Revenue Commission estimated that the amount of spirits required to supply the consumption of the country for drink- ing purposes was thirty-eight million gallons, while from three to six million gallons were required for industrial purposes. 138 THE INTERNAL REVENUE SYSTEM. other commodities; for experience has shown that the demand remains about the same, no matter what the cost of production. In the case of other articles, a substitute usually presents itself, which more or less completely satisfies the want, while not infrequently the increase in the price effectually checks the demand. Not so in the luxuries under discussion, for as yet no substitute has been found for intoxicants or other harmful narcotics. 1 This being assumed as true, the only problem which confronts the financier is an ad- ministrative one, — namely, the character and amount of the duty which from a fiscal point of view will prove the most efficient. In seeking an answer to this question, the period now under consideration fur- nishes one of the most instructive and interesting chapters in all fiscal history. The Act of 1862, which was in great measure experi- mental, imposed a low rate upon spirits, it being but twenty cents per gallon, equivalent to nearly one hundred per cent ad valorem. The duty was obviously insufficient. At this time Great Britain was collecting a tax of ten shillings per gallon, from which nearly fifty millions of dollars was annually derived, or twenty per cent of the entire inland revenue of the kingdom, a sum equal to seventy per cent of the revenue of the United States from all sources. So heavy a rate as this, the commis- sioner felt, could hardly be collected in this country, owing to the wide dispersion of the population, and the 1 Such is a principle which has frequently been advanced in re- gard to such articles ; hut our own experience, as will he shown later, seems to indicate that a considerable modification of the principle must be made. INDIRECT TAXES UPON CONSUMPTION. 139 undeveloped condition of the revenue service. He, how- ever, suggested an increase in the rate to sixty cents per gallon, at which point he thought the revenues would he more productive than at any other. 1 These recommen- dations were approved by Congress, March 7, 1864, when the rate was increased as suggested by the commissioner. By the provisions of these two Acts, the duty was pay- able by the owner or agent of the still where the article was produced, after inspection by a government official, who placed upon the cask or package a record of the amount and proof of the contents, together with the date of inspection and the name of the inspector. Any attempt fraudulently to evade payment by the re-use of the package, or by alteration of the stamp, was finable for each offence at five hundred dollars. Inasmuch as spirits are only marketable after a cer- tain age, a system of credits was inaugurated, by means of which the product might be placed in bonded ware- houses, or in bond as it is termed, for a certain period of years, whence it could only be removed on payment of the tax. To insure observance of the law, every distiller was compelled to take out a license, and give bonds, with one or more approved sureties, conditioned upon the faithful conduct of his business. He was further re- quired to enter daily a record of the amount of spirits distilled, as well as the quantity of grain consumed in production, and to render a verified report of the same to the collector at stated intervals. Scarcely had the new rate become operative, when Congress, disregarding the advice of the commissioner, set itself to increasing the revenues by raising exist- 1 Report on Finances, 18G3, p. G4. 140 THE INTERNAL REVENUE SYSTEM. ing rates without providing adequate means for their collection. Duties were doubled and trebled, the tax being increased gradually from $1.50 per gallon, after July 1, 1864 ; to $2.00 per gallon, after Feb. 1, 1865. 1 This latter rate was equivalent to an ad valorem tax of nearly one thousand per cent of the original cost of the product ; and the results were such as would be anticipated from such an exorbitant duty, and stand as a permanent illustration of the effects of an excessive rate of taxation upon a manufactured commodity, where adequate machinery does not exist for its enforcement. The justification of this increase in the rate was partly sumptuary and social, and partly fiscal. It was main- tained that spirits being a harmful luxury, and in no sense essential to comfort or sustenance, no injury would result from the imposition of a heavy tax, even though it did diminish consumption. But the fiscal needs were adequate to account for the increase in rates, for it was expected that large revenues would accrue from this source. As a matter of fact, none of these expectations were verified; while the altera- tions continually being made in the rate by legisla- tion, together with the apprehension that the stock on hand Avould be subjected to the $2.00 rate, exer- cised an unfavorable influence upon production. It is further a matter of regret that the full increase of the duty was not made immediately operative. Ow- ing, however, to a desire to avoid all appearance of retroactive legislation, Congress saw fit to exempt bonded stock from the increase in rates, which opened 1 Act of June 30, 1864. By amendatory Act of Dec. 22, 1864, the $2.00 rate went into effect Jan. 1, 1865. INDIRECT TAXES UPON CONSUMPTION. 141 the door for an immense amount of speculation, and enabled producers to accumulate stock at the old rate of taxation sufficient to supply the market for months ahead. In this way the law was practically evaded, the Treasury was in no sense benefited, while the consumer paid the higher tax in the form of enhanced profits to the speculator, when he chose to place the supply upon the market. So general was this speculative spirit, and to such an extent had production been stim- ulated in order to anticipate the increased tax, that on the 1st of July, 1864, when the rate was advanced from sixty cents to a dollar and a half a gallon, there was estimated to have been produced and stored at least forty million gallons of spirits, a quantity sufficient to supply the wants of the country for at least a year in advance. 1 Upon this stock a duty of twenty and sixty cents per gallon had been paid, which yielded upwards of $24,000,000, instead of $60,000,000, which would have been produced had the rate been made imme- diately operative. The same inexplicable legislation in regard to tobacco caused corresponding losses to the revenue from that source. We conceive that the policy to be pursued in the taxation of luxuries, especially where the sumptuary element is present, to be to assess the article at the highest rate the commodity will bear, without encoura- ging evasion and loss to the revenue through illicit distil- lation or production. In order the better to illustrate this principle, it may be well to trace the results of this most anomalous series of enactments from 1864 to the changes made in the rates shortly subsequent to the close of the war. 1 Report of Revenue Commission, p. G. 142 THE INTERNAL REVENUE SYSTEM. 1. The Tax Rates and the Revenue. Contrary to all expectations and all known rules of calculation, the advance of the rate to $1.50 and $2.00 per gallon produced no corresponding increase in the revenues. During the ten months of the fiscal year 1863, the tax was uniformly twenty cents per gallon, and the revenues therefrom $3,229,990, collected from 16,149,954 gallons of spirits. Accepting as accurate the census figures on the production of the country, which placed the annual output in 1860 at upwards of 90,000,- 000 of gallons, this was rather an unsatisfactory show- ing. There is reason for believing this an over-estimate, however ; for even in 1864, when the desire to anticipate the tax gave a decided stimulus to production, the num- ber of gallons upon which the tax was paid was but 85,295,391. The rate for this latter fiscal year was sixty cents per gallon, although during the earlier months the old rate reigned, and the receipts there- from rose to $28,431,797. Inasmuch as the Commis- sioner of Internal Revenue estimated that one-half this amount was the result of forced production for the pur- pose of anticipating the increased tax, which went into effect July 1, 1864, we may assume that the normal annual production approximated from forty to forty-five million gallons, which is substantially the estimate later made by the Special Commissioner of Revenue, Mr. Wells. With the imposition of the increased rate after July 1, 1864, production was temporarily suspended. Such a result was to be expected from the accumulations of the article on hand. But, despite this fact, the commissioner INDIRECT TAXES UPON CONSUMPTION. 143 confidently expected to realize forty million dollars from spirits during the last seven months of the fiscal year 1865. x How wide of the truth were his estimates will be seen from the fact that the actual receipts for the entire year were but $15,995,701, or twenty-four million less than had been expected for half that time. For 1866, he anticipated eighty million dollars, to secure which result the sole thing needful " to render it almost certain is a few additional means for securing the collec- tion of the tax on the whole product of the distilleries, and thus protecting the revenue against illicit distilla- tion, to which high duties afford so strong a tempta- tion." 2 His sanguine expectations were again found to be illusory ; for despite the improvement of the service during the eighteen months of the operation of the new rate, but little over twenty-nine millions were turned into the Treasury in 1866 ; while for the fiscal year 1867 they fell considerably below this amount. This extraordinary rate remained in force but one year more, when in response to the recommendation of the Revenue Commissioner (and upon no subject are his investigations more exhaustive or the reasoning which advocated the reduction more conclusive), as well as the promptings of justice and expediency, the duty was reduced to fifty cents per gallon, at which rate it re- mained until 1872. In addition to this specific gallon tax, there was added a so-called capacity tax of so much per barrel, and a special duty for the reimbursement of the government for gaugers' fees and storekeepers' sala- 1 Report on Finances, 1864, p. 59. 2 Ibid. 144 THE INTERNAL REVENUE SYSTEM. ries which increased the per gallon rate to about sixty- seven cents. 1 The rates of duty, annual production of spirits, and the receipts therefrom, for the six years of the operation of these rates, were as follows : — YEAR. DUTY. PRODUCTION. RECEIPTS. 1863 80.20 $16,149,954 $ 3,229,990 1864 0.20 and §0.60 85,295,391 28,431,797 1865 1.50 and 2.00 16,936,778 15,995,701 1866 2.00 14,599,289 29,198,578 1867 " 14,148,132 28,296,264 1868 " 6,709,546 13,419,092 The results of this change were remarkable. Illicit distillation on a large scale practically ceased with the imposition of the new rate, while those industries and arts in which spirits formed a prominent ingredient ex- perienced an immediate revival. At the same time the receipts from this source increased with equal rapidity. They rose like magic from thirteen and a half millions in 1868, to over forty-five millions in 1869, while the number of gallons reported for taxation increased in an equal degree. Again, during the fiscal year 1870, there was a further increase of $10,534,864 in the revenue, or from $45,000,000 to $55,606,094. 1 Act of July 20, 1868. This Act made the tax 50 cents per gallon, to be paid by stamps ; but there was imposed on the distiller by the same Act, an additional tax on his product of $4 per barrel of 40 proof- gallons, which made the tax really 10 cents per gallon additional, or 60 cents per gallon. There was also a tax on the grain-mashing capa- city of the distillery, and a further requirement of reimbursement by the distiller of the sums paid by the government for gaugers' fees and storekeepers' salaries, altogether amounting to about 7 cents per gallon of the aggregate product of spirits, thus making the whole tax charged upon the distiller about 67 cents. INDIRECT TAXES UPON CONSUMPTION. 145 During the four years (1869-1872) of the operation of the reduced rate, the tax was assessed and collected upon an average production of 67,175,822 gallons, which yielded an average revenue to the Treasury of $34,000,000, indicating an average annual per capita consumption of 1.65 gallons. The results of this experience are sufficiently con- vincing to establish the claims of a new canon of tax- ation, to the effect that a tax to be efficient should be moderate in amount and well assessed, rather than so excessive as to encourage fraud and stimulate to evasion. 2. Fraud and Evasion. One of the most deplorable phenomena which charac- terized the period was the demoralization which the attempt to collect these excessive taxes wrought in the public service. The moral grain of government officials is not, as a rule, much above that of the general public from which it has its source, and especially true is this where public preferment is a reward for partisan activity rather than of meritorious public service. During the two years immediately following the im- position of the tax in 1862, while the rate was moderate and the temptation to fraud but slight, the loss from evasion was comparatively unimportant ; but with the opening of the fiscal year 1864, and the growing appre- ciation of the immensity of the struggle, and the probable fiscal necessities for its suppression, it became generally recognized that an increase of the tax-rate was probable. The prospect of legislative action in this direction at once stimulated production, in order that the tax might be anticipated ; and as we have seen, the capacity of the 146 THE INTERNAL REVENUE SYSTEM. stills was pressed to the utmost, while great numbers of new establishments sprang up in all parts of the coun- try. 1 As a result, production was abnormally increased, and the amount entered into bond rose from sixteen million gallons in 1863 to eighty-five millions in the following year. Of this amount seventy million gallons was bonded before the increase provided by the law of March 7, 1864, went into effect, while from this time on to June 30, when the duty was further increased to $1.50 per gallon, production continued at an unparal- leled rate. For reasons only apparent to Congress, these increases in rates were not made retroactive, or operative upon existing stock in bond ; but when the spirits came to be withdrawn for consumption by the producer, the duty then prevailing was added by him to the price, and the tax, which had never been paid, was exacted from the consumer. The profits accruing to private persons from this source were enormous, and have been estimated at more than two hundred million dollars. The effect of this excessive stimulation of the indus- try was to check further production until existing stock should be consumed ; and in the month succeeding the imposition of the new rate, we find the amount returned for taxation to have fallen to 697,099 gallons. More- over, as soon as it became apparent that the rate was likely to be permanent, producers at once began to cast about for means of evading its payment. Such were not hard to find ; and, during the next few years fraud 1 According to the census, the number of distilleries in 1860 was 1,138, which had increased in number, by 18G4, to 2,415, while in 1868 the number reported was 4,721. INDIRECT TAXES UPON CONSUMPTION. 147 and evasion became so prevalent in the production and and sale of liquors, that in 1868 a House committee on retrenchment asserted that hardly an honest man was to be found in the business. During this period very little effective effort was made to enforce the law, nor was it susceptible of enforcement. Evidence was pro- duced before the Kevenue Commission to show that large quantities of spirits, in amounts ranging from 20,000 to 80,000 gallons, were transported to market without the payment of the duty, and without protest on the part of the officials, or knowledge that the proceed- ing was conducted in anything but a perfectly regular manner. Distillers, and their own workmen in some instances, were appointed their own inspectors ; and one case came to the knowledge of the Commission where the official in charge of a still was ignorant of the use of the hydrometer. The looseness with which the law was administered during these years is almost incon- ceivable. Not the least of the causes for this were the defective provisions regarding official oversight, and lack of uniformity in inspection and practice in the matter of marking and branding the package. Officials were too frequently inefficient, and often, if not fraud- ulently in connivance with producers, ignorantly so. Hundreds of illicit stills existed all over the country, especially in the western central States, where one of the revenue agents estimated that four-fifths of the spirits produced did not pay the tax ; while in the case of the larger stills, the inspectors were not infrequently non-residents, who gave but casual attention to their duties, and often left the inspection and branding of packages to the distillers themselves, upon whom they 148 THE INTERNAL REVENUE SYSTEM. were dependent for their fees. Illicit stills also existed in great numbers in the large cities, where a still could be operated in a small space — a garret or cellar or any- where — and whose daily capacity was from twenty to fifty gallons. 1 The provisions of the law for listing, branding, and inspection were further indefinite and inadequate ; while inspectors and assessors were not infrequently appointed at the dictation of distillers. The means of evasion were, in fact, so numerous and so successful, that Con- gress exhausted its ingenuity in attempting to protect the revenue, but all to no purpose. " Eor three years," says a Congressional committee upon this subject, "efforts have been made to collect the tax (i.e., $2.00 per gallon) ; each year the frauds have increased, but not the revenue. The operators throughout have pos- sessed more ability than Congress ; more shrewdness than the revenue department. No sooner would a reg- ulation of the department or an Act of Congress be passed, than means would be devised to evade it. The human intellect seems far more inventive, and skill far more effective, when to incentive to gain is added the chance of providing security against detection and pun- ishment." In an even more graphic way Mr. Wells describes the 1 To correct these defects, which were traceable in large measure to defective legislation, and the failure to provide for adeqate inspec- tion, the Revenue Commission in 1865 proposed an Act for the consid- eration of Congress to correct the same ; and it is of interest to note that the measure as reported was in many respects identical with -that passed in the infancy of the Republic (March 3, 1791), which was draughted by Alexander Hamilton — a singular commentary on his perspicuity and almost intuitive knowledge of the problems to be confronted in the taxation of spirits. INDIRECT TAXES UPON CONSUMPTION, 149 phenomena which characterized the attempt to collect the excessive tax on spirits. " Under the strong temp- tations of large and almost certain gains/' he says, "men rushed into schemes for defrauding the revenue with the zeal of enthusiasts for new gold-fields ; and the ingenuity of the American people has never had more striking illustrations than was offered in their devices for evading the tax, and providing for security against detection and punishment in so doing. The parties concerned in these transactions also showed throughout more ability than Congress and more shrewdness than the revenue department of the national treasury." 1 So high was the rate of taxation that fear of detec- tion failed to deter men from attempting to evade it, while the profits of success were so large that the conni- vance of officials was secured by admitting them to a participation in the gains. How universal was this eva- sion may be seen by a contemplation of the statistics of receipts during these years. The normal annual con- sumption of whiskey was upwards of forty millions of gallons ; but, for the three years immediately sub- sequent to the imposition of the increased duty in 1864, the amount returned for taxation did not exceed one- third that amount. In 1867 it fell to fourteen millions, and finally sank, without apparent reason, in the follow- ing year to less than one-half that quantity. 2 The rev- enue manifested a like tendency to decline, despite the most strenuous efforts put forth to protect the collec- tion. In 1866 the receipts were but little more than 1 Special letter of D. A. Wells to Secretary Carlisle, July 8, 1893, p. (>. 2 The exact amount on which the tax was paid was 6,709,546. 150 THE INTERNAL REVENUE SYSTEM. they had been under the earlier rate of twenty cents, while in 1868 they dwindled to the comparatively in- significant sum of $13,419,092. The consequent loss in revenue was enormous, and during these years could not have been less than fifty millions of dollars annually ; for but three gallons paid the tax where five escaped, and the average rate of taxation thereon was but seventy cents. 1 One of the necessary results of this state of affairs was to reduce the plane of competition to that of the most unprincipled dealers in the market. Despite the enactment of Congress providing that the sale of whis- key for less than the amount of the tax was to be considered prima facie evidence of fraud, the article continued to be offered in the market in unlimited quantities at less than two dollars per gallon, 2 and the government was forced to acknowledge itself un- able to protect those who honestly paid the tax. The records of the attempt of the government to enforce the collection of excessive rates of taxation form one of the most interesting chapters in the finan- cial history of the country, and the teachings there- from cannot be better summarized than in the words of Mr. David A. Wells. Says that authority: "When- ever a government imposes a tax on any product of industry so high as to sufficiently indemnify and reward an illicit or illegal production of the same, then such 1 The loss from evasion and fraud has often been placed at a much higher figure. By the Commercial and Financial Chronicle it was estimated that nine-tenths of what was paid by the public did not reach tbe treasury. — Issue of Dec. 3, 1870. 2 Commercial and Financial Chronicle, issue of May 11, 18G7, quotes current price of distilled spirits as $1.35. INDIRECT TAXES UPON CONSUMPTION. 151 product will be illicitly or illegally manufactured ; and when that point is reached, the losses and penalties con- sequent upon detection and conviction — no matter how great may be the one or how severe the other — will be counted in by the offenders as a part of the necessary expenses of their business ; and the business, if forcibly suppressed in one locality, will inevitably be renewed and continued in some other. It is, therefore, matter of the first importance for every government, in framing laws for the assessment and collection of taxes, to en- deavor to determine, not only for fiscal, but for moral pur- poses, when the maximum revenue point in the case of each tax is reached, and to recognize that, in going beyond that point, the government ' overreaches ' or cheats itself. " Obviously, those who in the past have shaped the policy of the United States in respect to the taxation of distilled spirits for the purpose of revenue have, for the most part, never studied this aspect of the the case, or cared to encourage any one to do so ; but on the contrary, as has been somewhat humorously expressed, 'they have held out to the citizen, on the one hand, a temptation to violate the law too great for human nature, as ordinarily constituted, to resist; and in the other, writs for personal arrest and seizure of property, and thus equipped, have announced them- selves ready for business." * 3. Speculation. In this connection we can but speak in brief of the speculation which the excise engendered, and which was 1 Special letter to Hon. J. G. Carlisle on "Internal Revenue Tax on Distilled Spirits, Malt Liquors, and Tobacco," July 8, 1893, p. 6. 152 THE INTERNAL REVENUE SYSTEM. so universal in all branches of business. Officials in all circles were infected by it, and but few escaped the charge of having trafficked in the country's necessities. To accuse the framers of the measures, however, with the intent of purposely promoting private ends, would be to cast a reflection upon the characters of some of the noblest figures of the period — upon men whose aim was single to their country's good. But had the legis- lation of the period been devised for the purpose of encouraging speculation, it could hardly have been more productive of it ; for rates were constantly liable to change in conformity with the demands for revenue, and prices were in such a state of flux that skilful manipulators of the market were able to anticipate the action of Congress, and to realize upon the increase of prices which followed every advancement of rates. The rapid upward rush of gold in the- summer of 1864, together with the passage of the revenue act of that year, doubling rates upon nearly all articles, and increas- ing those upon tobacco and distilled spirits from six hundred to one thousand per cent of the original cost, quickened this spirit ; for, unwisely, the new rates upon the latter articles were not made operative upon exist- ing stock, and speculators on every hand began to fore- stall the market, so that neither the government nor the consumer was benefited by the change. To such an extent was this spirit of speculation carried, that, by the close of the fiscal year 1864, there had been made and stored in anticipation of this advance at least forty millions of gallons of whiskey, an amount sufficient to satisfy the demands of the trade for twelve months at least; while it was computed that in New INDIRECT TAXES UPON CONSUMPTION. 153 York alone there had. been accumulated from seventy to eighty millions of cigars. 1 In other commodities than whiskey and tobacco spec- ulation was quite as active, and the excise was in large measure responsible for it. As the war wore on, and its magnitude became more apparent, this spirit developed into a mania. Everybody was virtually bet- ting upon the action of Congress ; and it does not re- quire wide knowledge of men or of history to convince one that the influence of this spirit manifested itself in legislative halls, urging to a still further increase of taxes for the furtherance of private ends. Certain it is, that, in the case of tobacco and distilled spirits, private interests were enhanced by the increase of the rates more than were the revenues, while for years thereafter influences were operative which enabled dis- honest rings to connive with officials in such a way as to deprive the government of a large part of this important source of the revenue. Such is the experience of the country down to the close of the decade introduced by the Civil War. The later history of these taxes, while in many respects but a continuation and repetition of what has preceded, can be treated more logically in a later paragraph, inasmuch as the year 1870 marks a change, not only in the method of administration, but also in the beginning of the nar- row, more restricted system of internal taxation which has continued to the present day, and in which the taxes upon distilled spirits and tobacco form the central figures. 1 Estimated by the Revenue Commission. House Ex. Doc. No. 34, Thirty-ninth Congress, p. 6. 154 THE INTERNAL BE VENUE SYSTEM. II. FERMENTED LIQUORS. By the measure of July 1, 1862, the duty imposed upon fermented and malt liquors, such as beer, ale, porter, etc., was $1.00 per barrel of 31 gallons. This act remained in operation but six months, when the r;ite was reduced to sixty cents per barrel, 1 with the pro- vision added that the act should expire by limitation April 1, 1864. Subsequent to the latter date the origi- nal duty of $1.00 was revived, and has been in operation ever since. In recent years (since the amendatory law of July 20, 1868) the tax has been collected by means of stamps, one of which, " denoting the amount of the tax," must be affixed over the spigot hole or tap (of which there shall be but one), in such a way that the stamp will be destroyed upon the withdrawal of the liquor from the barrel. The tax of $1.00 per barrel is equivalent to 3.22 cents per gallon, or an ad valorem rate of twenty per cent. One barrel of 31 gallons equals 248 pints or 496 half- pints, and the present tax is therefore equivalent to one-fifth of a cent per half -pint or per glass, as usually sold at retail. The records of the early administration of this tax present the same phenomena which characterized other branches of the revenue. The tax was but poorly col- lected, and evasion was wide-spread. An improvement was early manifest in this latter respect, however, for the number of barrels returned for taxation increased with considerable regularity, irrespective of the rate of duty. Thus, while the number of barrels upon which i Act of March 3, 1863. INDIRECT TAXES UPON CONSUMPTION, loo the tax was paid was but 2.000,625 in 1863, in the } 7 ear following it rose to 3,141,381, while two years later over 5,000,000 barrels were reported. But, despite the growing observance of the law, a large portion of the product still escaped the vigilance of the assessor ; and in 1865 the Revenue Commission, after a most careful investigation of this portion of the revenue service, and after consultation with nearly every large producer in the country, came to the conclusion that the annual product of the country was upwards of 6,000,000 barrels, or considerably more than had been returned for taxation in that year. The loss to the revenue was estimated at $2,400,000, due in large measure, thought the Revenue Commission, to the faulty methods of ad- ministration which then prevailed. 1 These defects were in large measure corrected by the use of soluble stamps as a means of collection, which could not be re-used ! With this modification in the method of assessment, the principal avenues of escape were closed ; and the annual returns immediately rose by nearly forty million gallons, while the receipts for the first year thereafter were increased by three-quarters of a million dollars. Since that time the revenues have steadily risen, in recent years at a most phenomenal rate. In fact, this increase in the consumption of malt liquors has been more rapid than the increase in population. In 1863 the annual consumption of malt liquors of all kinds was sixty million gallons. Two years later the product had nearly doubled, and amounted to 3.2 gallons per capita. By 1870 the annual consumption had risen to 5.2 gallons per capita, and during the decade follow- i House Ex. Doc. No 34, Thirty-ninth Congress, p. 20. 156 THE INTERNAL REVENUE SYSTEM. ing, it again increased more than one hundred per cent. Since that time the increase in production has more than kept pace with the growth in population, until to-day the consumption approximates sixteen gallons per person, and the total annual output of the country- is one thousand million gallons. The receipts have increased in like proportion until malt liquors of various kinds yield an annual revenue of over thirty million dollars. 1 III. TOBACCO. The same lamentable errors which characterized the taxation of distilled spirits distinguished the early efforts of Congress to derive revenues from tobacco. Like the former commodity, tobacco is a staple article, the consumption of which does not vary much from year to year, and is little affected by the variations of price. The equation of demand and supply is not a parabola, but a straight line. Knowing, then, the annual consumption and the rate of taxation, it is a compara- tively easy matter for the financier to determine with tolerable exactitude the probable revenue to be expected therefrom. Such, at least, are the teachings of economic theory, and in this instance the teachings of experience and of the schools proximately coincide. At the present time tobacco forms one of the chief sources of revenue in nearly every civilized State; in some, as in France, Italy, and Austria, through govern- i In 1892 the receipts amounted to $30,037,452 ; in 1893 to $32,548,- 983; and in 1894, even under the unprecedented commercial depres- sion, they amounted to $31,414,788. INDIRECT TAXES UPON CONSUMPTION. 157 mental manufacture and sale, while in others as a basis of taxation. Our own experience is limited to the three decades subsequent to the general excise measure of 1SG2. This Act, so comprehensive in its enactments, did not neglect tobacco. By it all manufactured chewing tobacco was rendered dutiable at the rate of ten cents per pound on grades valued at less than thirty cents per pound, while on better grades a uniform rate of fifteen cents per pound was levied. Snuff was rated at twenty cents per pound, and smoking tobacco at from two to five cents per pound. Upon cigars a rough attempt at ad valorem rates was attempted by the following schedule : — VALUE. TAX-RATE. If valued at not more than $ 5. 00 per 1000 at $1.50 per 1000. " " 10.00 " 2.00 " 20.00 " 2.50 If valued at over 20.00 " 3.50 These charges were too low in the opinion of the com- missioner, as compared with what other commodities were bearing. At this time unmanufactured tobacco was taxed at the rate of seventy-seven cents per pound in England, while the manufactured article paid $2.33 per pound. From these taxes Great Britain secured an annual revenue of upwards of thirty millions of dollars ; while in the United States, where the con- sumption was much greater, the receipts for 1863 were but three millions. This meagre productivity was due to two causes : (1) the newness of the law and the inexperience of the administration ; and (2) the inadequacy of the rate 158 THE INTERNAL REVENUE SYSTEM. imposed. To the mind of the commissioner a remedy for the former evil was to be found in a change of the method of assessment, so that the tax would be col- lected upon the raw leaf, as was the custom in England ; while a simple nostrum for the latter difficulty lay in raising the rates. 1 To Congress nothing seemed more axiomatic than that " two and two make four," even in the arithmetic of taxation ; and forthwith the same mistaken legislation followed which we have seen to have been so fallacious in the case of distilled spirits. Chewing and smoking tobacco were still rated differently, the duty on the former being increased to thirty-five cents per pound, while the latter paid fifteen and twenty-five cents, ac- cording to description ; snuff was taxed at thirty-five cents per pound, while cigarettes were added to the list at a rough ad valorem rate. Upon cigars the attempt to take cognizance of the difference in grades was still maintained, and the following exorbitant rates imposed : 2 — VALUE. TAX BATE. Below $ 5.00 per thousand in value . $ 3.00 per 1000. Between 5.00 and $15.00 per 1000 . . 8.00 15.00 " 30.00 " ... 15.00 " " 30.00 " 45.00 " ... 25.00 " Over 45.00 in value " ... 40.00 " In the administration of the tobacco tax, the early experience is instructive. All methods were more or less tentative. No precedents existed at home ; and foreign nations, as a rule, taxed the article in the leaf. 1 Report on Finances, 1863, pp. 65, 66. 2 Act of June 30, 1864. INDIRECT TAXES UPON CONSUMPTION. 159 As a result, early legislation was more or less experi- mental, and the revenues suffered in consequence. The tax was levied at the place of manufacture, and was a mixture of specific and ad valorem rates. Stamps had not yet come into use in this branch of the service, nor had the practice of branding ; so that it was no dif- ficult matter to remove the article from one place to another, where it might be disposed of surreptitiously without payment of the tax. By the amendatory Act of March 3, 1863, however, the practice of the department was in this respect improved ; and the inspector was instructed to brand upon the cask or package the weight and quality of the tobacco, as well as his own name and the date of the inspection. By this means it became an easy matter to determine whether the duty had been paid or not, and to detect any attempted evasion. Later modifications placed severe restrictions upon the manu- facturers by insisting upon minute reports concerning their methods of business, stock on hand, destination and quality of the product, etc. These returns were made weekly, and in many instances were quite onerous to the producer ; for they amounted, in effect, to a labor tax upon the industry. In order to quiet the complaint that the tax rendered large capital necessary to the con- duct of the business, the bonded warehouse system was extended to it, so that the duty became payable only on the disposition of the product. 1 The assessment of the tax upon cigars was fraught with probably the greatest complications. The Act pre- scribed that the valuation placed upon the article by the assessor should be " the value of the cigars exclusive of 1 Act of June 30, 1864. 160 THE INTERNAL REVENUE SYSTEM. the tax." The rate, as we have seen, was not a propor- tional, ad valorem one, but a graduated tax assessed according to classes upon the price of the cigars. By- reference to these rates, it. will be seen that under these provisions no schedule of prices could be devised which would satisfy the law in the majority of cases. Take, for illustration, the case of a thousand cigars selling at twelve dollars. The value is determined by the sale; and the question arises, what is the tax ? It must obvi- ously be either three dollars or eight. If the former, then the cigars, exclusive of the tax, are worth nine dol- lars. But cigars valued at more than five dollars must pay a tax of eight dollars. Then put on the tax of eight dollars, and the value of the cigars is found to be four dollars, and not dutiable in this grade. Neither tax is appropriate to the value — one is too little, the other too great. The same difficulty is found in rela- tion to cigars selling at any price between eight and thirteen dollars, between twenty-two and thirty dollars, etc. The law furnished no rule by which they might be assessed, and the commissioner therefore instructed the officials to adopt the interpretation which imposed the lowest rate. 1 Another result of this anomalous method of assess- ment was that it became more profitable for the manu- facturer to sell his cigars at eleven, rather than fifteen, dollars per thousand ; at twenty-five rather than thirty- one dollars, and at sixty-nine rather than eighty-five. The value as determined by the sale was the determi- nant of the tax, and the returns of the producer were the only evidence of value. It thus offered a tempta- 1 Report on Finances, 1864, p. 62. INDIRECT TAXES UPON CONSUMPTION. 161 tion to undervaluation, which was often taken advantage of. Were the duty an ad valorem one, this opportunity would not exist ; and the commissioner therefore sug- gested that the latter mode of assessment be adopted, provided a tax upon the leaf seemed inadvisable. 1 Congress realized the anomalies of the tax, but chose to follow other avenues for relief. It thereupon placed the cap-sheaf upon the series of blunders by levying a uniform specific rate of ten dollars per thousand upon all cigars, no matter what the quality or value of the same might be, and also increased the rate on tobacco. 2 The uniform rate rendered the tax simple of assess- ment, which is certainly a desideratum in any duty ; but it is liable to the criticism that it placed an undue burden upon the cheaper grades of cigars, while the higher grades were but slightly affected. It also bore with some severity upon the small domestic producer, who was often unable to advance so large a tax. This rate remained in force but one year, and it is of interest to note that the number of cigars returned for taxation during this period was less than in any other year either before or subsequent to its passage. 3 1 Report on Finances, 1864, p. 62. 2 Act of March 3, 1865. 3 The total receipts from cigars, together with the aggregate num- ber returned, and the rate of the tax, from 1863 to 1870, were as follows : — YEAE. BATE OF TAX. ^ ! "TiTS ° F COLLECTIONS. 1863 $ 1.50 to $ 3.50 per M 199,288,2S4 $476,589 1864 1.50 to 3.50 " 492,780,700 1,255,424 1865 3.00 to 40.00 " 713,001,099 3,087,421 r 1866 10.00 " 347,674,259 3,476,236 1867 2.00 to 5.00 " 483,806,450 3,661,984 1868 5.00 " 590,335,052 2,951,675 1869 5.00 " 993,287,429 4,960,952 1870 5.00 •• 1,153,352,191 5,718,780 162 THE INTERNAL REVENUE SYSTEM. The experience of this period also furnishes an example of the influence of a tax in determining the equation of demand and supply of an article of universal consump- tion. Thus, in 1866, with the uniform rate of ten dol- lars per thousand obtaining upon all grades of cigars, only 347,674,259 were returned for taxation; while in 1869, with the rate reduced one-half, the number in- creased nearly threefold, or to 993,287,429. Conclusions in regard to the social and economic ten- dencies of a tax are, from the nature of the phenomena, but tentative, and on the whole unsatisfactory. The coworking of diverse forces precludes exactitude in the tracing of causal relations, and we are compelled to depend more or less upon conjecture. It is not so with the purely fiscal aspect of the study, for here we deal with phenomena whose results and meaning are clearly demonstrable. In the discussion of the duty upon distilled spirits, we have seen that there exists an intimate relation be- tween the rate of the tax and the extent of fraud and evasion ; and it is not, therefore, a matter of surprise that the same results are to be found in the taxation of tobacco. The returns from manufactured tobacco during the same period were as follows : — BATE AVERAGE BATE QUANTITY OF TAX. TEE I'ul'SU. IN POUNDS. YEAB. nvin-r T>i7n nnr\i, IV BAll-Jl.a tULLhtUUSB. 1863 2 to 20 cents 10 cents 23,852,387 S 2,613,438 1864 5 to 20 " 11 " 64,577,097 7,327,618 1865 5 to 40 " 22 " 37,641,822 8,300,372 1866 15 to 40 " 34 " 37,493,785 13,038,095 1867 15 to 40 " 34 " 47,631,494 16,043,842 1868 15 to 40 " 34 " 46,764,150 15,692,415 1S69 16 to 32 " 27 " 64,305,026 17,371,063 1870 16 to 32 " 27 " 90,288,082 24,300,4S3 INDIRECT TAXES UP OX CONSUMPTION. 163 The magnitude of the frauds committed under the stimulus of the high rate imposed will never be known ; but that it was very general the records of officials and the tone of the press of the day testify. It was cur- rently asserted at the time that scarcely one-half of the annual product of the country was reported for inspec- tion, while competent authorities estimated the loss much higher. Says the Special Commissioner of Rev- enue, writing in 1866 : " The losses which have ac- crued and are now accruing to the revenue through the failure to collect the tax . . . are of an amount almost to exceed belief — the losses on tobacco alone, in a single section of the country, being reported to the commis- sioner by a most competent authority as in probable excess of twenty thousand dollars daily." 1 The same official later stated that "the books of some of the largest manufacturers in this country show that their aggregate sales of smoking tobacco for the whole of the last year have not been in excess of the average of sales which, before the imposition of the tax, were ef- fected in a single week." 2 The failure to collect the tax was due to causes simi- lar to those operative in the case of distilled spirits. They were mainly four in number, namely ; (1) a very large percentage of the losses were due to incompetency and complicity of officials, for it was cheaper to secure the co-operation of the inspector by corrupt means than to pay the tax ; (2) the use of counterfeit or illegal in- spection brands was a prevalent cause of loss, as there existed no uniformity in this regard on the part of the 1 Report of the Special Commissioner of Revenue, 1866, p. 4. 2 Ibid., 1868. 164 THE INTERNAL REVENUE SYSTEM. different officials; (3) the re-use of packages or casks which had been previously inspected and properly branded further depleted the revenue ; as did (4) the substitution of other and better grades of tobacco for those upon which the tax had been already paid. Con- siderable loss also arose through the fraudulent use of the warehouse system. 1 So flagrant, in fact, did these frauds at last become that the manufacturers themselves headed a movement for reform, and presented a memorial to Congress indi- cating lines for legislation, which were embodied in part in a later enactment, and are substantially identical with those in use at the present clay. Greater simplicity in rates was needed, as were more efficient methods of collection ; and these the measure of July 20, 1868, aimed to secure by reducing the rates, rendering them payable by means of stamps, while the most minute provisions were made for marking, packing, removal, sale, etc. The effect of these modifications was immediate. Re- ceipts rose from $18,700,000 in 18G8, to over $31,000,000 in 1870, and this in the face of a very general reduction of rates. Cigars manifested the greatest increase (95 per cent), from which we are to infer that a larger por- tion of them had previously escaped taxation. 2 From this time on the receipts from this sovirce steadily in- creased at a normal rate corresponding to the natural growth of consumption, until, in 1876, tobacco produced somewhat more than one-sixth of the total revenues of the government, or $40,000,000. 1 Report of Special Commissioner of the Revenue, 1868, pp. 35-38. 2 Vide "Tobacco Tax," Quarterly Journal of Economics, January, 1891. INDIRECT TAXES UPON CONSUMPTION. 165 At this time the appearance of the surplus and the clamoring of special interests hostile to any reduction of the customs duties led to measures for the complete abolition of the tobacco tax, or at least for a diminution of the rates. In 1879 Congress in part conceded to the pressure by reducing the rates upon snuff and other' man ufactured tobacco to sixteen cents per pound, in- stead of twenty-four, while the duty upon cigars and cigarettes remained unaltered. By 1883, the revenues continuing redundant, the rate upon the former article was further reduced to ei ght cents per pound, while the duty upon cigars was cut down to three dollars per thousand. The result of these alterations was gratifying in so far as it indicated the efficiency of existing methods of administration and collection ; for while the revenues fell off from forty-seven millions in 1882, to twenty-six mil- lions in 1881, the increase in the taxable product was little more than normal. 1 From this time down to the present day, constant in- fluence has been brought to bear on Congress, advocat- ing the complete abolition of the tax ; and, as a partial concession to these clamors, the rateupon manufactured tobacco has been reduced to six cents per pound, while special license taxes upon retail dealers have been dis- pensed with altogether. 2 Just what effect has followed upon this reduction of duties in the price of the article, it is difficult to deter- mine with accuracy. There is reason to believe, how- 1 For list of collections, as well as rates of taxation and amount returned for taxation, see table, p. 226, as well as Appendix. 2 Act of Oct. 1, 1890. 166 THE INTERNAL REVENUE SYSTEM. ever, that but slight benefits have accrued to the consumer. IV. THE GENERAL EXCISE UPON" MANUFACTURES AND PRODUCTS. The first efforts of the Revenue Commission, subse- quent to the close of the war, were directed towards the relief of trade and industry from the burdens of the complicated system of taxes which obtained upon man- ufactures and products. It was to the operations of the general excise, thought the Commission, that the in- flation of prices, the insecurity of commercial relations, the chaos of speculation and business disaster, as well as the burdensome taxes of the consumer and wage-earner, were in a great part attributable. Not only were the duties so heavy as .to cause a marked diminution in the consumption of staple commodities, but so indiscrimi- nately were they levied, with so little regard to the laws of trade, that industry was blighted thereby, while Capital was diverted from the natural channels of its activity. The distinguishing feature of all the fiscal legislation of the time was the wide diffusion of taxes. The one absorbing demand of the Treasury was for revenues, and all other considerations were rendered subordinate to that end. Everything possible was made to contribute to the country's coffers, and in many instances the same article was taxed over and over again before it reached the consumer. Every product of the mill or factory was taxed at each turn of its manufacture, so that not infre- quently an article bore a duty imposed twice, thrice, and even four times, before it reached the market. The INDIRECT TAXES UPON CONSUMPTION. 167 system operated like a series of barriers, across which passage could be secured only by the payment of toll, which was re-exacted at every phase of the process of manufacture. This duplication led to an undue en- hancement of prices. Moreover, exact calculation in production became impossible, as the tax was liable to alteration at any moment, and the accumulation of a large stock of goods upon which a heavy duty had been paid might prove ruinous to a producer. For this reason production was made to conform as nearly as possible to immediate demand. At the same time the lack of harmony between the excise and customs duties was a further disturbing ele- ment ; for, although these taxes were designed to be mutually compensatory (and considerable skill was shown in the arrangement), it was soon discovered that many divergencies existed between them. So numerous, in fact, were they, and due to such irremediable causes, that the efforts of Congress to relieve them were only in part successful. As a consequence, many industries were seriously affected, in some instances a transfer of capital to other countries being the result. The manufacture of um- brellas and books is an instance in point, in the pro- duction of which it was said that foreign cheap labor, coupled with a low excise, speedily enabled the English producer to monopolize our market. 1 In the production of finished railroad and bar iron the results were similar. During the two years previous to 1864 but little railroad iron was imported, the customs duty being well-nigh prohibitive. In the latter year, however, the internal tax 1 See Report of Revenue Commission, p. 15. 168 THE INTERNAL REVENUE SYSTEM. was increased, to about nine dollars per ton, giving a protection to the domestic producer of four dollars per ton, which was held by the commissioner to be insuffi- cient to protect the market, a very large portion of the consumption of the year following being imported. 1 In the case of those industries controlled by strong corporate interests, and able to foresee and take advantage of every fluctuation of the market, this insecurity of business relations offered great opportunities for specu- lative gains. To the small producer, however, the ex- cise was an unmixed evil. The advancement of the tax demanded additional capital in his business, while in many ways, as in the case of the discounts upon stamps, it discriminated against him. 2 Especially burdensome was this interference with that numerous body of shoe- makers, dressmakers, milliners, etc., who produce mainly for immediate and local consumption. In fact, " of all the taxes imposed," said the special Revenue Commis- sion, " none probably have been more effectual in grind- ing the faces of the poor " than this, " while there are few which have given more annoyance to the revenue 1 " The present tax on iron consumed in the United States, in the complete forms of railroad and bar iron, will amount, when the coal consumed is taken into the account, to about seven dollars per ton ; while other taxes which indirectly fall upon this production will raise the tax to one or two dollars per ton more. During the two fis- cal years preceding the last, but little railroad iron was imported ; but in the year ending June, 18(34, a rapid increase in such importa- tion began, and nearly one hundred and twenty thousand tons, valued at four million eight hundred thousand dollars, were imported. This is equal to about half the entire quantity made in the United States, which is approximately stated at two hundred and eighty thousand tons." — Report on Finances, 18G4, p. 65. 2 See ante, p. 123. INDIRECT TAXES UPON CONSUMPTION. 169 officers entrusted with their assessment and collec- tion." 1 The rates imposed were, moreover, excessive, in some cases being so burdensome as to cause a complete sus- pension of business. In the case of the woollen industry, which was relieved from the full effect of the excise by compensatory tariff duties, it was estimated that in the years 1864 and 1865, when the duty upon woollens was six per cent, the revenues from this business in the State of Massachusetts were equal to nearly twenty per cent of the entire capital invested in the industry ; while the taxes extracted from the manufacture of boots and shoes in that State during the same year were equal to thirty per cent of the capital employed therein. 2 Such are but isolated examples indicative of the general dis- turbance induced by the excise ; for it was a period pre- eminently of flux, in which all forms of industry were endeavoring to adjust themselves to changed conditions of production. The method of levying the excise was a mixed one, partly specific, partly ad valorem, a distinction rendered necessary from the nature of the objects taxed, as well as by the desire to harmonize these duties with those of the tariff, which were modified at the same time in order to compensate the domestic producer for the burdens im- posed upon him. The Committee of Ways and Means had aimed to devise a system as diffuse as possible, on the theory that equality in taxation is universal taxa- tion, a principle most strongly insisted upon in our States. Only raw materials were exempted ; and even 1 House Ex. Doc. No. 34, Thirty-ninth Congress, p. :'.*.>. 2 Report of Special Commissioner of Revenue, 18(17, p. 28. 170 TEE INTERNAL REVENUE SYSTEM. here the exemption was in many cases only an apparent one, for the articles were frequently taxed in an in- direct way. By the early law of July 1, 1862, specific duties, were imposed upon mineral coals, oils of all kinds, gas, paints and colors, coffee and spices, cotton, sugar, snuff, railroad arid other iron ; while upon nearly all other articles, the product of the mill or factory, a general ad valorem rate of three per cent was imposed. Careful provision was made for the assessment and collection of these taxes. Every manufacturer was re- quired to furnish the assessor a verified statement of the nature of his business, and to make monthly returns of the products and sales in such form as the commis- sioner prescribed. Taxes were payable monthly, and were declared to be a lien upon his real and personal property; while the collector could enter, take posses- sion, and sell any goods and products to satisfy the tax. From the date of this Act down to the close of the war, alterations in the laws were frequent. In 1864 the ad valorem rate was increased to five per cent on the majority of articles previously dutiable at three per cent, while many additional articles were declared taxable. Again, in 1865, these rates were advanced twenty per cent, or from five to six per cent upon all enumerated articles, while the specific duties were in- creased in a like manner. The following is a condensed statement of the total collections from specific sources of manufactures and products for the years extending from 1863 to 1868 inclusive : — INDIRECT TAXES UPON CONSUMPTION. 171 Boots and shoes $14,687,824 Bullion 1,632,796 Candles 1,549,928 Clocks, clock-movements, etc 457,270 Cloth and other fabrics of cotton 38,006,287 Cloth and other fabrics of wool 29,922,434 Clothing, not including boots and shoes . . 25,422,745 Coal 2,966,961 Confectionery 3,541,773 Cotton, raw " 68,072,389 Gunpowder ... 1,045,395 India rubber 2,169,077 Iron and steel and their manufactures . . . 35,306,728 Leather of all descriptions 14,350,793 Oil distilled from coal and crude petroleum . 20,456,552 Paper, including pasteboard, binders' board, etc 4,336,177 Petroleum, crude 2,415, G97 Pianofortes and other musical instruments . 1,452,023 Pins 161,426 Salt 1,462,246 "Wood-screws 687,296 Silk 1,211,577 Soap 3,971,253 Steam-engines 3,179,781 Sugar, brown and refined 11,818,343 Thread and twine 2,014,243 Turpentine, spirits of 1,097,247 It has been estimated that after the amendatory Act of March 7, 1865, the government levied and collected from eight to fifteen per cent upon the cost of nearly all manufactured products, while in some instances as high as twenty per cent was collected. In the case of books, pamphlets, etc., it has been computed that the reader paid from twelve to fourteen distinct taxes, in- cluding the license tax. Upon all cotton goods the accumulated duty ranged from nine to fourteen per cent, while in the case of sugar the rates were about equal to the entire labor cost of its production. 172 THE INTERNAL REVENUE SYSTEM. A. The Excise and Prices. This continued duplication of duties contributed greatly to the rise in prices which characterized the period, as every increment of cost due to taxation was at once shifted to the price of the commodity, often with an additional profit upon the capital advanced by the payer of the tax. Moreover, every jobber, broker, retailer, and middleman contributed an additional li- cense tax for the privilege of carrying on his business, which eventually was extracted from the pocket of the consumer. It is this cumulative tendency of all indirect taxes which renders them so objectionable. A still further disturbing element in commercial cir- cles was the wide-spread spirit of speculation which prevailed, a spirit largely induced by the excise. Man- ufacturers and dealers often took advantage of the gen- eral ignorance of the market, and, by anticipating the action of Congress, reaped large profits by the accumu- lation of goods upon which a low rate of duty had been paid. Precise calculations in trade and industry were also rendered impossible by the constant tinkerings with the duties, for it was impossible to tell from month to month just what the tax upon any particular commodity would be. That this very uncertainty was not infre- quently a source of profit to the manufacturers is proven by the fact that they often urged an increase in the rate upon those articles which they produced. It is recognized that the study of prices is most intricate, and any conclusions indicative of causal rela- tions is little more than conjectural. Especially true is this of the period now under consideration, for the ele- INDIRECT TAXES UPON CONSUMPTION. 173 ments which enter in are both numerous and conflict- ing. The increase in the tariff rates doubtless gave a stimulus to industry, and inaugurated an era of good times accompanied by rising prices ; while little less influential was the unusual demand by the government for certain articles of war consumption. Either of these forces, independently of others, would have tended to raise prices ; and to them must be added the currency expansion, which is generally supposed to have been mainly responsible for the inflation which characterized the time. Secretary McCulloch advanced this opinion in his report for the year 1865, where he says, " On the 30th of April last . . . the circulation, bank and national, had reached the startling amount of $700,000,- 000. Nothing beyond this statement is required to ex- hibit the present inflation, or to explain the causes of the current and advancing prices." * As a matter of fact, the active circulation, at the time the secretary wrote, was but little more than two-thirds what he estimated it to be ; 2 and this fact, as well as others, has led some writers to discredit somewhat the importance usually assigned to this cause. 3 Such an opinion was advanced at the time by Mr. Wells, who asserted, after a careful investigation of the 1 Report on Finances, 1865, p. 11. 2 According to the report of the Comptroller of the Currency for that year, the circulation was but $400,814,229, the remaining $250,- 000,000 included in the secretary's estimate being at that time stored in the U. S. Treasury vaults, or held by the banks as reserves for their deposits or circulation. Ibid., p. G4. s Mr. Gibbons (" U. S. Debt, Finance, and Taxation," p. 22G) has denied to the currency any potency in this matter at all, and supports his position by showing that the inflation of prices and currency were not concurrent, but rather the reverse of it. 174 THE INTERNAL REVENUE SYSTEM. whole subject, that, while the unhealthy influence of a redundant currency, as well as the scarcity of labor, was to be recognized, still, that " perhaps the most influen- tial " of all the causes to which the inflation of prices was attributable was the " extent of the burden of national taxation ; " 1 while the Kevenue Commission of 1866, of which he was the chairman, maintained that it was "useless to talk of reducing prices to anything like their former level by a reduction or contraction of the currency." As materially contributing to this hypothesis, is the burden of taxes sustained at that time. For the fiscal year ending June 30, 1866, the receipts from internal sources alone amounted to $310,906,984, while the total revenues, estimated in currency, withdrawn from the channels of trade, were $561,572,266. Assuming that the population of the country was thirty-five millions, this was equivalent to a per capita tax of $16.04, or something like eighty dollars upon the head of every family ; while, on the assumption that the value of the real and personal property had neither increased nor diminished since the census of 1860, the general rate of taxation upon all tangible wealth was something over 3.90 per cent. 2 This statement of the burden of taxa- tion borne is, of itself, sufficient to explain, in part at least, the inflation of prices which characterized the period. B. The Excise and the Wage-Earner. It has often been asserted that labor bore the cost of the war. Of a certainty, the wage-earner is the greatest 1 Report of Special Commissioner of Revenue, 1866, p. 26. 2 Ibid., p. 27. INDIRECT TAXES UPON CONSUMPTION. 175 sufferer upon the inauguration of a heavy excise. The effects of excessive borrowing upon industry and labor, by which capital is diverted from the natural channels of trade and turned into the coffers of the state, has been ably exhibited by Professor Adams. 1 Similar results follow to an even greater degree upon any ex- cessive resort to taxation ; for in the latter case the wage-earner suffers not only from the intensified efforts of capital to recoup itself for the inroads of the state, but also from the enhancement of prices which results therefrom. So much as is true of that principle of political econ- omy which asserts that capital sets the limit to industry, is applicable to the phenomena now under discussion. Increase or diminish this sum, and, other things being equal, you increase or diminish the demand for labor. Unquestionably the excise had this latter effect; for it demanded from active capital invested in productive enterprises a share of its product, which it proceeded to dissipate in unproductive consumption. The fact that the government disbursed with one hand what it assumed with the other, does not alleviate the general effect of the taking; for the capital usually perished with the using, or was so expended that it only returned to productive pursuits through a very circuitous process. Moreover, not infrequently the excise was so excessive as to cause a temporary suspension of certain forms of business, thus further curtailing the capital fund of the country, and consequently the demand for labor. During the six years' duration of the extraordinary taxes, the total amount of capital exacted from internal i " Public Debts," p. 73. 176 THE INTERNAL REVENUE SYSTEM. sources by loans and taxation approximated six thousand million dollars, of which amount over forty-six hundred millions was obtained from the sale of public securi- ties and treasury notes, and twelve hundred millions from currently created wealth through the medium of taxation. Beyond controversy, such an incursion into the capital fund of the country must have diminished the sum devoted to productive pursuits, as well as the demand for labor. But this reduction of the capital fund, as well as the consequent diminished demand for labor, but inadequately represents the full effect of any system of inland taxation which rests upon man- ufactures and consumable commodities. The capital fund might be constantly undergoing depletion, yet be continually recruited from other sources, and the wage- earner be unaffected thereby. Such is not the case, however, when prices are affected as they were during this period. As we have seen, prices were rendered very capricious by the duplication which the excise engendered, rising out of all proportion to the amount returned to the state. It is perfectly apparent that, so long as all prices rise in a similar ratio, or at a like rate, no one will suffer, 1 as the equilibrium of exchange is undisturbed. If a disparity occur, however, then those which rise the least or at the slowest rate, are at a relative disadvan- tage, inasmuch as the depreciated commodity will not command as much in the market as it formerly did. For this reason labor is at a disadvantage in any indus- trial disturbance, for it is the quite universal testimony 1 Exception is, of course, to be made of certain classes of vested interests, and deferred payments. INDIRECT TAXES UPON CONSUMPTION. 177 of experience that rising prices find their way into al- most every other form of wealth before wages are affected. It makes little difference whether the dis- turbance arises from a disordered currency, or unusual demands through taxation, upon a rising market wages are among the last and the slowest to move. Anything which causes a general rise in prices, therefore, is detri- mental to the wage-earning classes ; for real wages are always temporarily lowered thereby, and possibly per- manently, if the laborer is willing to sink below his customary standard of living. 1 An examination of the phenomena which characterize the period renders it possible to demonstrate this in- fluence, which is corroborated by the records of nearly all great industrial disturbances, by statistical proof. At the close of the war, Mr. David A. Wells, as Special Commissioner of Revenue, devoted himself for some time to an investigation of the subject of prices during this period, and the causes to which their varia- tions were attributable; and from the data which he secured from all sections of the Northern States, it ap- pears that the advance in prices during these years, as compared with the year immediately preceding the war (1860) was in groceries and provisions, 90 to 100 per cent; in domestic dry goods, including clothing, 86 per cent; in fuel, 50 to 60 per cent; in house-rent, in the 1 "According to all experience, whether within modern observa- tion or recorded in history, it may he laid down as an established maxim that labor is the last of the objects of exchange to rise in con- sequence of dearth or depreciation, and that commonly the price of labor is the last to fall in consequence of increased abundance of com- modities or increased value of money." — Tooke's History of Pi-ices vol. i., p. 71. 178 THE INTERNAL REVENUE SYSTEM. cities, 90 to 100 per cent, and in the country somewhat less. The increase in the price of a barrel of flour from 1860 to 1868, throughout the Eastern manufactur- ing States, was in excess of 90 per cent ; of salt, from 100 to 150 per cent ; of butter, 100 per cent ; of brown sugar, 70 to 80 per cent, etc. In respect to ordinary cotton goods, the advance, even as late as October, 1866, was, in currency, 172 per cent over the gold prices of similar fabrics in July, 1860 ; of woollen goods, 53 per cent; and of silk, about 100 per cent. The general advance in wages during the correspond- ing period was generally as follows : for unskilled labor, 50 per cent ; for skilled mechanical labor, 60 to 75 per cent. In the cotton-mills of New England the advance in the prices paid to female adults working by the piece was 50 per cent ; of male adults, ditto. 1 In general, the effect of the agencies growing out of the war was to raise prices about 90 per cent, while the corresponding advance in wages was not in excess of 60 per cent. 2 Elsewhere we have seen that Mr. Wells considered the excise to have been one of the chief agencies, if not the chief, to which this inflation of prices was to be attrib- uted, and hence one of the means for raising the cost of living of the laborer, and the reduction of his standard of life. The taxes were in great part coerced wages in the form of diminished consumption of clothing, boots, food, etc., which the wage-earner was able to command as the fruits of his earnings. Were it necessary to substantiate the testimony of these statistics of prices and wages, it is to be found in i " Cobden Club Essays," 1871, p. 481. 2 Report of Special Commissioner of Revenue, 18G6, p. 14. INDIRECT TAXES UPON CONSUMPTION. 179 the evidences of curtailed consumption which character- ize the period, and which contribute to corroborate the theory that taxation may be a significant force in deter- mining the plane of life of a people. During the years coincident with the war the natural increase in the pop- ulation of the loyal States was approximately four mil- lion souls, but the statistics of consumption for the same years show a constant and marked falling off in the demand for the staple necessities of life. Of cotton, for example, the home demand fell off from 978,043 bales in 1860 to 554,400 bales in 1865 ; of coffee the consumption during the years from 1855 to 1861 was 548,000 tons, which declined during the next six years to somewhat over one-half that amount. Sugar demand fell off in a like manner nearly fifty per cent ; while in textiles, boots, shoes, and the like, the same diminution in consumption was apparent. 1 From this it will be seen that consumption was ma- terially decreased during this period ; and while to the casual observer it might appear that wages had increased and the condition of the laborer improved, the rise in wages was merely an apparent one, for real wages, as measured in commodities, had actually declined. In order fully to appreciate this it 'must be remembered that there are real and nominal wages. The latter are the apparent wages of labor, represented by the cur- rency of the country, while the former are determined by the standard of living of the consumer. As the statistics indicate, nominal wages do not rise or fall concurrently with the rise or fall of prices. The pi-ice of labor is always less susceptible to the 1 David A. Wells, in " Cobden Club Essays," 1871, p. 482. 180 THE INTERNAL REVENUE SYSTEM. sudden influences of artificial causes than those of com- modities, and the reasons are not far to seek. The manufacturer, producer, or merchant is able to foresee the change, and can put up the price in anticipation of its arrival. Such is not the case with the wage-earners. They, like society, move as a mass, by a slow growth of consciousness. Labor is, moreover, more ignorant and more at the mercy of the moment, and has neither the ability nor the knowledge to anticipate and protect itself from the change which has taken place in other articles. Upon learning that the prices of other articles have advanced, the wage-earner does not immediately put up its price, because the inertia of the market is too great to be at once overcome. It is not until the full force of the movement reaches him, and he, as a class, finds that his nominal wages have lost purchasing power, and fail to secure for him what, according to his estab- lished habits, he has become accustomed to, that he begins to insist upon an increase in his wage. But while they are slow to move, wages do follow the market price of commodities in a rough kind of a way ; and as a sort of compensation, and this tends to allevi- ate the hardness of the burdens which the period km posed, labor is very reluctant to submit to a reduction again when prices resume their normal level. 1 i " In the previous report of the commissioner it was proved, that while up to the commencement of the year 1867 the average advance of commodities was about 90 per cent, that of wages was not in ex- cess of 60 per cent. Now, however, the case is being entirely reversed ; commodities have fallen so much more rapidly that the purchasing power of wages, even when reduced, is probably greater at the pres- ent time than when they had attained their maximum." — Report of Special Commissioner of Revenue, 1868, p. 30. INDIRECT TAXES UPON CONSUMPTION. 181 Further evidence is hardly necessary to demonstrate the effect of the inauguration of a new system of taxa- tion imposed upon the staple necessities of life, upon consumption, or the grievousness of a heavy excise upon those dependent for support upon fixed incomes or their daily toil. Such a system, if as excessive and universal as that imposed during the Avar, is unjust and discriminating ; since it enforces unequal sacrifices upon contributors, and enables one class to enrich itself at the expense of the more dependent members of the community. C. The Excise and Industry. The tracing of causal relations in trade, commerce, and industry is an exceedingly complicated and delicate task ; and any attempt at exactitude must be acknowl- edged to be well-nigh hopeless. To single out a partic- ular cause, and attribute to its influence the changing phenomena of industrial relations at a time when the state was interfering with private enterprise on every hand, and when it was itself a very considerable con- sumer of all forms of commodities, would lead to unjustifiable conclusions ; for this was a period pre- eminently of reorganization in all forms of trade and industry. Nothing was stable or fixed ; the circulation of the country was inflated, speculation was well-nigh universal, and the war induced many reckless undertak- ings. The excise still further complicated industrial relations, but the effects of its influence differ according to conditions. In some instances it bore with a heavy hand, curtailing the productive power of small concerns, in some cases destroying them altogether; in others it served as a stimulant to intensified production, while 182 THE INTERNAL REVENUE SYSTEM. not infrequently it operated to accelerate the spirit of combination by segregating these smaller producers. Upon this latter class, it is generally conceded, the taxes were very burdensome ; and, in fact, an excise, if heavy, is nearly always prejudicial to small producers. The duty advanced is hard to shift in the first instance, as the inertia of the market resists any increase in prices, and is slow to respond to any change in the cost of production. Much hardship was thus caused in the early days of the war, before prices had become elastic, and industry accustomed to the altered conditions of production. Moreover, the excise failed to take account of a losing business ; and, while the period is one of quite general industrial activity, it Avas more or less abnormal, and the records of mercantile mortality indicate the death-rate to have been unusually high. Many firms produced for months at a loss, as even this course was preferable to complete suspension ; and from such indus- tries the license and general excise duties were as ruth- lessly collected as from those producing at a handsome profit. As a representative case in point, the Commis- sion reported a firm whose losses in business for six months were ninety-six thousand dollars, of which sum twelve thousand dollars had been paid in taxes. 1 The stamp-tax was also so devised as to give considerable advantage in the form of a discount to those purchasing in large quantities, a discrimination which has been held to have been sufficient, in the case of the match industry, to concentrate the industry of the entire coun- try into a few hands, who have continued to monopolize the production up to the present day. In addition to 1 House Executive Doc. No. 34, Thirty-ninth Congress, p. 5. INDIRECT TAXES UPON CONSUMPTION. 183 this, the advancement of the tax was of itself sufficient in many instances to cripple the small manufacturer; while the larger capitalist, ever alive to the advantages of the market, was able to profit by the same, as well as the opportunities for evasion. As a matter of fact, all the discriminations favored the large rather than the small producer; and the general tendency of these dis- criminations was to force those with the least staying power to the wall. But, despite the burden of taxation, the ravages of war, and the removal of millions of men and capital from productive pursuits, the prosperity of the country seems not to have been greatly checked. It is doubtful if the country was in any great degree poorer at the close of the war than at the beginning ; the explanation of which is to be found in the intensifica- tion of industry traceable to the stimulating effect of increased demand, and to the incentives given to produc- tion by taxation. Such was the opinion of Mr. "Wells, written in 1867 : " It is not believed," said he, " that any great amount of Northern capital, accumulated prior to the war, was used or destroyed during the war, but that the service and commodities used were largely the product of the time." 1 John Stuart Mill admits that a tax upon profits may serve as a fillip to industry, stimulating to intensified production, and the discovery and introduction of im- proved methods, which tend to cheapen production with- out depleting the income of the manufacturer. All acknowledge this to have been a period of great appar- ent prosperity. Industry sprang full grown into life, 1 Report of Special Commissioner of Revenue, 1867, p. 19. 184 THE INTERNAL REVENUE SYSTEM. fortunes were rapidly acquired, "while labor found a ready market for its activity. On the other hand, con- sumption of staples in time of war is not likely to equal that of peace. There are no more mouths to feed nor backs to cover. At the same time enforced economy is likely to diminish demand for many articles, the only increase in consumption lying in the field of muni- tions and appliances of war. Experience seems to prove also that production does not suffer any great check, either through the transfer of labor to military service, or through moderate demands of the taxing power. The productive power of the country may, in fact, be in- creased. The farmer, for instance, will not permit his fields to lie idle because one of his sons has entered some other pursuit, nor will the capitalist allow the wheels of industry to rust because the state has assumed a portion of the produce. So long as a market remains, each will seek to compensate himself for the loss which he has endured. Either remaining labor will intensify its exertions, or ingenious contrivances will be devised to supply the depletions of labor, or to compensate for the exactions of the tax-gatherer. That these phenomena characterized the period now under discussion is too well known to require proof. A brief glance, however, at the statistics of the patent office for these years may demon- strate somewhat more graphically that such tendencies were really operative. The total number of patents is- sued during the years extending from 1861 to 1866, as well as the total taxes collected, were as follows : — PATENTS INTERNAL TATENT8 INTERNAL GRANTED. REVENUE. GRANTED. REVENUE. 1861 3340 1864 4637 $110,210,000 1862 3521 $ 1,790,000 1865 6220 210,660,000 1863 3780 39,120,000 1866 9100 311,200,000 INDIRECT TAXES UPON CONSUMPTION. 185 From this it will be seen that the number of patents issued varied in a ratio corresponding somewhat roughly with the amounts derived from internal taxation, in- creasing but slightly up to 1863, but from that time on growing at a rapid rate. Such a coincidence would seem to -indicate some relation existing between them. In agriculture the development of labor-saving machin- ery ^was phenomenal, and is attributable, in part at least, to the drain on the rural laboring classes for recruiting the army ; but in industry the same scarcity of laborers was not so marked, and the cause for the unprecedented development of labor-saving machinery is found in the desire of the manufacturer to indemnify himself for the inroads made upon his capital and income by the state. It is true that many industrial establishments were checked, some even destroyed, by the excise. These were the marginal producers, the no-rent " entrepre- neurs" whose elimination from the field of competition gave those remaining an additional stimulus for exer- tion. A glance at the change which the period wrought in the textile industries of New England, as well as in the iron and steel business of Pennsylvania, which dur- ing these years of disordered trade conditions were run- ning full hands, proves that wealth was being produced at a rapid rate, and that the country was not being impoverished by the demands of war. P. Conclusion. To reach any proper estimate of the vast and com- plicated fiscal system which we have been consid- ering in the last four chapters, it is necessary to take 18G THE INTERNAL REVENUE SYSTEM. cognizance of the fact that the excise was the prod- uct of extraordinary conditions ; as in all our periods of financial change a gigantic war formed the back- ground, demanding contributions so unusual as to set exact, or even approximate, justice at defiance. The imperative necessities of the occasion precluded a care- ful and scientific study of the consequences and burdens of the taxes provided for, and, even were it possible, under the most favorable circumstances, to determine with precision the incidence of taxation in general or of each tax in particular ; if one could determine to what degree each tax was susceptible of being charged to a particular class, or upon a particular commodity, trade, or business ; if one could determine consequently upon whom it is socially the most legitimate to cause the public burdens to fall, — even were such problems as these susceptible of exact scientific determination, as they are not, it is hardly to be expected that Congress, with no special knowledge of the principles of finance, with no precedents for guidance, and with little statis- tical data of manufactures or commerce, should have been able to solve "the art of plucking the fowl with- out making it cry out." In view of all these circumstances, our amazement is not so much that so many social, moral, and industrial ills should have followed in the trail of the fiscal legis- lation of the period, but rather that any nation could have sustained the withdrawal of business capital to the amount of $4,660,000,000 by loans and treasury notes, of $666,000,000 by internal taxation, and $525,- 000,000 by customs duties, without being well-nigh pros- trated thereby. Yet such was the experience of this INDIRECT TAXES UPON CONSUMPTION. 187 country during the years extending from 1861 to 1866 ; but so elastic was industry, and so versatile the ingenu- ity of the people, that the burden, though appreciable, scarcely checked the onward inarch of the country's prosperity. The early policy of the Administration was to leave industry untouched, and to rely in great measure upon the proceeds of loans and treasury notes. A similar misplaced confidence in the customs revenue and credit of the country had brought the administrations of Gal- latin and Campbell to the brink of insolvency in 1814, and Secretary Chase did not escape a like fate. It is hardly too much to state that, had the machinery for immediately realizing on the currently created wealth of the country existed at the outbreak of the war, the receipts from such internal sources as the income tax, license, stamp, spirit, and tobacco duties might have been rendered immediately productive of $100,000,000, a resort to treasury notes might have been averted, and the war been brought to a more speedy termination. Moreover, when Congress did take the matter seri- ously in hand, its action was such that the consumer was frequently unnecessarily oppressed, while the Treas- ury received the minimum of return from the maximum of effort. And the general excise upon consumable commodities, other than spirits and tobacco, was in the main responsible for the evils which resulted. It was to the influence of these taxes that much of the specu- lation, uncertainty, and business disaster which marked the period was attributable. They induced an undue enhancement of prices; they took from the pockets of the payer much more than ever reached the Treasury. 188 THE INTERNAL REVENUE SYSTEM. Wages were affected by them, both in the diminution of active capital devoted to business, but much more by the increase in the cost of living which ensued. At the same time the excise, together with the tariff, gave to all industry an artificiality and instability which became manifest in the great number of commercial failures which followed in the wake of the war. Small establishments were forced into liquidation or concentration with other concerns, while many others, by inequalities of the tariff and internal taxes, ceased producing. In general, commercial conditions were in a state of great instability, and continued so for many years subsequent to the close of the war. But the defence of the general excise on manufac- tures was that it was productive. Not immediately as fruitful as Mr. Morrill had anticipated in 1862, when he estimated its productivity at $75,000,000, but still so important as to form 34. 61 per cent of the total receipts during the five years of its continuance, from 1863 to 1868. Obviously, to have deprived the Treasury of this important source of revenue would have caused serious embarrassment. And it is doubtful if the financial sup- port necessary for the conduct of the war could have been secured, save at great sacrifice, without the aid of these taxes, baneful as they were in their effects. Even before their imposition the credit of the country had been strained to the utmost to meet the demands placed upon it. A further dependence upon loans was appar- ently out of the question. The only other alternative lay in the discovery of new sources, or other means of realizing upon currently created wealth through other forms of internal or customs taxes. But already the INDIRECT TAXES UPON CONSUMPTION. 189 customs rates were well-nigh prohibitive, and the only escape from the general excise, with its many imper- fections and evils, lay in some such concrete system of inland taxation as the Commission suggested for the reorganization of the finances at the close of the war. This contemplated a concentration upon incomes, lux- uries, stamps, licenses, and some of the other less objec- tionable forms of revenue, which would have relieved the country from the burdens of the tax upon manufac- tures and products. But the rates upon these subjects were already as high as they would bear, and any at- tempt to increase the rates would have resulted in evils and complications greater than those sought to be avoided. And had such a concrete system been de- pended on without some such change of rates, the Treas- ury would have been deprived of $36,222,716 in 1864, of $73,318,450 in 1865, and of $127,230,608 in 1866 (the collections from manufactures and products), or 31, 35, and 41 per cent of the total receipts from internal sources during these critical years. To suppose that these collections could have been ren- dered good by a further resort to the income tax and an increase in the duties upon distilled and malt liquors, tobacco, stamps, and licenses, which, as has been shown, were already taxed at an almost prohibitive rate, is un- tenable ; and we are forced to conclude that public policy justified measures which seem to have been as inimical to the material interests of the country as any that could have been devised. The experiences here described are further instruc- tive, in the highest degree, of the practical limits set by nature to the power of government to derive revenues 190 THE INTERNAL REVENUE SYSTEM. by taxation. A government may be loath to admit its inability to cope with the ingenuity and cupidity of private interests, and to acknowledge its incompetency to collect any rate of taxation which it may choose to impose ; but the experience above recorded proves most conclusively that a fiscal system, to be efficient, must not contravene the principles of human nature, or place too great a strain upon official integrity, or too high a pre- mium upon dishonesty ; and that a government which disregards this elementary principle, not only cheats itself, but tends to degrade the standard of public honesty and probity. Moreover, nothing displays the boundless resources of the nation more strongly than the ability with which the people accepted and bore a system of taxation almost unparalleled in its univer- sality and in the rates which it imposed. We have seen the internal revenue system, however, in its worst light. Later modifications have brought the system into such universal favor that to-day it is opposed only upon political or sentimental grounds. Fraud and evasion have been reduced to a minimum, while the objection formerly advanced with so much effect, namely, that it interfered with individual liberty, has disappeared before the advancing sense of the peo- ple. The cost of collection has further been so reduced that the excise has become the cheapest of taxes. Moreover, as it now exists, and under ordinary condi- tions, the charge of inquisitorialness cannot be applied to it, although at one time this doubtless constituted a grievance with the people. But a consideration of these changes will be deferred to a later chapter. ITS ADMINISTRATION. 191 CHAPTER VII. THE ADMINISTRATION OF THE INTERNAL REVENUE SYSTEM. A tax may be theoretically the most just that can be devised, but in its collection so fraught with difficulties and complications as to render it untenable. It is the supposed difficulties inherent in its administration that have condemned the excise in the past, for it has been supposed that, in addition to the fact that it is cumula- tive, and requires a large number of officials to collect it, the excise obstructs industry, is a check to its de- velopment by requiring a disclosure of processes and methods of manufacture, and is thus inquisitorial and hostile to the spirit of a free people. Moreover, an ex- cise is said to offer great opportunities for evasion, either by false returns or by connivance with dishonest officials, and in this way tends to discourage public probity, and degrade the moral tone of a people. Such objections as these have been, and are still, urged against the excise in foreign countries, and it was such a traditional dislike in the minds of the colonists of English and Irish descent, with whom the idea of an excise was inseparably connected with the window and hearth tax, that induced much of the hostility against its inauguration in this country in the early days of the Republic. Many of these objections were well founded during the greatest extension of the excise ; but at the 192 THE INTERNAL REVENUE SYSTEM. present time, with the reduction of the number of tax- able articles and the perfection of the machinery of administration, such arguments have lost their force, for later changes have elevated the system well-nigh be- yond reproach. In administrative details the collection of the tax has undergone many changes since the organization of the department under the law of July 1, 1862. This meas- ure followed closely earlier precedents, both in the selec- tion of articles to be taxed, as well as in prescribing how they should be placed under contribution. In 1861, in harmony with the prevailing belief in the early suppression of the war, no provision was made for a permanent and independent bureau of internal rev- enue. The assessment and collection of the direct and income taxes was reposed with the Secretary of the Treasury, under whose direction was placed a Commis- sioner of Taxes, whose duties were those of preparing forms, and general superintendence of subordinate offi- cials. But the growing appreciation of the enormity of the struggle, and the necessity for increased revenues from inland sources, led to the creation of the office of Commissioner of Internal Revenue, whose duties were mainly ministerial and administrative ; the new official being charged, under the direction of the Secretary of the Treasury, with preparing all instructions, regula- tions, directions, forms, blanks, stamps, licenses, and the distribution of the same, as well as all other matters pertaining to the assessment and collection of the tax, and its general superintendence. A definite number of deputies and assistants Avas provided for, to assist him. Along with these were five, and later ten, special agents, ITS ADMINISTRATION. 193 whose duty it was to aid in the prevention and detection of frauds, and to look after the general enforcement of the law. 1 For convenience of collection, the States and Terri- tories were divided into districts, varying in size accord- ing to density of population or other conditions, in each one of which a principal assessor and collector were appointed, endowed with plenary power further to sub- divide their districts into smaller areas, in which assist- ant officers were to be appointed. 2 Certain small or sparsely populated States comprised one district ; while others more densely populated, as the eastern manu- facturing States, were divided into a large number of administrative districts. Thus Xew York included 32 districts, Pennsylvania 21, Ohio 19, Illinois 13, Indiana 11, and Massachusetts 10. 3 These districts were usually coextensive with Congressional districts, and could not exceed them in number. Keturns were required from all persons, partnerships, firms, associations, or corpora- tions rendered taxable, before the first Monday in May of each year, the return to include the amount of annual income, the articles or objects charged with a tax, the quantity of goods, wares, and merchandise made or sold, and charged with a specific or ad valorem duty, accord- ing to the forms as provided by the Commissioner of Internal Kevenue. In case of failure on the part of the taxable to make such return, the assessor was empowered to make up the tax duplicate from the best information i Act of July 1, 1862. 2 See Report on Finances, 1867, p. 266. 3 Boutwell's "Direct and Excise System in the United States," 1864, p. 242. 194 TIIE INTERNAL REVENUE SYSTEM. available ; and, if any person disclosed a false list to the official with intent to evade payment, he was finable in a sum not exceeding $500. In case of refusal to make return, the assessor was empowered to enter upon the premises, and make out a list of taxable objects, and add thereto fifty per cent as a penalty for refusal. If any person objected to his assessment, the right of appeal from this decision of the official was allowed. These lists, with the taxes payable thereon, were deliv- ered to the collector of the district, who was authorized to proceed with their collection ; and, if the duties were not paid within ten days after such demand, he was empowered to collect by distraint and sale of the goods, chattels, and effects of the delinquent, and to add thereto ten per cent as a penalty. Lists of collections were transmitted monthly to the commissioner, and de- posits were made by the collectors, upon order of the commissioner, in such depositaries as were designated by him. At the organization of the system the force of offi- cials was unusually large, although even at this time the commissioner asserted that the number employed did not equal that of other countries where similar systems prevailed. 1 From the inauguration of the system, the adminis- tration suffered seriously from the changes continually made in the personnel of the employees, which com- pletely neutralized the most zealous efforts to secure a trained service. In 1867, when the entire number of collectors slightly exceeded 700, the number of removals for the year was 230 ; 2 while, of the 3,100 assessors and i Report on Finances, 1867, p. 2G8. 2 Ibid., p. 207. ITS ADMINISTRATION. 195 assistants in the service that year, over one-third were supplanted by new and untried appointees. As a very natural result, inefficiency and maladministration char- acterized the service, dissipating the confidence of the public, and deleteriously affecting the revenues. Two causes were in the main responsible for this result : one, the inadequacy of the remuneration offered ; but by far the most potent cause was the absence of a merit system for the determination of appointments. Probably no branch of our national administration has suffered so much from the spoils system as has the in- ternal revenue service ; for in no department of the gov- ernment are efficiency and honesty so essential in the employee. In addition to the regular officials enumerated above, temporary assessors were engaged during the annual assessments, while a small army of detectives and in- spectors for the prevention of fraud were constantly employed. Plenary authority was granted all grades of officials, and the principle of personal responsibility was insisted on. Every subordinate received his commission from his immediate superior, who directed his work, required commensurate bonds, and was directly respon- sible for his acts. 1 By this means it was hoped to relieve the central administration of a vast amount of detail and minutia, while it was further thought that the numerous gradations of officials would serve as a corrective of errors in accounting. That these latter expectations were not fulfilled, may be inferred from a treasury circular dated December 29, 1865, from which it appears that, during the preceding four months, over 1 Report on Finances, 1SG7, p. 266. 196 THE INTERNAL REVENUE SYSTEM. three hundred and sixty-five errors had been detected in the returns, involving amounts ranging from a few cents to sixty thousand dollars. Embezzlement was also more or less frequent, but the greatest losses were traceable to the incapacity and dishonesty of officials and to poor assessments. So badly was the system administered, in fact, during the first two or three years, that it has been estimated that less than one-third of what was paid by the people passed into the Treasury. 1 In 1865, compe- tent authorities calculated that existing laws should have produced $500,000,000, while, as a matter of fact less than half that amount was collected. Innumerable cases might be instanced to demonstrate that the extravagance of the war was quite equalled by the wasteful and inefficient methods of administration which prevailed, evils which were so flagrant as to cause the entire system to be viewed with suspicion and dis- trust. The duties upon many articles were so high as to stimulate evasion, while the probability of detection was so unlikely that it failed to serve as a deterrent. Corrupt whiskey rings influenced the appointment of men who connived with them in evading the duty, so that distil- lers, otherwise honest, were forced either to suspend business or become partners to the crime. As the com- missioner stated, "It requires a man of tried integrity to resist the flattering temptation of a corrupt distiller. Ten thousand dollars adroitly and wickedly expended may hide the manufacture of a thousand barrels of wine, which would yield a hundred thousand dollars for the public revenues. If an inspector has forgotten his duty in a single instance, he is in the power of his pur- 1 Commercial and Financial Chronicle, 1870, p. 711. ITS ADMINISTRATION. 197 chaser for all subsequent transactions, becoming his constant protector, and his ready witness against the government." 1 During the continuance of hostilities but little effort was made to introduce the system into the rebellious States. With the triumph of the Union arms and the restoration of peace in the border States, officers were appointed to proceed with the collection of the tax ; and it became necessary to decide whether or not taxes which had accrued prior to the establishment of federal authority therein should be collected. Secretary Mc- Culloch decided that in view of the non-existence of officers to whom payment could have been made, as well as the heavy and exhausting burdens and ravages of the war already resting upon these States, that, without waiving in any degree the right of the government in respect to the taxes, the department did not deem it advisable to insist on their payment, so far as they were payable prior to the establishment of a collection district embracing a territory in which the tax-payer resided. 2 For similar reasons the secretary was induced to sus- pend the sales under the direct tax. In view of these facts, as well as the grave difficulties which would arise, and the interests which would be invalidated were the provisions of such taxes as the stamp-duty insisted on, Secretary McCulloch advised : — First, that the collection of all internal revenue taxes which accrued before the establishment of revenue offi- cers in the Southern States be indefinitely postponed ; Second, that all sales of property in those States under the direct tax be suspended until the States should have i Keport on Finances, 1866, p. 56. 2 Ibid., 18C5, p. 29. 198 THE INTERNAL REVENUE SYSTEM. an opportunity of assuming the tax ; Third, that all transactions in such States, which may be invalid by the non-use of stamps, be legalized. 1 These recommendations were substantially adopted, and as rapidly as possible federal tax-gatherers were appointed, and the system extended to the reconstructed States. The perfection of the details of the service received, but scant attention during the war ; but with the growing familiarity of officials with its defects from the disclo- sures of the press, as well as the invaluable investiga- tions of the Revenue Commission, the importance of administrative efficiency became apparent. A careful revision of so much of the law as related to the manu- facture and assessment of distilled spirits was made at the instance of the Revenue Commission in the years immediately subsequent to the war, the leading feature of which was the subjection of each distillery to the direct surveillance of a government inspector, whose duty it was to oversee the process of manufacture and sale, and the assessment of the duty. While the change was conducive of greater fidelity on the part of weighers, gaugers and other officials, and placed an additional check upon them, the powerful inducements which could be offered by the dishonest distiller frequently neutral- ized the effect of the measure ; and there was no provis- ion for constant rotation of the inspectors from one still or district to another, as was suggested by the Commis- sion, a provision which would have greatly enhanced the efficiency of the law. But the effect of this, as well as all other remedial efforts on the part of Congress, was 1 Finance Report, 1865, p. 30. ITS ADMINISTRATION. 199 checked by the dishonesty, complicacy, and inefficiency of officials, traceable in part at least to the system of ap- pointment and retention in office for political service. With the abatement of the duties, and the decrease in the number of taxable articles, the defects of the method of assessment were more noticeable. During the war, stamps had proven a most effective method, not only as a means of taxing acts and instruments, but also certain classes of commodities as well. The method was simple, the returns easy of collection, and evasion well- nigh impossible. In 1868 2 this plan was extended to tobacco, malt and distilled liquors, and license duties, and with some slight alterations remains the method of assessing these objects at the present day. By this plan, the stamp, of proper denomination, is affixed to the package containing spirits, beer, or tobacco, with an in- dication upon its face of the quantity of the article within. In the case of special license taxes a similar stamp is required to be prominently displayed in the place of business. The results of this change were im- mediate and marked. Receipts from all sources showed a quick response, while the difficulties of collection were reduced to a minimum. This reduction of the number of taxable objects, and the substantial concentration of the system upon luxu- ries, banks, legacies, and a few commodities, soon ren- dered possible still further simplification. Heretofore assessments had been made by local officials, appointed in each revenue district. In 1872 2 the local force was abolished altogether, and the official force reduced by the dismissal of 228 assessors, 240 clerks, 1,040 assistant i Act of July 20, 1868. 2 Act of Dec. 24. 200 THE INTERNAL REVENUE SYSTEM. assessors, their work being centralized at the Treasury Department, and the commissioner authorized person- ally to make the various inquiries, determinations, and assessments of taxes which had heretofore been done by these local officials. Under this arrangement assess- ment lists are now made up by the commissioner, and forwarded to the collectors of the various districts, thus insuring greater uniformity in returns. The change was most radical, but the results proved equally aston- ishing. In addition to saving nearly $2,000,000 annu- ally in the form of salaries and expenses, an immediate increase in the revenues resulted. This was especially noticeable in the case of license taxes and those on banks, an increase in collections of half a million accru- ing from the latter source in 1874, and of nearly ninety per cent from the former. At the same time * the num- ber of revenue districts was reduced to eighty ; but this revision never went into effect, although four years later the number was reduced to one hundred and thirty-one. 2 The system of local administration, as above de- scribed, depended wholly on the assumption that local officials are honest. And where such is the good fortune of the government the tax has been uniformly collected. It would seem that with the intricate system of checks imposed, illicit distillation would be well-nigh impossible ; yet so much more acute is private activity, when inspired by cupidity and the probability of great gains, that these guards have, from time to time, been broken down. But to do this it was necessary to secure the co-operation of both the storekeeper and the gauger, and then to place the spirits upon the market through i Act of June 6, 1872. 2 Act of Aug. 15, 1876. ITS ADMINISTRATION. 201 the re-use of stamps, or by the co-operation of the rec- tifier. It was by such means as these that the great frauds, extending from 1872 to 1875, were committed ; and so strong were the interests involved, and so inscrutable the means employed, that it required the most vigorous efforts on the part of the government to extirpate the ring, and bring the leaders to justice. The mania for fraudulent profits, so long gratified during the war, sought other avenues for gain at its close ; and while the reduction in the rates and the changes in the service rendered the profits more precarious and the advantages resulting less tempting, still they were sufficient to call into being the great whiskey ring in the early years of the decade beginning with 1870. The fortunes of this corrupt organization were fostered by the connivance of many influential persons high in public authority. Or- ganized at first for the promotion of certain political aims, after their accomplishment it was conducted for the fraudulent advancement of private ends ; and so notorious at last became its operations, and so wide- spread its influence, — the nation itself being co-exten- sive with its operations, — that an investigation was made, its methods exposed, and the principals brought to justice. The enormity of the ring's operations will never be fully known, but a partial appreciation may be had from the fact that in St. Louis alone the losses to the revenue approximated $1,200,000 annually. 1 As 1 For a graphic account of the methods and aims of the ring, as well as the many prominent puhlic officials implicated, see the con- fession of General John McDonald, " The Secrets of the Great Whis- key Ring, and the newspapers of the day." 202 THE INTERNAL REVENUE SYSTEM. further indicative of the immensity of its operations, the commissioner reported in 1875, that he had document- ary evidence that warranted him in seizing twenty-four distilleries and thirty-seven rectifying houses, implicat- ing over fifty United States officials. The evidence further showed that there had been issued during the ten months extending from July 1, 1874, to May 1, 1875, 20,000 packages of fraudulent spirits ; while, by the aid of false gauging, over one million additional gallons escaped, entailing a loss to the government during this comparatively short period of $ 1,650, 000. 1 During the years covered by the operations of the ring, the total losses to the Treasury amounted to at least four million dollars. Since this time the revenue service has been con- ducted with singular fidelity, and has steadily improved in efficiency. Evasions still occur, and some illicit dis- tillation is still carried on in the outlying districts and in the large cities. Discoveries of illicit distillation have markedly increased since the last increase in the rate to $1.10 per gallon; and the average number of stills destroyed since the rate went into effect has approximated one hundred and fifty per month. The most strenuous efforts of the department have been ineffectual in closing up the moonshine stills in the South; and recently large numbers of small stills have been discovered in the Xorthern cities, where a still with a capacity of forty or fifty gallons per day can be secreted in a cellar or garret, and an inferior quality of spirits produced at an average cost of less than twenty- five cents per gallon. Such a still costs but a few dol- 1 Report on Finances, 1S75, p. 157. ITS ADMINISTRATION. 203 lars, and detection is only possible as the spirits are placed on the market. The loss which accrues to the revenues from this source cannot be estimated with any exactitude, but it has been placed at more than four million dollars annually. In concluding this sketch of the years of experimenta- tion by means of which the present perfected machinery foi the garnering of the resources of the nation into the Federal Treasury has been brought about, it may not be inadvisable to describe in some detail the workings of the internal revenue department in the collection of the several taxes at present imposed. The ground plan of the system has not changed fundamentally from the out- lines defined by Hamilton over one hundred years ago. As in the department of customs, the chief ministerial officer is the commissioner, whose duties remain sub- stantially as outlined in the Act of 1862, as described in an earlier portion of this chapter. In recent years, with the gradual reduction of the system, there has been a tendency to centralize and simplify the collection of the taxes, as is seen in the abolition of -the offices of dis- trict assessors, as well as in the reduction of the collec- tion districts, of which there are at the present time but sixty-three. 1 It is now the duty of the commissioner to make all inquiries, determinations, and assessments of all taxes and penalties, and to certify a list of such assessments to the collector of the proper district, who is authorized to collect and account for the same to the commissioner. The latter officials are appointed by the President, by and with the consent of the Senate, 1 The number was reduced to 131 in 1876; to 12G in 1877; to 84 in 1883 ; and to G3 by Executive Order of May 21, 1887. 20-1 THE INTERNAL REVENUE SYSTEM. and must be residents of the districts in which they serve. Every collector, before entering upon the duties of his office, is required to execute a bond, with not less than five sureties, conditioned upon the faithful per- formance of his duties. He is then empowered to appoint as many deputies as he may deem necessary, for whose actions he is, in a like manner, held re- sponsible. In addition to the official force directly employed in the collection of the taxes, there are appointed by the commissioner a certain number of special agents, who are deployed from the central office for the purpose of checking any attempted evasion or suspected complicity on the part of other officials ; while the Secretary of the Treasury is authorized to appoint, wherever ■ deemed necessary, a certain number of gaugers and storekeepers, whose duties will be described later. SPECIAL OR LICENSE TAXES. The license taxes now remaining upon the statute books may be looked upon as subsidiary and ancillary to the general specific duties imposed upon distilled and malt liquors, tobacco, and oleomargarine. Since 1872 1 all license taxes have been collected by means of stamps, which must be conspicuously displayed in the place of business ; and on default of the same the dealer is sub- ject to severe penalties. The duty is a graduated one, and applies to all persons, firms, and copartnerships engaged in the business of manufacturing, selling, or dis- tributing these articles, save retail tobacco dealers, who l By Act of Dec. 24, 1872. ITS ADMINISTRATION. 205 liave been exempt since 1890. l It is, in effect, a charge, as a condition precedent to the transaction of business ; and the rates range from $G00 upon the manufacturers of oleomargarine and $200 on rectifiers of spirits hav- ing a still capacity of 500 barrels or more, down to $20 upon retail dealers in malt liquors. Every person en- gaged in any one of the businesses subject to the tax is required to register with the collector of the district, and furnish specific information in regard to his resi- dence, place of business, etc. DISTILLED SPIRITS. No portion of the service has been the object of greater attention on the part of the government than the collection of the tax upon distilled spirits, and no part of the system is now administered with greater fidelity. However faulty the collections may have been in the past, it is safe to say that at the present time evasion is almost unknown outside of the " moonshine " districts in the mountainous regions, and in the large cities. By a system of checks and espionage, the pro- duction of distilled spirits is substantially in the hands of the government; for it oversees the production of the article from the moment the grain enters the store- house until the manufactured article is retailed. The distiller is little more than the agent of the government in the matter. He invests his capital, and assumes all the risks. His still must be constructed according to approved plans, his machinery must pass inspection and 1 By Act of Oct. 1, 1890, so much of the tax as applied to dealers in tohacco and cigars, manufacturers and peddlers of the same, was repealed. 206 THE INTERNAL REVENUE SYSTEM. be of an approved pattern, ere he can begin operations. No movement goes unrecorded, the severest penalties are enforced against him for breach of regulations, and his entire plant and bond may become forfeited upon some mischance or inadvertent act. Even the keys of the cistern-rooms, fermenting-tubs, warehouses, etc., are in the hands of the government ; and the distiller is even denied access to the place of manufacture save upon permission, or to the warehouse after the spirits have been placed in bond. Not only is the distiller required to transmit to the collector a minute account of the operations of the still, but a government storekeeper is placed in charge of each distillery, whose duty it is, in addition to the oversight of the warehouse, to keep a daily account of all the materials brought to the dis- tillery to be used in the business, of all fuel consumed, repairs made and by whom, of the materials put into the mash-tub, of the time when any fermenting-tub is emptied, and of all the spirits drawn off from the receiving-cistern, and, in fact, every operation of the business. All of this is carefully recorded, and trans- mitted to the Commissioner of Internal Revenue, as well as to the collector of the district. From the dis- tiller a similar account is also required. "When pro- duced, the spirits are placed in packages under the supervision of the gauger, who proves the same, and cuts upon the package containing the spirits the quan- tity contained therein in wine and proof gallons. They are then removed to the warehouse, where the gauger, in the presence of the storekeeper, places upon the head of the package an engraved stamp, signed by the collec- tor of the district as well as by the storekeeper and ITS ADMINISTRATION. 207 ganger, upon which is written the number of proof gal- lons in the cask, the name of the distiller, date of receipt in the warehouse, and the serial number of each cask or package. Here they are permitted to remain for the term of eight years, when they must be with- drawn, tax paid, under penalty of forfeiture of bond, and placed upon the market. Upon withdrawal, they again pass under the review of the several officers of the gov- ernment, are gauged, and allowance made for leakage. The package is again stamped, the contents noted upon the package, and the article is ready for market. By this system of checks and counter checks, success- ful evasion in a registered distillery has become well nigh impossible. To perpetuate fraud, it is first neces- sary to secure the co-operation of the gauger and store- keeper in the making of returns. But even this is highly dangerous, from the fact that the government is in possession of records relative to the producing capa- city of each still, as well as the fermenting and mashing period of the same. As a further check, officials are lia- ble to be transferred from one still to another, without notice ; while the special agents and surveyors in the employ of the government are empowered at all times to enter and examine the books and operations of every still, and report on the condition of the same. In the fiscal year 1894, 2,729 violations of the inter- nal revenue laws were reported by the revenue agents, which led to the arrest of 632 persons, and the seizure of $246,197.96 worth of property; while over forty thou- sand dollars worth of property was seized for unpaid taxes and penalties. 208 THE INTERNAL REVENUE SYSTEM. FERMENTED LIQUORS. Before commencing business, every brewer is required to file with the collector of bis district a notice of such intention, as well as a description of the premises em- ployed, and to execute a bond in a sum equal to three times the amount of the tax, which, in the opinion of the collector, the brewer will be liable to pay during a month, conditioned upon the faithful execution of the law, and the payment of tbe tax upon his product. He is further required to render to the collector monthly a verified statement of the operations of his brewery, the amount of beer produced and sold, and to keep his books open at all times to the inspection of the govern- ment. The same careful scrutiny and supervision provided in the case of distilled spirits has been found to be need- less in the case of the tax on fermented liquors, which is largely self assessed. Stamps are used as in other subjects, 1 but the brewer is permitted to affix them him- self. But in order to prevent their re-use they are re- quired to be placed over the spigot hole on the head of every barrel upon sale or removal from the warehouse, which stamp shall be destroyed by driving a faucet through the same, and cancelled by writing across the face of the stamp the name of the person by whom such liquor was made, as well as the date when can- celled. Severe penalties are imposed upon manufacturers or dealers for failure to comply with these requirements. i The Act of July 13, 1866, provided for this change. ITS ADMINISTRATION. 209 TOBACCO, CIGARS, AND SNUFF. In the collection of the tax upon tobacco in its vari- ous forms, the government depends almost wholly upon the use of stamps as a prevention of fraudulent produc- tion. This method was first introduced in 1868, at the instance of the manufacturers themselves ; and it has proven most efficient as a means for the detection of false returns. Before commencing manufacture, every producer is required to furnish to the collector of the district a verified statement of the location of his busi- ness, the number of machines used, quality of tobacco produced, etc., and to furnish bond in amount ranging from $2,000 to $20,000, conditioned that he will not attempt to defraud the government in the payment of the tax, and that he will make due return of all his pro- cesses, and will properly stamp all his output. Failure to comply with these preliminary requirements renders the manufacturer liable in amounts ranging from $100 to $5,000, and imprisonment. In the conduct of his business the manufacturer is subject to the same restric- tions as in the case of the production of malt and dis- tilled liquors ; he must place a conspicuous sign upon his premises, take an annual inventory of all stock on hand, and keep an itemized account of all the operations of his business, recording all tobacco purchased by him, as well as the amount removed for consumption and sale, or transferred in bond, and must make a verified return of the same monthly to the collector, subject to severe penalties in case of failure. Further stipulations are imposed in the directions for packing and shipping tobacco, the manufacturer being required to put up his 210 THE INTERNAL REVENUE SYSTEM. product in certain prescribed packages, and to stamp the same, and print thereon the manufacturer's name and place of manufacture, the registered number of the fac- tory, and the weight of the contents of the package. And if any person receives for sale tobacco which lias not been properly stamped and branded, he shall be held liable in severe penalties in a like manner. The provis- ions are the same in regard to the manufacture and sale of cigars. OLEOMARGARINE AND OPIUM. As the duties upon oleomargarine and opium are pro- fessedly protective and sumptuary, and not designed as revenue measures, consideration of them has been de- ferred to the present chapter. The measure imposing a duty on oleomargarine was passed in 1886, 1 in response to the existing sentiment against its use and the de- mands of the agricultural interests ; and the measure has been the precursor of kindred acts in nearly all of the States, which have quite effectually stopped its use. The rate of the tax is two cents per pound, or frac- tion thereof, while special license charges are imposed upon manufacturers of $600, upon wholesale dealers of $480, and upon retail dealers of $48. In the assessment and collection of the duty the same minute regulations regarding registration, bond, the keep- ing of books, and returns to the collector, are provided as in other subjects ; while the product must be packed, branded, and stamped according to the directions of the department. Like provisions apply to the manufacture 1 Act of Aug. 2. ITS ADMINISTRATION. 211 of opium for smoking purposes, the rate of tax being ten dollars per pound. 1 The recent measure of Aug. 24, 1894, in so far as it related to the taxation of play- ing-cards, adapted the stamp and registration system to this subject. 2 The collections on behalf of the duties on oleomarga- rine and opium are as follows : — OLEOMABGAKINE. OI'Il'M. OLEOMABGABINE. opima 1887 $ 723,948 1892 $1,266,326 $700 1888 864,149 1893 1,670,644 125 1889 894,248 1894 1,723,480 410 1890 786,294 1895 1,409,211 1891 1,007,924 COST OF COLLECTION". Early experience, as well as the prevailing opinion at the outbreak of the war, inclined to the belief that taxes from inland sources would be so costly of collec- tion as to be of doubtful availability. If a tax signally fail in this respect, it is not easily defensible ; and, while every indirect tax is more or less cumulative in its nature, still, in so far as the initial cost of collection is concerned, it may be contended that the excise taxes have proven to be the most economical of duties. In this respect they stand pre-eminent, for neither the cus- toms revenue nor the States' systems return receipts to the public treasury at so slight a charge as does the federal excise. During the period from 1812 to 1816 the charges i Act of Oct. 1, 1890. . 2 For existing laws relative to internal revenue department and the assessment and collection of the several taxes, see Revised Stat- utes of the United States. 212 THE INTERNAL REVENUE SYSTEM. for collection ranged from 7.8 to 4.8 per cent, and at the organization of the department of internal revenue in 1862 it was estimated that the cost of collecting the excise tax would considerably exceed the customs. From the wide expanse of territory, the almost infinite num- ber of taxable articles, the untrained condition of the service, it was variously estimated during the pendency of the first internal revenue measure in the Thirty-sev- enth Congress that the charges for collection would be from seven to twelve per cent; and it Avas freely con- tended that the excise proper could not reach the Treas- ury for less than fifteen or twenty per cent of its amount. Experience soon demonstrated the falsity of these predictions ; for many of the taxes, such as licenses, stamp-duties, and the taxes on corporations, cost comparatively little and were highly productive ; while the income tax, which returned nearly eleven per cent of the entire revenue collected from inland sources, was likewise an inexpensive one to collect. During the first year's operation of the system, the receipts were comparatively light, — but little over forty- one millions, — while the expenditures consequent upon the inauguration of a new system were necessarily heavy. As the collections gradually increased, how- ever, from 1863 to 1866, in which latter year they attained the sum of three hundred and ten millions, the charges for administration gradually diminished, until, during the latter fiscal year, they were reduced to one-half of what they had been in 1863. The percentage cost of collection during this period, and the gross receipts from internal revenues, were as follows : — ITS ADMIN IS TEA TION. 213 TOTAL REVENUE. COST OF COLLECTION 1863 . . $ 41,003,192.93 5.15 per cent. 1864 . . . 117,145,748.52 3.28 " 1865 . . 211,129,529.17 2.28 " 1866 . . . 310,906,9S4.17 2.22 " 1867 . . . 265,920,474.05 2.69 " At the present time the receipts from this source are returned to the public coffers at an expense of less than three per cent, 1 the customs costing somewhat more than that amount. 1 In 1893 the percentage cost of collection was 2.62 per cent; in 1894, 2.70 per cent; and in 1895, 2.88 per cent. 214 TEE INTERNAL REVENUE SYSTEM. CHAPTER VIII. INTERNAL TAXATION UNDER PEACE CONDITIONS, 1870-1895. By 1870 the country had in large part adjusted itself to the changed economic and industrial conditions, the echoes of the war were slowly being lost in the gathering hum of the enlarged industrial development upon which the country was entering, while an era of unparalleled railway construction was rapidly converting the distracted energies of the South and the hidden re- sources of the great West into richness and abundance. The population of the United States at this time numbered 38,558,371. The national debt amounted to $2,480,672,427, or $64 per capita, a reduction since 1865 of $363,977,199, at the average annual rate of $72,795,439. The annual interest charge thereon was $118,784,960. 1 Before entering upon a consideration of the modifica- tions introduced into the internal revenue system during the last quarter of a century, it may not be out of place to contemplate for a moment the changes which have come over budgetary management during the period. As has been frequently remarked, the growth of con- stitutional government has been accompanied by a phe- 1 The interest charge of the deht is very variable, owing to the •refunding operations. In 1893 the interest charge had been reduced to one-fifth its size in 1871, although the principal of the debt had been reduced but little over one-third. UNDER PEACE CONDITIONS. 215 nomenal increase in expenditure. In America this tendency has manifested itself in river and harbor improvements, the erection of public buildings, the advancement of science and education, in pension legis- lation, Indian appropriations, and the creation of a naval establishment ; and, in fact, in every line of gov- ernmental activity. This increase in expenditure forms the peculiar feature of the period we are about to con- sider. How marked this change has been in the attitude of the nation toward itself, and the proper constitu- tional sphere of federal activity, is apparent from an examination of the expenditures for the two fiscal years, 1860 and 1870. The disbursements are as follows : — 1S60 1S70 War $16,472,202 $57,655,675 Navy 11,514,649 21,780,229 Indians 2,991,121 3,407,938 Pensions 1,100,802 28,340,202 Miscellaneous 27,977,978 53,237,401 NetDrdinary expenditure . $60,056,752 $164,421,505 Public debt 13,854,250 393,254,282 Premiums 15,996,555 Interest 3,144,120 129,235,498 Total expenditure .... $77,055,120 $702,907,840 The increase in expenditure for the first five items is over one hundred millions. While the population in- creased twenty-two and six-tenths per cent, the ex- penditure of the country increased one hundred and seventy-three per cent; and if we add to this the dis- bursements incident to the war debt, we find the an- nual expenditures nearly decupled. Previous to 18G0, as we have seen, the excise had been viewed as a sort of fiscal reserve, only to be brought into action in case of urgent necessity ; but at 216 THE INTERNAL REVENUE SYSTEM. the termination of the Civil War, in view of the burden of indebtedness which it had entailed, it became appar- ent that the earlier resources were no longer adequate to satisfy the larger fiscal needs of the country. The war had, moreover, induced a more generous view of the Constitution, and the conservative hostility which had prevented the utilization of federal powers during the long tenure of the Democratic party no longer existed ; while the subsequent inclination of the government to engage in all sorts of expenditure for various internal purposes rendered the utilization of inland sources as a portion of the permanent fiscal service a necessity. The reduction in expenditure between the years 1866 and 1870 rendered it possible to dispense with nearly all the extraor- dinary war taxes, and to concentrate the system upon the broad and elastic basis of consumption. The income tax was retained until 1872, as were the bank taxes, and several unimportant duties on manufactured products. In 1870 the receipts from these sources were as follows : — Spirits $55,581,599.18 Tobacco 31,350,707.88 Fermented liquors 6,319,126.90 Banks and bankers 4,419,911.13 Gross receipts 6,894,799.99 Sales 8,837,394.97 License taxes '. . 9,620,960.26 Income 37,775,873.62 Legacies 1,672,582.93 Successions 1,419,242.57 Articles in schedule A 907,442.09 Passports 22,756.00 Gas 2,313,417.37 Sources not elsewbere enumerated . 728,105.30 Penalties 827,904.72 Adhesive stamps 16,544,043.06 Total $185,235,867.07 UNDER PEACE CONDITIONS. 217 The suitableness of distilled and malt liquors and tobacco for taxation is 'recognized by nearly every civil- ized country, and it is the uniform practice of European governments to derive from them the largest possible revenue consistent with efficiency of administration. Of well-nigh universal consumption a§ they are, socially harmful in their effects, and non-essential to the comfort and well-being of a people, the payment of the taxes upon whiskey, beer, and tobacco may be viewed as a sum abstracted from the surplus fund of individual in- come. Furthermore, such taxes are but little obstruc- tive of industrial freedom, and there is no evidence that even the highest rate imposed has ever proven produc- tive of any very general discontent. From the mass of the people the cry for free whiskey and free tobacco meets no answering response ; and in the past such agi- tation has been largely of a political character, for the purpose of distracting attention from an increase in the tariff rates, or an attempt to reduce a possible surplus in the Treasury. Since 1868 the history of the taxation of these sub- jects has been quite uneventful. The reduction of the rate on distilled spirits to fifty cents a gallon 1 was ac- companied with results most phenomenal. It is possibly too much to ascribe the subsequent increase in the reve- nues and improvement in their collection wholly to the reduction of the rates ; for changes in the method of ad- ministration were also introduced, which greatly simpli- fied collections, and rendered evasion by the ordinary methods well-nigh impossible. Since this time all taxes, specific, ad valorem, and license, have been col- i By Act of July 20, 1868. 218 THE INTERNAL REVENUE SYSTEM lected by means of stamps, affixed to the packages con- taining the commodity or displayed in the place of business. The specific tax of fifty cents on whiskey, with the subsidiary capacity tax, remained in force from July, 1868, to August, 1872, during which period the tax was assessed upon an average production of 67,000,000 gallons, which yielded an average annual revenue of $34,000,000, indicating an average annual per capita consumption of 1.65 gallons. By the same Act the rates upon manufactured tobacco and cigars were placed as follows : — Snuff $0.32 per pound. Che wing find other tobacco prepared by hand, .32 " Smoking tobacco 16 " Cigars 5.00 per 1000. Cigarettes 1-50 " Alterations were also made in the method of assess- ment. Instead of the tax being collected after removal from the place of manufacture and sale, the duty from this time on was prepaid by means of soluble stamps, 1 placed upon the package at the place of manufacture. Goods were required to be placed in certain forms of packages, which were to indicate the manufacturers' name, place of manufacture, trade-mark, contents and weight of package, etc. Itemized returns were also required from the producer in regard to his business. Failure to comply with these requirements rendered the producer liable to heavy penalties, as did any attempt to place untaxed goods on the market by a dealer. By 1 The stamps were printed in fugitive ink, which disappeared when washed for the purpose of re-use. UNDER PEACE CONDITIONS. 219 the same Act existing taxes on mineral or illuminating oils and refined petroleum were repealed. The revenues from tobacco immediately responded to the change. In 1868 the receipts were $18,729,000. In 1869 they rose to $23,430,707, a gain of four and three- quarter millions. Again, in 1870 they increased to $31,350,707, and in 1871 to $33,578,907. Fraudulent evasion of the tax was greatly diminished. Some little loss did occur through the refilling and re-use of stamped packages, and the improper classification of manufac- tured tobacco. It was easily possible for producers to take advantage of the difference of rates on chewing and smoking tobacco to place the former on the market at rates applicable only to the latter ; and it was difficult to impute or prove fraud, or to correct the evil, save by a uniform rate, which change was later adopted. But, despite the gratifying showing of the revenues, agitation was soon renewed for change. The profits previously secured by speculators and producers from legislative changes were too sweet to be willingly relin- quished ; and Congress was not deaf to the proposals for an increase of duties, by which gains were legislated into the pockets of speculators by increasing the rate without rendering it applicable to stock in bond. At the same time temperance agitators, who viewed a high rate on whiskey and tobacco as advisable on sumptuary grounds, advocated an increase in the duties, thinking it would serve as a deterrent to their use. In 1872, in response to this pressure, the rate upon whiskey was changed from the mixed one then prevailing, the barrel and capacity tax being repealed, while the specific rate was increased by twenty cents or to seventy cents per 220 THE INTERNAL REVENUE SYSTEM gallon. The change was largely an administrative one, as the several duties then prevailing had aggregated be- tween sixty-five and seventy cents per gallon. By the same measure all manufactured tobacco, what- ever its value or use, was rendered dutiable at a uniform rate, the duty \ip to 1875 being twenty cents per pound. 1 While this was equivalent to a reduction of six cents per pound, or of 22i per cent on the average rate for the two preceding years, the diminution in receipts from tobacco for the year 1873 was but little over one million dollars, while the increase in tax-paid production was over nineteen and one-half million pounds, a result trace- able in large part to the fact that unmanufactured to- bacco under the new law was taxed at substantially the same rate as the manufactured article, whereas it had formerly been practically exempt. These changes were uniformly in the line of im- provement ; for while it is to be acknowledged that there is some injustice in the taxation of any article like tobacco, whose value varies so widely, at a uniform rate, experience has shown that assessments are likely to be so arbitrary that a specific rate is preferable to an ad valorem one, for the latter offers great opportuni- ties for fraudulent practice, false swearing, and compli- cations in valuation. Again, in 1875, the rate on spirits was advanced to ninety cents per gallon, where it remained unaltered until 1801. In the taxation of the latter article the ex- perience of these years is marked by phenomena similar to those of the war, although less monstrous, and brought home to officials high in the government service. It 1 When it was again increased to twenty-four cents per pound. UNDER PEACE CONDITIONS. 221 is not true, however, as is frequently asserted, that the frauds disclosed in 1875 were due to the increase in the rates ; for, although discovered immediately after the passage of the Act of that year, they were traceable to complicity and conspiracy of officials, and had been in existence for many years previous to the change. That the increase of the rate to ninety cents was a source of gain to speculators there is no doubt, for the new duty was not made operative on stock in bond. During the three months previous to the date when the increased rate went into operation, there was made and stored sufficient spirits to cause a loss to the revenues of $1,400,000. This loss was but temporary, however ; and from this time on down to the present day the revenues from this source have steadily increased in amount, and there is no reason to suppose that the tax was not as universally collected as under the earlier and lower rate. "With the general revival of trade which set in during the years immediately preceding 1880, the receipts from the several sources of internal revenue manifest a marked improvement. Beginning with 1878, they increase from $110,000,000 in that year to $124,000,000 in 1880, to $135,000,000 in 1881, and to $146,500,000 for the fiscal year 1882. At this time there remained, as a heritage of the war, taxes upon the following subjects, which produced for the fiscal year 1882 the following sums : — Friction matches $3,272,258.00 Patent medicines, perfumery, etc 1,978,395.50 Bank checks 2,318,455.14 Bank deposits 4,007,701.98 Savings-bank deposits 88,400.47 Bank capital 1,138,340.87 Savings-bank capital 14,729.38 $12,818,281.40 222 THE INTERNAL REVENUE SYSTEM At the same time taxes were collected by the Treas- urer of the United States from national banks as fol- lows : — On national-bank deposits $5,521,927.47 " national-bank capital -137,77-1.90 Collections from national banks $5,959,702.37 making a total collection of $18,777,983.77. As early as 1880 the Commissioner of Internal Rev- enue had advised the repeal of all these taxes, and reit- erated his suggestion two years later, 1 when he further advocated an abatement of forty per cent in the special license charges then existing upon rectifiers, wholesale and retail liquor dealers, and tobacconists, from which an additional reduction in the revenues of three million dollars was expected. The act of March, 1879, had reduced the rate on manufactured tobacco by one-third, or from twenty- four to sixteen cents per pound ; and a corresponding reduction in the rate on cigars would cause a further diminution in the revenues of $6,716,000, which the commissioner also recommended. These suggestions were substantially followed 2 in the abolition of all adhesive stamps imposed on matches, proprietary medicines, perfumes, and bank checks, the abatement taking effect July 1, 1883. The duties on bank deposits and capital ceased at the beginning of the same calendar year ; while the rates on tobacco in all its forms, as well as the special license taxes, were reduced fifty _per cent. The loss to the revenue from these com- 1 Report on Finances, L882, p. To. - Act of March 3, 1883. UNDER PEACE CONDITIONS. 223 bined abatements was variously estimated at from forty to forty-five millions, including the $6,000,000 collected from national banks by the treasurer. The loss fell much short of this estimate, however, the total decrease for 1884 being less than $23,000,000, a considerable gain being manifest in spirits and other sources. The chief loss lay in tobacco, from which the receipts fell from $47,391,000 in 1882, and $42,101,000 in 1883, to $26,- 062,000 in 1884. Inasmuch as the collections of 1882 were made under the old rate entirely, and those of 1884 wholly under the new one, it shows a falling off of $21,229,000, or nearly forty-five per cent. When it is borne in mind that population was increasing at the rate of one and a quarter millions per year, it would seem to indicate that the consumption of tobacco was but little affected by the tax-rate ; for the increase in annual con- sumption after the reduced rate, as indicated by removal from bond, was but three and one-half million pounds, the total withdrawals being less than the average quan- tity withdrawn for several preceding years at double the rates. At the same time a perceptible increase in the number of firms engaged in tobacco manufacture was remarked, 1 a fact which seems to indicate the tendency of a high tax-rate to concentrate the business into a few hands. In 1890 another reduction of twenty-five per cent was made in the rates upon snuff, chewing and smoking tobacco, while all special license taxes upon the sale of tobacco were repealed. 2 The total receipts from tobacco in all its forms for 1 Report on Finances, 1885, p. 31. » Act of Oct 1. 1890. 22-1 TIIE INTERNAL REVENUE SYSTEM 1893 were about $32,000,000, a sum which would have approximated $60,000,000 had the taxes existing in 1882 been allowed to remain unchanged. For the same year, the per capita revenue collected in the United States from this subject was but forty-eight cents, as against ninety cents in 1882, and as opposed to $1.71 in France, and $1.50 in Great Britain. Manifestly the revenues from this source are susceptible of increase. In recent years the growth in the consumption of to- bacco has been phenomenal. In 1892 the per capita consumption of smoking and chewing tobacco was four pounds, while the number of cigars and cheroots re- turned for taxation was 4,548,799,417. As compared with other countries, the consumption of tobacco in America is about two and a half' times as great as in England and France, slightly in excess of that of Hol- land and Belgium, and somewhat less than that of Germany. The tax upon malt liquors has remained practically unchanged since the organization of the system in 1862, namely, at $1.00 per barrel of 31 gallons. 1 The following tables exhibit in detail the results of the experience which has been portrayed in the past chapter, showing, for distilled spirits : 2 — 1 In 1886 special license and specific taxes were imposed on the manufacture and sale of oleomargarine ; but, as these duties were pro- tective in character, the revenue features being merely incidental, they have not been considered in detail in the text of the essay. 2 These tables are taken from Letter of Hon. David A. Wells to Hon. John J. G. Carlisle, Secretary of Treasury, July 8, 1893, published in Report of Secretary of Treasury, 1893, p. 1100. They were prepared from official data. UNDER PEACE CONDITIONS. 225 1st. The Population of the Country for each Successive Fiscal Year from 1870 to 1893, inclusive. 2d. The Quantity of Gallons of Spirits annu- ally taxed. 3d. The Average per Capita Consumption for each Suc- cessive Year. 4th. The Amount of Revenue annually collected. 5th. The Average Annual Revenue, or Tax per Capita. 6th. The Annual Tax per Gallon. 7th. The Average Tax per Gallon. year ending June 30 — POPULA- TION. 1 QUANTITY TAXED. H « H & P s b 3 & REVENUE. P < K 03 H s a r > * 2? w ej .• MS 1S70 . . . 1871 . . . 1S72 . . . 38,558,371 39,555,000 40,596,000 Gals. 78,490,198 62,314,628 66,235,578 Gals. 2.03 1.58 1.63 8. 39,245,099 31,157,314 33,117,788 8. 1.02 .79 .82 Cents. 50 50 50 Cents. 50 50 50 1873 . . . 41,677,000 65,911,141 1.58 43,131,064 1.03 (SI 65.44 1874 . . . 1875 . . . 42,796,000 43,951,000 62,581,562 64,425,911 1.46 1.47 43,807,093 46,877,938 1.02 1.07 70 (70) too/ 70 72.76 1876 . . . 45,137,000 58,512,693 1.30 51,390,490 1.14 (70) 190) 88.58 1877 . . . 46,353,000 58,043,3S9 1.25 52,671,291 1.14 (70| (90 J 89.97 1878 . . . 47,598,000 50,704,189 1.07 45,626,533 .96 J70J (90 J 89.99 1879 . . . 48,S66,000 53,025,175 1.09 47,709,464 .98 ,50 70 (90) 89.98 1880 . . . 50,155,783 62,132,415 1.23 55,919,119 1.11 (70) •90 1 90 1881 . . . 51,316,000 69,127,206 1.34 62,214,127 1.24 (70) I 90 J 90 1882 . . . 52,495,000 71,976,398 1.37 64,778,756 1.23 (70. (90) 90 1883 . . . 1881 . . . 53,693,000 54,911,000 76,762,063 79,616,901 1.43 1.45 69,085,856 71,055,211 1.22 1.30 90 90 90 90 1885 . . . 56,148,000 69,158,025 1.23 62,242,221 1.23 (70) (90) 90 1886 . . . 1887 . . . 1888 . . . 1889 . . . 1890 . . . 1891 . . . 1892 . . . 1893 . . . 57,404,000 58,680,000 59,974,000 61,289,000 02,622,250 63,975,000 65,520,000 66,826,000 70,851,355 67,380,391 71,565,4S6 77,163,529 85,043,336 88,473,437 95,045,787 99.145,889 1.23 1.15 1.19 1.25 1.35 1.38 1.45 1.48 63,766,219 60,642,351 64,40S,937 69,447,175 76,539,002 79,626,093 85,541,209 89,231,300 1.11 1.03 1.07 1.13 1.22 1.24 1.31 1.34 90 90 90 90 90 90 90 90 90 90 90 90 90 90 90 90 1 Populatio i for 1870, 18 80, and 1890 from < ensus ; otli< ir yeai s calc ulated by the actuary of the Treasury Department. 22G TUB INTERNAL REVENUE SYSTEM A similar table for fermented liquors and tobacco shows as follows: — O BEER. TOBACCO. ^ Q j fa X . O J . < tfl P " h a « fc - — v - =- P5 a 5 m , -f<3 < 3 E- S h a h fc '---A z '- »< " J » S5 - w O 5 * A B ~ ------ a < - -! sags JH %**% > ~. ~ ~ H > '/■ T. < >-. = ■- > O 9 - - - - ■J. t a a < - -- - r - -- s E « fa Gals. Gals. s S S S s 1863 33,305,000 62,105,375 1.86 1,058,083 .05 (1.00) 1 .go ) 3,097,620 .09 1864 34,046,000 97,3S2,S11 2.86 2,223,719 .07 I ■ G0 \ 1 1.00) 8,592,099 .25 I860 34,748,000 113,372,611 3.26 3,607,181 .11 1.00 11,401,373 .33 1866 35,469,000 108,569,340 4.47 5,115,140 .14 1.00 10,531,008 .41 1867 30,211,000 192,429,462 5.31 5,819,340 .16 1.00 19,7G5,148 .50 1868 36,973,000 190,540,553 5.15 5,GS5,603 .15 1.00 18,730,095 .51 1869 37,756,000 196,603,705 5.21 0,S66,400 .16 1.00 23,430,708 .62 1870 38,508,371 203,813,127 5.29 6,081,020 .16 1.00 31.350.708 .81 1871 39,555,000 239,91S,060 6.06 7,159,740 .18 1.00 33,578,907 .80 1S72 40,590,000 20S,44i',2:j7 6.01 8,009,909 .20 1.00 33,730,171 .83 1873 41,677,000 298,633,013 7.10 8,910,823 .21 1.00 34,386,303 .83 1874 42,790,000 297,627,807 6.95 8,8S0,829 .21 1.00 33,242,876 .78 ls7> 43,951,000 293,033,607 6.66 8,743,744 .20 1.00 37,303,462 .80 1876 45,137,000 306,972,912 6.80 9,159,675 .23 1.00 39,795,340 .88 1877 46,353,000 304,111,8G0 6.56 9,074,305 .20 1.00 41,106,547 .89 1878 47,598,000 317,485,001 6.67 9,473,360 .20 1.00 40,091,705 .80 1879 48,860,000 314,195,004 7.04 10,270,302 .21 1.00 40,135,003 .82 1880 50,155,783 413,760,441 8.25 12,346,077 .25 1.00 38,870,140 .77 1881 01,310,000 443,641,868 8.G5 13,237,700 .26 1.00 42,804,992 .84 1882 52,495,000 520,514,035 10.01 10,680,678 .30 1.00 47,391,989 .90 1883 53,693,000 550,494.652 10.25 16,426,050 .31 1.00 42.104,250 .78 1S84 04,911,000 5SS,957,1S9 10.73 17,573,722 .32 1.00 26,062,400 .48 1885 06,148,000 594,704,543 10.59 17,747,006 .32 1.00 26,407,088 .47 1886 57,404,000 042.038,923 11.18 19,157,612 .33 1.00 27,907,363 .49 18S7 58,6SO,000 716,767,306 12.21 21,3S7,411 .36 1.00 30,108,067 .01 1888 59,974,000 765,086,789 12.77 22,829,202 .3S 1.00 30,662,432 .03 1889 61,289,000 778,715.443 12.71 23,235,863 .38 1.00 31,866,861 .52 1890 62,622,250 854,420,264 13.64 25,494,798 .41 1.00 33,958,991 .54 1S91 63,975,000 944,823,952 14.77 28,192,327 .44 1.00 32,796.271 .51 1892 65,520,000 986,352,916 15.05 29,431,498 .45 1.00 31,000,493 .47 1893 66,826,000 1,071,183,827 16.03 31,003.743 .48 1.00 31,889,712 .48 UNDER PEACE CONDITIONS. 227 RECENT LEGISLATION. For upwards of a decade previous to 1893, America, in the fulness of her resources, presented to the world of finance the unique and almost isolated spectacle of a nation with revenues so redundant as almost to defy ex- penditure or exhaustion ; of successive administrations whose efforts were directed, not in devising means by which revenues could be collected with the least possible friction and inequality, but rather in spending almost unwelcome revenues, in order that their collection might be continued; and of a party in power, to whom the taxing machinery was an engine to be employed prima- rily for the support of an industrial policy, rather than for supplying the legitimate demands of the state. The fruition of this policy was a deficit in the Treas- ury. Not only has the expenditure imposed by recent Congresses been in excess of current revenues, but the party called into" power in 1892, after many years of opposition, has carried into effect a policy of tariff revision which has greatly increased the deficiency. It is to be admitted that such a reduction in the rates as has been effected by recent legislation may eventually lead to the opposite result; for our experience during the reduction of the revenue system subsequent to the war shows that an increase in the revenues is often most surely obtained by a diminution of the charges, especially those which bear upon consumption. English experience displays this apparent paradox even more strikingly than does our own. In 1842, when Eobert Peel, by one of those transcendent strokes of genius which characterized his public life, undertook 228 TIIE INTERNAL REVENUE SYSTEM the reform of the revenue system, the budget had for several years shown a deficit. From 1837 to 1842 the annual expenditure had exceeded the revenues by nearly forty million dollars. The trouble had become chronic ; and the remedy applied had been to increase the rates, with the uniform result that the revenues diminished rather than increased. With the reforms inaugurated by Peel, however, which were looked upon as chimer- ical in the extreme, the receipts began to recover, and from that time down to the later modifications of the revenues manifested a steady and continuous increase. The same results may follow the modifications in rates introduced by the Democratic party ; but for some years a deficiency may be expected. Shortly after its advent to power in 1893, the new administration found itself confronted with an unfore- seen commercial depression, which caused a further marked reduction in receipts, traceable to diminished demand for taxable commodities. For upwards of two years now the Treasury has been confronted with an actual or approximate deficiency. Expenditures have not been greatly diminished, while the customs and internal revenue receipts have shown a marked falling off. In the report of the Treasury Department for 1893 the estimated shortage for the fiscal year 1894 was placed at twenty-eight millions. As a matter of fact, it was much more than this ; and even at the pres- ent time, with the assistance of the measures extorted from the reluctant Fifty-third Congress, these revenues show but slight tendency to improve. This condition of affairs has been viewed as but tem- porary, and traceable to the existing suspension of trade UNDER PEACE CONDITIONS. 229 and general stagnation of industry, which a revival of business may be depended upon to rectify. But the improvement has not come. Moreover, it is impossible to calculate, with any degree of exactitude, on the effects of a depression upon the revenues ; for our ex- perience during the decade subsequent to the crisis of 1873 shows that a depression may make its influence manifest for years after the stringency itself has passed away. This deficiency, together with the reorganization of the tariff charges, rendered recourse to other sources necessary; and the problem proved a knotty one for solution. Two avenues of relief lay open. Either new taxes, as the income, corporation, stamp, or license du- ties, might be reimposed, or the rates upon those objects already upon the schedule, as whiskey, malt liquors, and tobacco, might be increased. Experience has demon- strated that the best fiscal policy always advises that taxation should be so devised as to allow the largest possible freedom to the individual and the greatest liberty to industry, and that this is best attained by a concentration of the excise upon the smallest number of objects consistent with efficiency of administration. Our experience since the war has led to well-nigh uni- versal approval of the taxes upon whiskey, malt liquors, and tobacco ; and few will contend that the rates upon these subjects are as high as they will bear. The tax upon tobacco has been repeatedly reduced, and is now lower than in almost any other country, while the duty upon malt liquors is but twenty per cent ad valorem, or about one-fifth of a cent per glass. As regards distilled spirits, Mr. Wells has maintained that the old rate (90 230 THE INTERNAL REVENUE SYSTEM cents per gallon) was the maximum one which could profitably be imposed, and supported this contention by reference to the humiliating experience during the years extending from 1864 to 1868, when the $2.00 rate ob- tained. But the conditions of production, as well as of administration, have changed radically since that time. No longer is the service raw and untrained. Officials have become familiar with the laws. Alterations are made but infrequently, and the means for the detection of fraud and illegal distillation have greatly improved. Moreover, the recent organization and successful conduct of the so-called "whiskey trust" places in the employ of the government a most effective agency for the pre- vention of illicit distillation ; for it is manifestly to the interest of this combination to prevent illicit distilla- tion rather than encourage it, while the eventual result of this concentration of the business into a few hands will be to localize it, and render the collection of the tax a simple matter. The area of illicit production is now confined within the mountainous districts of the South, where the output is comparatively small, and does not enter into the general market. Furthermore, the capa- city of these " moonshine " stills is inconsiderable, and the quality of the article produced inferior, so that there is little danger of it entering into competition with the tax-paid whiskey. It was therefore believed that the rate upon distilled spirits could be materially increased without loss in the quantity returned, while the revenues would be increased by many millions of dollars. Such was the plan of the Secretary of the Treasury, who recommended, in his first annual report, that the deficiency then existing and UNDER PEACE CONDITIONS. 231 thereafter to exist be met by an increase of the rate upon this subject from ninety cents to one dollar per gallon ; that the duties upon cigars and cigarettes be ad- vanced ; and that new taxes be imposed upon playing- cards, cosmetics, perfumeries, legacies, and successions ; and that a duty of two per cent be placed upon all incomes derived from investments in the stocks and bonds of private corporations and joint-stock compa- nies. 1 From these combined sources he felt that an in- crease of fifty millions of dollars would accrue to the Treasury in 1895. In support of his proposal for an income tax, he very truly says : " It is a generally recognized fact that capi- tal in the form of money, bonds, and other evidences of debt, does not usually, by reason of its intangible and transitory nature, bear its due proportion of the burdens of taxation under the revenue laws of the several States and municipalities, as compared with real estate and visible personal property ; and while no discrimination should be made against it, whether it be represented by corporate or other investments, there appears to be no good reason why the contributions for the support of the public service generally should not be equalized as nearly as possible by including this kind of property in the federal revenue system." 1 The proposal of the secretary contemplated an in- direct income tax; and by this plan many of the more objectionable features of that tax would be eliminated, for the individual citizen would be relieved from the personal visits of the assessor, while the possibilities of evasion would be diminished. By this arrangement all i Report on Finance, 1893, p. 82. 2 Ibid., p. 83. 232 THE INTERNAL REVENUE SYSTEM taxes would have been collected by means of stoppage at the source, the corporations deducting the tax before dividends were announced. The duty falls upon the eventual payer just the same as if collected from him in person, without the necessity of that scrutiny into his private affairs which seems to be inseparable from the income tax. During the war this form of collection was applied to a large class of corporations, and in the fiscal year 1865 over forty per cent of the income tax was turned into the Treasury through the instrumentality of such corporations. With it extended to all dividend- paying companies, even with the rate at two per cent, it is not too much to believe that the yield would have exceeded the estimate of the secretary, who thought it capable of producing thirty millions of dollars. But Congress acceded to the report in part only. As to the propriety of increasing the rate upon distilled spirits, there was but little diversity of opinion ; but the proposals for the rehabilitation of the income tax aroused the most bitter opposition, and its fate for a long time hung in the balance. The deficiency for the fiscal year 1894 amounted to over forty-three millions, instead of twenty-eight millions as estimated by the secretary ; and it was soon demonstrated that this sum would be nearly doubled ere the close of the calendar year. 'Moreover, the proposed revision of the tariff was expected to re- duce the revenues to the extent of seventy-five millions more. So much of this deficiency as was but temporary was to be met by loans ; but the Committee of Ways and Means, in its report to the House, approved of the rec- ommendations of the secretary in so far as they related to distilled spirits, playing-cards, and incomes, except UNDER PEACE CONDITIONS. 233 that the tax upon incomes was to be collected from individuals as well as corporations. 1 In Congress the debate upon the proposed measure wore on for over seven months, and its fate for a long time was a matter of conjecture ; and eventually it be- came a law without the signature of the President, who objected to the tariff schedule. 2 The provisions of the measure relating to incomes were modelled upon the later war legislation. They pro- vided that the tax should be first assessed on or before the first Monday in March, 1895, computed on the in- comes received during the year 1894. The duration of the measure was limited to five years. All persons hav- ing an income in excess of thirty-five hundred dollars were required to make a verified return to the collector, as were all persons acting in a fiduciary capacity ; and in estimating the income of any person for this purpose there was to be included : (1) all interest received upon stocks, bonds, and other securities, save such bonds of the United States as were exempt from federal taxation ; (2) all profits realized within the year from sales of real estate purchased within two years previous to the close of the year for which income is estimated ; (3) interest received or accrued upon evidences of indebtedness, whether paid or not, if good and collectable ; (4) the amount of all premium on bonds, stocks, etc. ; (5) the amount of sales of live stock, sugar, cotton, wool, butter, cheese, pork, beef, mutton, or other meats, hay and grain, or other vegetable, or other productions, being the 1 See report of committee, Fifty-third Congress, second session, House of Representives, No. 276. 2 Act of Aug. 28, 1S<)4. 234 THE INTERNAL REVENUE SYSTEM produce of the estate, less the amount expended in the raising or purchase of such produce, as well as any part consumed directly by the family ; (6) money, and the value of all personal property acquired by gift or inher- itance ; (7) all other gains, profits, and income from any source whatsoever, except so much as has been already taxed through the disbursing officer of the government or of a private corporation. In computing such returns, however, the following deductions were also permitted in addition to the minimum exemption of four thousand dollars : (1) the necessary expenses actually incurred in carrying on any business, occupation, or profession ; (2) all interest due or paid within the year on existing in- debtedness ; (3) all national, State, county, school, and municipal taxes ; (4) losses actually sustained during the year incurred in trade, or arising from fires, storms, or shipwreck, and not compensated for by insurance or otherwise ; (5) debts ascertained to be worthless. Xo deductions were permitted for expenditures for improve- ments. In case the taxable neglected or refused to make such return, the collector was authorized to make up a list from the best information available, and to add thereto fifty per cent as a penalty, and in case of fraud- ulent return, one hundred per cent. Appeal therefrom was permitted to the collector of the district, and from him to the Commissioner of Internal Eevenue. The principle of stoppage at the source was more widely extended in this measure than ever before ; and all banks, trust companies, saving institutions ; fire, ma- rine, life, and other insurance companies; railroads; canal, turnpike, telephone, telegraph, express, electric- lighting, gas, water, street railway, companies ; as well UNDER PEACE CONDITIONS. 235 as all other corporations or associations doing business for profit in the United States, no matter how created or organized (but not including partnerships), — were directed to deduct the tax of two per cent upon all profits and net incomes before the payment of the same to stockholders or additions made to surplus. And net profits for the purpose of estimating the tax were to include any amounts paid to stockholders, or carried to the account of any fund, or used for improvements or other investments. 1 The same principle was applied to federal salaries in excess of $4,000, as well as any salaries paid by private corporations to their employees in excess of that sum. The Act departed from earlier legislation in yet an- other and very important particular ; for it forbade under heavy penalties the divulgement by the officers of the revenue of the incomes, losses, or returns of any taxable, whether a private corporation or an individual. All returns were to be listed upon blanks provided for the purpose, on or before the first Monday in March, and were to be paid before the first day of July of each year. The law doubtless contained many imperfections, and in many places was so worded as to cause irritation to the payer, and to open wide the door for evasion, fraud, and false swearing. It reposed great powers, moreover, in a politically appointed service. These imperfections 1 The Act specifically exempted all organizations of a religious, charitable, or educational character, fraternal or beneficial orders! building and loan associations, and savings-banks and insurance com- panies of a strictly mutual character. Nor did it apply to States, counties, or municipalities. 236 THE INTERNAL BEVENUE SYSTEM were particularly noticeable in the deductions allowed. For instance, as to what are " necessary expenses in- curred in carrying on business," " losses actually sus- tained during the year," " debts ascertained to be worthless," there lay a possibility of wide divergence of opinion. The provision that corporations should deduct the tax from the salaries of their employees was absolute, notwithstanding the fact that they might have been entitled to deductions which would bring their incomes below $4,000. Corporations were like- wise compelled to pay the tax upon their net earnings, irrespective of whether the recipient of the dividends had an income of $4.00 or $40,000. Moreover, the collector was granted the widest latitude and most unusual powers. He was empowered to pass upon in- terest due and payable ; to increase the return of the individual, subject, however, to appeal; and to make up a taxable's income from the best information avail- able. These but indicate some of the difficulties which would have beset the administration of the measure, as well as the individual honestly desirous of making a fair return. Had we a trained service, these objections would lose much of their seriousness ; but, with col- lectors appointed for partisan service rather than merit, there is reason to believe that this power would have become a means of unjust discrimination. It certainly offered great opportunities for corrupt collusion with tax- payers. But these objections were but incidental, and easily corrected. Was the tax defensible on broad grounds of public policy, justice, and expediency, or did it so contravene the American spirit as to be untenable ? UNDER PEACE CONDITIONS. 237 The desire to disguise taxes seems to inhere in democ- racy and government by party, and leads to the choice of indirect taxes rather than direct ones, whose inci- dence is more palpable, and which induce irritation and party strife. At the present time the annual taxes col- lected for federal purposes approximate $313,000,000. Of this sum over § 152,000,000 is derived from cus- toms receipts, over $ 143,000,000 from internal reve- nue, and about $18,000,000 from other miscellaneous sources. 1 Of all the revenues collected for meeting the annual expenses of the government, less than two per cent is derived exclusively from taxes upon realized wealth ; over ninety-eight per cent falls upon consump- tion, and is taken mainly from the earnings of those who depend upon small incomes for their livelihood. In the adjustment of the federal budget, the ques- tion of incidence seems never to have been taken se- riously into account. The problem is one of party expediency, the aim being to raise the revenues where they will cause the least outcry. Our financial leaders have not had "a mixed and joint regard for the two great descriptions of taxation, the attractive sisters," the direct and indirect taxes, but have wooed the latter to the utter neglect of the former. How unequal are the resultant burdens of this dis- crimination appears from a contemplation of the inci- dence of such taxes as the customs duties and those levied on whiskey, malt liquors, and tobacco. Such taxes are in their operation regressive. 2 They bear with 1 These are the receipts for 1895. 2 "A tax is said to be regressive when the rate per cent increases as the property decreases." — Ely. 238 THE INTERNAL REVENUE SYSTEM greatest severity upon those least able to sustain them. Consumption of staple commodities is not in proportion to wealth or income. Taxes paid thereon are in like manner per capita rather than proportional. Indirect taxes, such as the duties on liquors and tobacco, are in effect exaggerated poll taxes, for their incidence is not only without regard to the ability of the payer to sus- tain them, but they grow unduly with each intermediate transfer, and take and keep from the pockets of the payer much more than they turn into the Treasury. During the period extending from 1872 to 1894, the federal government collected from customs and inland sources approximately $7,000,000,000, of which $4,150,- 630,000 was produced by the customs, and $2,793,930,- 000 by the excise. The collections from sources which might be termed direct do not merit mention. Surely there is no crying hardship, no glaring injustice, in compelling vested wealth and those enjoying large in- comes to contribute a small percentage of the surplus for the support of the state, when all other taxes dis- criminate against those having small and precarious means of livelihood. Were our State and local taxes properly devised, these inequalities would be in large part corrected. But the reverse is more usually true. An examination of the assessors' books of any State or city shows the greatest inequality in the ratio of assessment, and the discrimination is always against the small holder. Not only is his realty rated higher, but necessarily his tan- gible personalty is returned more fully and completely ; for by crude methods of assessment it is likely to be rated at its approximate value, rather than at a fraction UNDER PEACE CONDITIONS. 239 thereof, as is the case of the richer members of the community. AVhen a comparison is made between rural and urban districts, similar conditions appear. Intangible person- alty is returned in a ratio inverse to population, when, as a matter of fact, the great bulk of stocks, bonds, and credits are to be found in our cities, where from one-half to nine-tenths of it escapes. In the country districts, on the other hand, every man is practically an assessor, and is interested in the return of his neigh- bor. Fuller and more complete returns are secured, and not only tangible, but intangible, personalty is scheduled at approximately its full value. The substantial result of both national and local sys- tems of taxation is undue pressure upon small holdings and incomes, and the disproportionate shifting of the burdens of government upon those least able to bear them. "We have departed a long way from the ideal, and it makes little difference what be our canon for the proper distribution of taxes ; the present arrangement is unjust in its incidence, cumulative in its tendencies, and regressive in its principle. The income tax stands as a sort of equalizer. Theo- retically satisfying the demands of equality, it should occupy a position in any complete and well-ordered fiscal scheme to equalize the burdens of the indirect taxes of our federal system, as well as the inequalities induced by legislation, and the faulty methods of assess- ment in vogue in our States. It not only reaches vested incomes from privileges, as rent, but it demands a share of the revenues of talent and ability, as well as of such intangible forms of wealth as escape local officials by 240 THE INTERNAL REVENUE SYSTEM faulty assessment, or by migration from locality to locality. Nor can income be hypothecated at assess- ment days, and the duty avoided by the incurrence of liabilities, as can the tax on personalty. Income is usually a definitely ascertainable amount, and, by the honest-intentioned, the easiest of taxes to return. Rarely would it be necessary to examine the books of a person to verify returns, and the government owes no obligation or consideration to the dishonest taxable endeavoring to elude the duties of citizenship. More- over, it demands contribution from individuals in ac- cordance with ability, in proportion to the revenues enjoyed under the protection of government. The in- come tax would, moreover, induce a closer scrutiny of government expenditures, and a more careful surveil- lance of public servants. Indirect taxation and extrava- gance have ever gone hand in hand. When government touches the pocket of the citizen directly, however, it induces a patriotic inspection of party stewardship, and a more watchful observance of its action. Measured by broad principles of equality and political expediency, the income tax is demanded by many con- siderations of public Avelfare. Does it bear examination equally well from a practical, fiscal point of view ? If it fails in administrative features, if too costly of collec- tion, if it cripples industry, or is unjust in its incidence, it can have no permanent claim to public favor. And upon no point has the income tax been assailed so vehemently, or denounced so bitterly, as regards its administrative features. It is held to invade the sanc- tity of a man's most personal affairs, to lay open to the inquisitive eye of the official, and perchance the public, UNDER PEACE CONDITIONS. 241 his income, and, in case of inspection, his business meth- ods as well. It is, in effect, said to be an inquisitorial tax par excellence. How little real force this objection has is seen from the ease with which the tax of 1894 was assessed. The large authority reposed in the collec- tors induced prompt and quite general compliance with the law, while the penal clauses for violation proved a tolerably thorough cheek to attempted evasion. Even with the tax assessable upon all save small incomes, it would be less inquisitorial than the returns required in any one of our States of personal property, returns which are usually open to public inspection. Those who urge this objection also fail to take note of the fact that in the collection of the taxes on distilled spirits, the gov- ernment is the practical operator of the still, while in the taxation of malt liquors and tobacco the closest supervision is maintained. Experience also shows the income tax to be the cheap- est of taxes to collect. With the possible exception of the duties on corporations, which were collected by the internal revenue office at Washington direct from the payer, the income duty was one of the most economical of taxes which has ever been imposed. During the war, when the cost of returning the inland revenue was be- tween three and four per cent, the estimated cost of the duty on incomes was not in excess of two per cent. The reason is plain ; and this advantage would have been even more marked now than then, for the tax would have been collected mainly from corporations direct, at scarcely any cost. 242 THE INTERNAL REVENUE SYSTEM THE CONSTITUTIONALITY OF THE INCOME TAX. But however just and defensible the tax may have been, and however necessary to equalize the burdens of federal taxation, it was to be tried in another forum. Despite the fact that the meaning of Sect. 2, Art. 1, of the Constitution, which provides "that representa- tives and direct taxes shall be apportioned among the several States according to their respective numbers," had been interpreted uniformly and unanimously upon several different occasions, and despite the fact that the meaning of direct taxes within the Constitution, as fixed by judicial determination, seemed to be limited to taxes on land and the capitation tax, the constitutionality of so much of the measure of Aug. 28, 1894, as ap- plied to incomes, was again raised. Three cases were brought to enjoin the Commissioner of Internal Eev- enue from collecting the tax, one in the District of Columbia, the other two in New York. Both the lat- ter cases were appealed from the decision of the Cir- cuit Court for the Southern District of New York, which had affirmed the law by a divided court. The cases were argued before the Supreme Court, March 7, 8, 11, 12, and 13, Attorney-general Olney and Assistant At- torney-general E. B. Whitney appearing for the govern- ment; and Messrs. Joseph H. Choate, W. D. Gurtrie, C. A. Seward, B. H. Bristow, David Willcox, Charles Steele, and Charles F. Southmayd for appellants ; and Herbert B. Turner, J. C. Carter, W. C. Gulliver, and F. B. Candler for appellees. Upon appeal, the exceptions to the ruling of the Cir- cuit Court were as follows : First. That the Act im- UNDER PEACE CONDITIONS. 213 poses a direct tax iu respect of the rents, issues, and profits of real estate, as well as of the income and profits of personal property, and not being apportioned, is in violation of Sect. 2, Art. 1, of the Constitution. Second. That the law, if not imposing a direct tax, is nevertheless unconstitutional in that its provisions are not uniform throughout the United States, and do not operate with the same force and effect upon the subject of the tax wherever found; and in that it provides ex- emptions in favor of individuals and copartnerships, while denying all exemptions to corporations having similar income derived from like property and values, and provides for other exemptions and inequalities in violation of Sect. 8, Art. 1, of the Constitution. Third. That the law is invalid so far as imposing a tax upon income received from State and municipal bonds. Chief Justice Fuller delivered the opinion of the Court, and after reviewing the constitutional points involved, and the previous determinations of the Su- preme Court, stated in part, as the opinion of the major- ity of the court, that it is established : That as taxes on real estate belong to the class of direct taxes, therefore any taxes on the rent or income of real estate, which is the incident of ownership, belong to the same class, and that, therefore, so much of the Act of Aug. 15, 1894, as attempts to impose a tax upon the rent or income of real estate without apportionment is invalid. The Court was further of the opinion that the Act was invalid so far as it attempted to levy a tax upon the income derived from State or municipal bonds, or upon the salaries of judges of the courts of the United 244 THE INTERNAL REVENUE SYSTEM States. As a municipal corporation is the representa- tive of the State and one of the instrumentalities of the State government, the properties and revenues of muni- cipal corporations are not the subjects of federal taxa- tion, nor is the income derived from State, county, and municipal securities ; since taxation on the interest therefrom operates on the power to borrow before it is exercised, and has a sensible influence on the con- tract, and therefore such a tax is a tax on the power of the States and their instrumentalities to borrow money, and consequently repugnant to the Constitution. And the decree of the Circuit Court was declared to be reversed in respect only of the voluntary payment of the tax on the rent and income of real estate, and that winch was held by the trust companies in trust, and on the income from municipal bonds held or owned by them. Upon each of the other questions argued at the bar, to wit : (1) whether the void provisions as to rents and incomes from real estate invalidates the whole Act ; (2) whether as to the income from personal property as such the Act is unconstitutional as laying direct taxes ; (3) whether any part of the tax, if not considered as a direct tax, is invalid for want of uniformity on either of the grounds suggested, — the justices who heard the argument were equally divided, and therefore no opin- ion was expressed. Dissenting opinions were delivered by Justices "White and Harlan. 1 By this decision the law was left in an emasculated condition, and its enforcement would have induced exag- 1 Pollock vs. Farmers' Loan and Trust Co. et al., 15 Supreme Court Reporter, pp. G73-717. UNDER PEACE CONDITIONS. 245 gerated injustice. Moreover, it introduced intricacies and complications in declaring incomes and assessing the tax which would have rendered it most difficult of collection and exceedingly vexatious to the payer, and would have rendered necessary countless legal proceed- ings for the determination of the meaning of the law. Treasury officials had estimated the tax capable of producing between thirty and fifty million dollars, and the department estimated the amount involved in the opinion of the Court at from fifteen to twenty millions. The argument was heard by an incomplete Court ; and as the constitutionality of the entire measure had not been passed upon, permission was granted for a rehearing. This was later heard by a complete Court, and the law decided by a vote of five to four to be unconstitutional in toto. This opinion is in large part a review of the general issues involved ; and as the decision rests largely upon historic grounds, we venture to give its substance. The Chief Justice discussed the reasons for the con- stitutional provisions regarding direct taxation. The States have plenary powers of taxation, he said, but gave up the great sources of revenue from commerce, and retained' the power of levying taxes and duties covering anything other than excises ; but, in respect to the sources of revenue granted them, the range of taxa- tion was further narrowed by the power granted the federal government over interstate commerce. While they granted to the federal government the power of apportioning direct taxation, they secured to themselves the opportunity to pay the amount apportioned to them, and to recoup from their own citizens in the most feasi- ble way. 246 THE INTERNAL REVENUE SYSTEM " The Constitution ordains affirmatively, he said, that repre- sentatives and direct taxes shall be apportioned among the several States according to numbers, and negatively that no direct tax shall be laid unless in proportion to the enumera- tion." The opinion continued : — "It is said that a tax on the whole income of property is not a direct tax, in the meaning of the Constitution, but a duty. . . . We do not think so. Direct taxation was not restricted in one breath, and the restriction blown to the winds in another." The opinion next took up the argument that a tax on the general income of property is not a direct tax within the meaning of the Constitution ; and on this point the Court held : — " The Constitution prohibits any direct tax, unless in propor- tion to numbers as ascertained by the census; and, in the light of circumstances to which we have referred, is it not an evasion of that prohibition to hold that a general unapportioned tax im- posed upon all property owners, as a body, for, or in respect of, their property, is not direct, in the meaning of the Constitution, because confined to the income therefrom ? Whatever the specu- lative views of political economists or revenue reformers may be, can it be properly held that the Constitution, taken in its plain and obvious sense, and with due regard to the circumstances attending the formation of the government, authorizes a general unapportioned tax on the products of the farm and the rents of real estate, although imposed merely because of ownership, and with no possible means of escape from payment, as belonging to a totally different class from that which includes the property from whence the income proceeds ? " There can be but one answer, unless the constitutional re- striction is to be treated as utterly illusory and futile, and the object of its framers defeated. We find it impossible to bold that a fundamental requisition, deemed so important as to be UNDER PEACE CONDITIONS. 247 enforced by two provisions, one affirmative and one negative, can be refined away by forced distinctions between that which gives value to property, and the property itself. Nor can we perceive any ground why the same reasoning does not apply to capital in personalty, for the purpose of income or ordinarily yielding income, and to the income therefrom. All the real estate of the country and all its invested personal property are open to the direct operation of the taxing power, if an apportion- ment be made according to the Constitution. The Constitution does not say that no direct tax shall be laid by apportionment on any other property than land ; on the contrary, it forbids all un- apportioned direct taxes; and we know of no warrant for except- ing personal property from the exercise of the power, or of any reason why an apportioned direct tax cannot be laid and as- sessed, as Mr. Gallatin said in his report, when Secretary of the Treasury in 1812, ' upon the same objects of taxation on which the direct taxes levied under the authority of the State are laid and assessed.' . . . " Nor are we impressed with the contention that, because in the four instances in which the power of direct taxation has been exercised, Congress did not see fit, for reasons of expedi- ency, to levy a tax upon personalty, this amounts to such a practical construction of the Constitution, that the power did not exist, that we must regard ourselves bound by it. We should regret to be compelled to hold the powers of the general gov- ernment thus restricted, and certainly cannot accede to the idea that the Constitution has become weakened by a particular course of inaction under it. "The stress of the argument is thrown, however, on the as- sertion that an income tax is not a property tax at all ; that it is not a real estate tax, nor a crop tax, nor a bond tax; that it is an assessment upon the taxpayer, on account of his money-spending power, as shown by his revenue for the year preceding the as- sessment; that rents received, crops harvested, interest collected, have lost all connection with their origin, and, although once not taxable, have become transmuted in their new form into taxable subject matter ; in other words, that income is taxable irrespec- tive of the source from whence it is derived. . . . 248 THE INTERNAL REVENUE SYSTEM "If it were the fact that there had been no income tax law, such as this, at the time the Constitution was framed and adopted, it would not be of controlling importance. A direct tax cannot be taken out of the constitutional rule, because the particular tax did not exist at the time the rule was prescribed. . . . The power to tax real and personal property and the income from both, there being an apportionment, is conceded ; that such a tax is a direct tax in the meaning of the Constitution has not been, and in our judgment cannot be, successfully denied ; and yet we are thus invited to hesitate in the enforcement of the mandate of the Constitution, which prohibits Congress from laying a direct tax on the revenue from property of the citizen without regard to State lines. . . . We are not here concerned with the question whether an income tax be or be not desirable, nor whether such a tax would enable the government to diminish taxes on con- sumption and duties on imports, and to enter upon what may be believed to be a reform of its fiscal and commercial system. Questions of that character belong to the controversies of politi- cal parties, and cannot be settled by judicial decision. In these cases our province is to determine whether this income tax on the revenue from property does or does not belong to the class of direct taxes. If it does, it is, being reapportioned, in violation to the Constitution, and we must so declare. . . . " "\Ye have considered the Act only in respect of the tax on income derived from real estate and from invested personal prop- erty, and have not commented on so much of it as bears on gains or profits from business, privileges, or employments, in view of the instances in which taxation on business privileges or employ- ments has assumed the guise of an excise tax, and been sustained as such. l - Being of opinion that so much of the sections of this law as lays a tax on income from real and personal property is invalid. we are brought to the question of the effect of that conclusion upon these sections as a whole. . . . According to the census the true valuation of real and personal property in the United States in 1890 was $65,037,091,197, of which real estate with im- provements thereon made up $39,54 1,544,333. Of course, from the latter must be deducted, in applying these sections, all un- UNDER PEACE CONDITIONS. 249 productive property, and all property whose net yield does not exceed $4,000 ; but even with such deductions it is evident that the income from realty formed a vital part of the scheme for tax- ation embodied therein. If that be stricken out, and also the income from all invested personal property, bonds, stocks, invest- ments of all kinds, it is obvious that by far the largest part of the anticipated revenue would be eliminated, and this would leave the burden of the tax to be borne by professions, trades, employ- ments, or vocations; and in that way what was intended as a tax on capital would remain in substance a tax on occupations and labor. We cannot believe that such was the intention of Con- gress. We do not mean to say that an Act, laying by apportion- ment a direct tax on all real estate and personal property or the income thereof, might not also lay excise taxes on business, priv- ileges, employments, and vocations. But this is not such an Act, and the scheme must be considered as a whole. " Being invalid as to the greater part, and falling, as the tax would if any part were held valid, in a direction which could not have been contemplated except in connection with the taxation considered as an entirety, we are constrained to conclude that Sects. 27 to 37 inclusive of the Act, which became a law with- out the signature of the President on Aug. 28, 1894, are wholly inoperative and void. "The conclusions of the Court are as follows: First. We ad- here to the opinion already announced that taxes on real estate being indisputably direct taxes, taxes on the rents or incomes of real estate are equally direct taxes. " Second. We are of the opinion that taxes on personal prop- erty or on the income of personal property are likewise direct taxes. " Third. The tax imposed by Sects. 27 and 37, inclusive, of the Act of 1894, so far as it falls upon the income of real estate and of personal property, being a direct tax within the meaning of the Constitution, and therefore unconstitutional and void, because not apportioned according to the representation, all those sections constituting one entire scheme of taxation are necessarily invalid. " The decrees hereinbefore entered in this Court will be va- 250 THE INTERNAL REVENUE SYSTEM cated. The decrees below will be reversed, and the cases remanded with instructions to grant the relief prayed." 1 The decision is perhaps the most important that has been handed down by the Supreme Court in years. Not only may the limitations which it places upon the powers of Congress seriously cripple the Treasury in time of emergency, but, as in the Legal Tender decisions and the report of the Electoral Commission, it indicates the extraordinary powers which may be wielded by one man in determining the fundamental law of the land. The decision was reached by a vote of five to four on the final hearing. The judgment of one man upon a contro- verted point was enough to overthrow the uniform decis- ions of the same Court, as well as the settled- conviction of Congress and the public for over a century. With- out question Congress had accepted as settled the mean- ing of the Constitution in this regard, and had embodied its conviction in several measures. But this fact, as well as the uniform holdings of the Supreme Court, seems to have had but little weight. It must be acknowledged that the doctrine of stare decisis has received a severe blow, when a Court, whose claim to honorable distinction rests most largely on the con- sistency of its decisions, gives no consideration to five separate determinations, in which the meaning of the Constitution is passed upon without dissent by over a score of justices ; when the fact that in one of these cases two of the presiding justices had been members of 1 For full text of the opinion, as well as dissenting opinions of Jus- tices Harlan, Brown, Jackson, and White, vide Pollock vs. Farmers' Loan and Trust Company, et ah, 15 Supreme Court Reporter, pp. 912-951. UNDER PEACE CONDITIONS. 251 the Constitutional Convention and were most qualified to speak upon the subject, while upon two other occa- sions, by a unanimous Court, the income tax had been held to be a duty, and not a direct tax within the mean- ing of the Constitution. In 1895, by a majority of but one man, it is determined that Chief Justices Chase and Waite, and Justices Wilson, Nelson, Miller, Strong, Bradley, and others, were in error, and the dissenting voices of twenty-three justices are overruled by the opinions of five men. Such a reversal of established opinion could only be warranted on the ground of new historical evidence as to the meaning of the term "di- rect taxes" in the eighteenth century. And this evi- dence was of the most indirect kind, and was far from conclusive. Considerable material indicating the exis- tence of modified income taxes in the colonies at the time of the adoption of the Constitution was introduced by the appellants' counsel. From other sources were added notes from correspondents, fragments of debates and controversies, and the subsequently recorded opin- ions of members of the Convention. Yet this was far from convincing ; and it is quite as reasonable to suppose that the framers of the instrument had in mind I'impot unique of the French Physiocrats, as that they appre- ciated the administrative distinctions followed by the Court. The fiscal consequences of the decision may be quite as portentous as the legal and political ones. While the revenues are redundant, and the customs and excise ade- quate to supply all possible current needs of the govern- ment, the question is one of but little moment. In cases of emergency, however, the income tax is most essential 252 THE INTERS AL REVENUE SYSTEM to an adequate fiscal policy. In time of war the cus- toms duties are most unstable, as the experiences of the wars of 1812 and 18G1 give evidence, and cannot be relied upon to satisfy any increased demands placed upon them. The excise in like manner is slow in yield- ing, and when imposed upon consumable commodities may work grievous injustice. No tax is so fitted for emergency purposes as the income tax ; for its yield is immediate, the receipts capable of expansion to meet unforeseen exigencies, while its operations are in no sense obstructive to the freedom of industry and trade. The result of the decision deprived the Treasury of about $30,000,000, about two-thirds of the sum needed to satisfy the deficit of 1895, which was something less than $45,000,000. The losses lay mainly in the department of internal revenue, and were traceable to the large withdrawals of spirits, taken from bond in the months previous to the date when the law of 1894 went into effect, and which greatly diminished production and receipts for the following fiscal year. In addition to the duty upon incomes, the measure of Aug. 28, 1894, provided for a tax of two cents per pack upon playing-cards sold within the United States subse- quent to Aug. 1, 1894, as well as an increase of twenty- two and one-half per cent in the rate upon distilled spir- its, or from 90 cents to $1.10 per gallon, which increase was to be levied and collected upon all spirits in bond at the time of the passage of the Act or thereafter manufac- tured. This provision differed from previous legislation, in that the new rate Avas payable upon all spirits in bond rather than upon future production only. But, des- pite this provision, the gains which accrued to specula- UNDER PEACE CONDITIONS. 253 tors were enormous, for it was evident as early as June that the tax would be increased. As a consequence, pro- duction was very active during this period, and specula- tors and distillers withdrew spirits in great quantities in order to anticipate the increase of the rate. During the months of July and August, 1894, 26,500,000 gallons more of spirits were withdrawn from the bonded ware- houses than during the same months of 1893 ; while the total withdrawals during the two months previous to Sept. 1, 1894, were 36,554,088. Upon these with- drawals the old rate of 90 cents per gallon was paid, with the idea of holding the product until the new duty went into effect, when the stock would be disposed of upon the basis of the new rate. Assuming that the ad- vantage which accrued upon withdrawals during the months previous to July offset any overestimate, the gains to distillers and speculators could not have been less than seven million dollars, all of which should have been saved to the Treasury. The measure further provided for an extension of the bonded period from three to eight years. In the past it has been the custom to collect the tax on tobacco, as well as the customs duties, when the commodity entered the market for consumption ; but the principle has never been applied to spirits. The distiller has not only been required to pay the highest rate of tax im- posed upon any product under the laws, but has been compelled to pay the same within a specified time, no matter what the demand for spirits or the condition of the market. This provision was frequently a cause of great hardship ; and while an unlimited bonded period is not granted under the present law, as is permitted in 254 THE INTERNAL REVENUE SYSTEM tobacco and malt liquors, it lias been extended to eight years, a provision which affords great relief to producers. How burdensome the former law was is shown by the large number of failures which occurred among distillers and holders of stock during the early days of the recent commercial depression. From this increase of the rate to $1.10 a gallon, an annual gain of twenty million of dollars is anticipated to the revenues. The collections for the past three years from internal sources have been as follows, those for 1895 being under the revised rate : — OBJECTS OF TAXATION. 1893. 1894. 1895. From spirits and license taxes upon rectifiers, man- ufacturers, dealers, etc. . $94,720,200 $85,259,252 $79,862,627 From tobacco (chewing and smoking) 31,889,711 28,617,898 29,704,908 From fermented liquors and licenses 32,548,983 31,414,788 31,640,618 From oleomargarine . . . 1,670,643 1,723,479 1,409,211 From income 77,131 Banks, bankers, etc ... 2 Miscellaneous, — includ ing penalties, opium, playing- cards, etc 1 175,390 153,028 551,583 Aggregate receipts .... $161,004,987 $147,168,447 $143,246,078 THE INCIDENCE OF THE INTERNAL TAXES. The charge is not infrequently brought against the excise, as it now stands, that, although theoretically a tax upon luxuries, it is in reality a burden upon the i The tax on opium yielded §41,000 in 1894, nothing in 1895; and the duty on playing-cards §382,403 in the latter year. UNDER PEACE CONDITIONS. 255 wage-receiving classes. It is these classes, it is con- tended, who form the largest consumers of liquors and tobacco ; and it is just this class which it should be the first aim of the government to protect. The almost universal consumption of tobacco and malt liquors ren- ders them, as a matter of fact, a necessity to the major- ity of the people ; and the want is of such an intense order that it is usually satisfied even before those more essential to comfort. This objection rests largely upon the theory that all taxes upon commodities are eventu- ally shifted to the consumer ; that any addition to the cost of production in the form of a tax is forthwith added to price, and is thus diffused throughout the community. The substance of this argument is as fol- lows : The manufacturer who pays the tax originally will not deduct the same from his profits, for in a sys- tem of free competition they are already at a minimum. He therefore views it as one of the essential increments of cost of production, and adds it to price, together with a profit for the use and advancement of capital. Other- wise he would cease producing. He cannot recoup him- self from labor, nor from the farmer who produces the raw product. The same process goes on in the retail transaction, until the enhanced cost is eventually taken from the final payer, who consumes the product. But this theory is only true under conditions of perfect competition, conditions which, in the subjects under consideration, do not exist ; for the production and sale of whiskey, malt liquors, and tobacco are, in a measure, subject to the laws of monopolistic value. Now, mani- festly, the principle of diffusion recognized to be true in conditions of free competition is inoperative here, inas- 256 THE INTERNAL REVENUE SYSTEM much as free competition does not exist. Profits are, therefore, not regulated by the mean average profits se- cured in other industries ; for monopoly price is always fixed at the point where the largest sales and the largest net profits will be realized. The substantial truth of this theory is seen from an investigation of the influ- ence of the changes of rate upon prices. During the course of the extraordinary system in operation during the war, the price of spirits sold over the bar did not vary. Whether the tax was two dollars, or fifty cents, a gallon, the retail price of the article remained practi- cally the same. The recent experience in regard to tobacco shows the same phenomena, the tax being prac- tically paid either by the producer or the dealer. A partial shifting of the tax is brought about by adulter- ation and the use of inferior grades of the article; but the unusual profits derived from the retail liquor and tobacco traffic, as seen from the fact that a large family may be supported from the income of a small establish- ment, as well as the practical concentration of the busi- ness of distilling, brewing, and tobacco manufacture into a few hands, which has taken place in recent years, leads to the belief that, unlike other commodities of universal consumption, the tax upon such articles as we are considering is, in part at least, extracted from mo- nopolistic profits, and is by no means wholly shifted upon the consumer. CONSUMPTION AS INFLUENCED BY TAXATION. Reference has heretofore been made to the influence of taxation in determining prices and the consumption of such staple articles as food, clothing, and the like; UNDER PEACE CONDITIONS. 257 and the inference was drawn that taxes, if heavy, might be a factor of some importance in determining the standard of living of a people. During the debates in Congress, one of the reasons most frequently urged for the retention of the two-dollar rate upon distilled spir- its was the deterrent effect expected upon consumption ; for it is a principle well recognized in economic science that the demand for any article of general consumption is more or less dependent upon price. It is a current theory, however, that in certain articles for which the demand may be said to be " intense," this principle is in abeyance. For such articles the demand is said to be " inelastic," and varies but slightly with the altera- tions in price. Whiskey, malt liquors, and tobacco are held to be pre-eminently of this class of commodities, and for this reason are especially fitted for taxation. Our own experience seems to demand some modifica- tion of this principle ; for the consumption of whiskey, malt liquo'rs, and tobacco, as found in the. returns of the Treasury Department, indicate that the duties are to some extent reflected in consumption, although not in any exact ratio. But little, if any, reliance can be reposed in the statistics of production prior to 1868, in so far as they are indicative of the consumption of these years, inas- much as evasion was so universal, and production so irregular and speculative, that any attempt to measure the consumption by the amount returned for taxation would be misleading. Since that date, however, the reports offer data from which surer inductions can be made, although even these returns must be taken with considerable allowance. By reference to tables upon a 258 THE INTERNAL REVENUE SYSTEM preceding page, 1 it will be seen that production was greatly stimulated in the two years immediately subse- quent to 1868 ; the per capita production in 1870 being 2.03 gallons, and the total tax-paid product 78,500,000 gallons. From this time on domestic production continued to decline until 1878 ; and the average per capita consump- tion fell from 2.03 gallons in 1870, and 1.58 gallons in 1873, to 1.07 and 1.09 gallons in the fiscal years 1878 and 1879 respectively. With the renewal of business during the years which followed, the annual taxed pro- duction increased from 50,704,189 gallons in 1878 to 79,616,901 in 1884, and the per capita production in- creased during the same years from 1.07 gallons to 1.45 gallons. During the period from 1871 to 1880, there was this marked reduction, both in the production of the country as well as in the amount consumed by the peo- ple ; and this, too, notwithstanding an increase in the population of the country during the same ' period of thirty per cent. The tax-rate was increased twice dur- ing this period, — in 1872 to seventy cents per gallon, and in 1875 to ninety cents : but it is by no means safe to infer that the diminution in production, and con- sequently of consumption, is traceable to the increased rate ; for a disturbing element enters in, in the unprece- dented commercial depression, which, beginning in 1873, continued down almost to the end of the decade, and tended to check the consumption of all commodities. Since 1880, again, the increase in the consumption of spirits has been continuous and rapid. During the suc- ceeding decade, with an increase in the population of i See p. 225. UNDER PEACE CONDITIONS. 259 24 per cent, the increase in consumption was 36.8 per cent, or a per capita consumption in 1890 of 1.35 gal- lons, as compared with 1.23 gallons in 1880. During the three years subsequent to 1890 the consumption has increased at an even more remarkable rate, growing out of all proportion to the increase in population ; the an- nual increase in tax-paid production being 10,000,000 gallons, the per capita consumption in 1893 being 1.48 gallons. And just as the diminution in consumption during the previous decade is attributable to general economic and industrial conditions, so the increase re- cently recorded is due to the very general and widely diffused prosperity of the country. The country was growing rich at an unprecedented rate ; wages were high; redundant crops, in the face of partial failure of European harvests, eased the distress of the farmer, and enabled him, along with the laborer, to improve his condition of life, and expend more on luxuries. It is, moreover, to be borne, in mind that these figures are only indicative of the amount withdrawn from bond during these years, and it is unsafe to assume that they accurately represent consumption; for, under existing statutes, spirits deposited in a distillery warehouse were compelled to be withdrawn, tax paid, within three years from date of entry. In the fiscal years 1884 and 1885 taxes thus became due upon an unusual amount of spirits, which were withdrawn in consequence of the three years limitation, and without regard for the de- mand for consumption. Many thousands of barrels were also withdrawn for export for the same reason, in subsequent years to be returned to the United States for sale. In this way overproduction in years of plenty 260 THE INTERNAL REVENUE SYSTEM. has operated to depress receipts in subsequent years, and to cause an apparent increase in consumption in others. The same disturbing elements prevailed during the years 1890, 1891, 1892, and 1893, when there was a steady increase in withdrawals of tax-paid spirits, due to heavy production in the years extending from 1887 to 1890. Sporadic increase or decrease in withdrawals is not, therefore, to be attributed to increase in con- sumption, or loss from evasion, until all the elements are taken into account. When allowance is made for these influences, as well as the commercial depression extending from 1873 to 1880, it becomes doubtful if any great influence upon consumption can be attributed to the slight alterations in the rates. Unquestionably the imposition of the two- dollar rate in 18G4 operated as an effectual check to household consumption, such as was well-nigh universal previous to that time ; and the rate has been sufficiently high ever since to prevent its revival. During the investigation of the Be venue Commission in 1865, testimony was taken upon this question ; and, while considerable diversity of opinion was exhibited by experts on the subject, the Commission held that the imposition of the heavy duty had undoubtedly been a potent influence in determining consumption. Some estimated the reduction in consumption for drinking purposes consequent upon the imposition of the two-dol- lar rate in 1864 as high as seventy-five per cent, while others were unable to recognize any perceptible diminu- tion. The discrepancy was due to the difference in the point of view of the observers, but it appeared conclu- sive to the Commission that a large reduction in con- UNDER PEACE CONDITIONS. 261 sumption was observable on the part of the working classes. Previous to the imposition of the tax, raw whiskey had been retailed at from fifteen to forty cents per gallon. At this cost it was possible for the very poorest to partake very freely of whiskey as a beverage, while it Avas the custom of agriculturists to buy whis- key by the barrel, and to dispense it freely for their hands during the season of harvesting. With the advance in the price of the article to sixty cents per quart, and two dollars and twenty-five cents per gallon, such free use was rendered impossible ; and while consumption over the bar has possibly remained more or less constant, the amount of home consump- tion has perceptibly diminished. Along with this, there was observable an increase in the consumption of malt liquors, which have been quite largely substituted for distilled spirits. 1 The statistics seem to establish that, while the original imposition of a high rate had a marked effect upon consumption, since 1868 the changes in the duty have not been sufficient to influence to any degree the price or the demand for the article. During the last thirty years the price of whiskey over the bar has not changed ; and if any diminution in consumption has occurred, it lies in other directions. It is probable, however, that the increase in rate has led to adulteration in the quality of spirits. With whis- key obtainable at twenty-five cents per gallon, as before the war, the consumer was assured a comparatively pure article, because the inducement to adulteration was but slight. But with a tax added thereto of from 200 to 1 Report of Revenue Commission, p. 12. 262 THE INTERNAL REVENUE SYSTEM 400 per cent, the incentives to dishonesty are too great to be resisted. A study of the statistics of consumption of tobacco and malt liquors does not materially modify these con- clusions; although it appears that the demand for the latter articles was but little affected by the commercial depression of 1873, as the consumption increased at a pretty uniform rate during these years. CONCLUSION. 263 CONCLUSION. Such is the history of the internal revenue system, from its inauguration by Hamilton over one hundred years ago, down to the present time. It has now become a recognized and essential portion of our financial order, and there is no possibility that it will soon be aban- doned. Upon this basis and under ordinary conditions, it is above reproach from an economic standpoint, Avhile no department of the government is administered with greater fidelity, or is freer from reproach. However faulty it may have been at the period of its greatest extension, when the necessities of life formed the prin- cipal sources of revenue, the same objections cannot now be urged against it, reduced as it is to the smallest pos- sible compass, and based only upon those articles recog- nized quite universally as deleterious both to the morals as well as the social well-being of the community. At the present time frauds have practically ceased, save in the outlying districts ; and even these are rapidly being brought under federal supervision by the improvement of the means of transportation, and the encroachment of civilization into the heretofore sparsely populated dis- tricts. As to the position which the excise will occupy in the future it- is idle to conjecture. With the return of good times and the increase of customs revenue, certain por- 26-1 THE INTERNAL REVENUE SYSTEM. tions of it may be relinquished ; but, in some form or other, it is safe to assume that it will always perform a substantial service in our budgetary arrangement. And in view of the recent necessities of the Treasury, and the possible prospective demands for an increase of the revenues, owing to the determination of the Supreme Court in regard to the income tax, it becomes a matter of present interest to take stock of our resources. It would seem advisable, in case further reliance upon in- land sources be found necessary, to look for the same from an increase in the rates on malt liquors and tobacco. The consumption of the former article as a beverage has of late years increased at a phenomenal rate, the quan- tity taxed per capita having doubled during the thirteen years subsequent to 1880. * Since 1863, when the duty was first imposed, the amount returned for taxation has increased from 62,000,000 gallons to 1,071,000,000 gal- lons, or an increase in the per capita consumption of from 1.86 gallons in the former year to 16.03 gallons in 1893. During the same years the revenues have in- creased from $1,558,000 in 1863 to $32,500,000 in 1893, while illicit manufacture is so difficult, owing to the fact that large and expensive plants are essential to production, that evasion may now be said to be non- existent. What little fraud does exist is traceable to the re-use of stamps which have never been properly cancelled. Further reasons which indicate this com- modity as especially fitted for further taxation is the low rate now existing upon it, — i.e. one dollar per barrel, or approximately twenty per cent ad valorem, — and the 1 In 1S80 the consumption was 8.25 gallons per capita : in 1893, 16.03 gallons. CONCLUSION. 265 large profits accruing from the manufacture and sale. It has been estimated that the average cost of beer over the counter is not in excess of one and three-fourth cents per glass, upon which a tax of one-fifth of one cent per glass is levied. An increase of the tax to double this amount, or to $2.00 per barrel, would be borne with comparative ease, the quality of the article would not thereby suffer, while the revenue would be increased to upwards of sixty millions a year. The duties upon cigars and tobacco are likewise lower in the United States than in almost any other country. In 1890 all license taxes for the privilege of sale were removed, and the rates reduced to a uniform tax of six cents per pound upon manufactured tobacco, and to $3.00 per 1,000 upon cigars, regardless of quality. With these rates increased one hundred per cent, the revenues could doubtless be augmented to sixty million dollars ; with the same rates imposed as prevail in Great Britain, to eighty -five millions ; and with those levied in France, to one hundred and twelve millions. The total revenue from the three sources of distilled spirits, malt liquors, and tobacco is now something over $141,000,000, a sum which could with comparative ease be increased to $200,000,000. With such a balance- sheet as this, and with such an unparalleled showing of resources, no apprehension need be felt for the future ; for it is safe to assert that contemporary budgetary his- tory makes no like exhibit of unopened resources and unemployed powers. Whatever may be the contingencies which arise, and induce greater dependence upon the internal revenue sys- tem, any reasonable revenues can be secured from inland 266 THE INTERNAL REVENUE SYSTEM. sources without impairment of our industrial vigor, or even the creation of appreciable burdens. Our ability to sustain taxation, even the most onerous and vexatious, was abundantly demonstrated during the war ; and since that time the rapidity of our industrial progress, as well as our growth in resources and opulence, has been un- paralleled in the history of nations. While other coun- tries, confronted with bankruptcy and a tax-burdened people, are vexed with the problems of expanding indebtedness and increasing tax-rates, America stands almost alone in the family of nations, Avith a debt whose extinction is only a matter of a few years. At the present time our federal revenue system bears so lightly as to arouse scarcely a ripple of dissatisfaction ; while the internal taxes alone, reduced as they are to small compass and levied at moderate rates, ordinarily produce to the Treasury sufficient revenues to satisfy the expenditures on behalf of the civil establishment, together with the war, navy, and Indian departments. It is safe to assert that the records of modern his- tory find no parallel to such a display of resources by a great nation. APPENDICES. APPENDIX I. Bibliography. Adams, Henry. Writings of Albert Galla- tin, Philadelphia, 1879. Adams, IT. C. Public Debts. New York. Taxation in United States, 1789-1816. Johns-Hopkins University Studies, Vol. II. Bastable, Charles F. Public Finance. London, 1892. Bolles, A. S. Financial History of the United States. New York, 1884. BOUTWELL. Direct and Excise Taxa- tion in the United States. New York, 1864. Cooley, Thomas M. A Treatise on the Law of Taxation, including the Law of Special Assessments. 2d Ed. Chicago, 1886. Commercial and Financial Chronicle, 1861-1870, New York. Coxe, Tench. History of the Internal Rev- enue System. Philadelpbia, 1796. Dowell, Stephen. A History of Taxation and Taxes in England from the Earliest Times to the Pres- ent Day. London, 1884. Dunbar, C. F. Refunding Direct Tax of 1861. Quarterly Journal of Economics, Yol. III. Ely, R. T. Taxation in American States and Cities. New York, 1888. Elliot, Jonathan. Debates on the Federal Constitution. Washington, 1845. Garnier, Joseph. Traite des Finances. Paris, 1862. Gibbons. United States Debt and Taxation. New York. 269 270 APPENDIX I. Ford, Paul L. Pamphlets on the Consti- tution of the United States, 1787-1788. Brooklyn, 1888. Gould & Tucker. The Federal Income Tax Explained. Boston, 1S95. Hamilton. Works. Hock, Carl Freihebb Vox. Die Finanzen und die Fi- nanz-Geschichte der Verein- igten Staaten von Amerika. Stuttgart, 1867. Jefferson. Works. Kxox, Jonx J. United States Notes. New York, 1884. Lalors'. Encyclopedia of Political Science, Political Economy, and the Political History of the United States. Chicago, 1881. LeKoy-Beaulieu, Paul. Traite de la Science des Finances. Paris, 1888. Madison. Writings. MCCULLOCH, J. P. A Treatise on the Princi- ples and Practical Influence of Taxation and the Funding System. London, 1845. Mill, John Stuart. Principles of Political Economy, with some of their Applications to Social Philos- ophy. New York, 1878. Olmsted, F. L. Taxation of Tobacco. Quarterly Journal of Eco- nomics, Vol. V. Pabietj, E. Traite des Impots. Paris, 18(52. Peto, Sir William M. Taxation, its Levy and Ex- penditure, Past and Future ; being an Enquiry into our Financial Policy. London, 1863. Picardo, David. Principles of Political Economy and Taxation. Sciiouler, James. History of the United States of America. Wash- ington, 1880. Schwab, J. C. History of the New York Property Tax. Publications American Economic Associa- tion, Vol. V., No. 5. Balti- more, 1890. APPENDIX 1. 271 Seligman, E. R. A. The Taxation of Corpora- tions. Political Science Quarterly, Vol. VI., p. 693. New York. The General Property Tax. Ibid., Vol. V. p. 24. Progressive Taxation, in Theory and Practice. Pub- lications American Eco- nomic Association, Vol. IX., Nos. 1 and 2. Baltimore, 1894. The Shifting and Incidence of Taxation. Publications American Economic Asso- ciation, Vol. VII., Nos. 2 and 3. Baltimore, 1892. Sherman, John. Speeches and Reports on Finance and Taxation. New York, 1879. Smith, Adam. An Enquiry into the Na- ture and Causes of the Wealth of Nations. Sumner, W. G. Robert Morris, the Finan- cier, and the Finances of the American Revolution. New York, 1891. TOOKE. History of Prices. Von Holst, Dr. H. Constitutional History of the United States. Chicago, 1879. Weeden, W. B. Economic History of New England. Boston, 1890. Wells, David A. Recent Financial, Indus- trial, and Commercial Expe- riences of the United States. Cobden Club Essays, series 2, 1871-1872. London, 1872. Taxation of Distilled Spir- its, Our Experience in the. Princeton Beview, N. S., Vol. XIV. West, Max. The Inheritance Tax. Studies in History, Econom- ics and Public Law, edited by University Faculty of Political Science of Colum- bia College. New York, 1893. Wilson, A. J. The National Budget. London, 1S82. Wolf, D. J. Die Brantweinsteuer, Fi- nanz Archiv, 1887. 272 APPENDIX 1. Official Documents. American State Papers ; An- nals of Congress ; Congres- sional Record and Globe; Journal of Continental Con- gress. Report of Commission ap- pointed for the Revision of the Revenue System of the United States. Washington, 1866. Reports on Finance for the years 1811 to 1817 and 1860 to 1895. Washington. Reports of Special Commis- sioner of the Revenue for the years of 1866, 1867, 1868, and 1869. Washing- ton. APPENDIX II. 273 APPENDIX II. Schedule of Internal Revenue Duties, from 1862 to 1867. A. Corporations, on Gross Receipts, and Personal Income Taxes. Objects of Taxation. O < » P, '$■ O < B o < O ►J ti O < H O < Railroads and Steamboats worked by steam . . . Railroads and Ferry Boats not worked by steam . . Bridges Toll % 3 H 3 7c 3 li 3 1 o 3 2£ % 3 5 li 3 o % % 2i 2£ 3 3 5 3 % on re- ceipts in ex- cess of $1,000. Repealed Repealed 2£ Insurance Companies . . 1 O Toll Roads and Bridges Ferry Boats Ik o H 1 Act July 1, 18G2. — 3 per cent on excess of $600; 5 per cent on excess of $10,000; 1£ per cent on incomes from United States securities ; 5 per cent on incomes of United States residents abroad. Act June 30, 1864. —5 per cent on incomes between $600 and $5,000 ; 7J per cent on incomes between $5,000 and $10,000 ; 10 per cent on incomes in excess of $10,000. Discrimination in favor of United States securities repealed. Act Mab. 3, 1865. — 5 per cent on incomes between $600 and $5,000 ; 10 per cent on all incomes in excess of $5,000. Act Mar. 2, 1867. —5 per cent on all incomes in excess of $1,000. 274 APPENDIX II. n f^& 0) . eo *3 o © fl ® is > a a -; o a <-* 3 — < 2 fa | >*: a, /X»N^- ci > ©> • 1 o . 43 © . 5»~S 5 © • S ® a a o a >-5 ^ ° €© . © fa O ft £ Sac > a ■8 « © ® -s 8 Q O H as 2 H fa o CO b 1 ■2 w <£ s § | g £ g 5 I .§ -5 £ PQ o a, O 02 & ® i2 co co l"* 1 x © > > t> > e3 ia .& fa. ft fa- fa fa Ph Pm o « >< 3 s u «l CO B3 ■< uj Sg u «) s 4-3 a _ +3 z » © F •-S r^ fa » » ^ ® EJ ft < >H 01 ■* its CO CO 43 j)l o H < ' K •^> © ^ 9 1-3 CO © » M « - H H ft " O ccW-tN W rH M -f lO rt • rr H ® .2 m a © a « a co H H o n o O fa, © A -2 ft 1 o ? a 03 fal o ft a 6 K "-3 pa O 1—1 ^_, o ° 5 a < 3 ^ © o g 5 ^ --, fa .a © to b3 S ft fa -d co a t<3 rt a p ^, -3 co i3 C' - » 4- a iK ft ^ APPENDIX II. 275 Stamp-Taxes on Instruments, Acts, and Evidences. Any agreement, per sheet Bank Check Bills of Exchange, Inland Bills of Exchange, Foreign Bills of Lading Express Receipt Bond Bond of Indemnity . . . . Certificate of Stock . . . . Other Certificate Charter Party ....'.. Contracts, bills of sale, bro- ker's note of sale . . . Conveyance of Real Estate when consideration does not exceed $500 . . . . Conveyance — Consideration from $500 to $20,000 . . Conveyance — Consideration in excess of $20,000. On each $10,000 Telegraph Despatch . . . Bill of Entry Insurance Policy, according to amount of insurance . Lease Manifest Mortgage (up to $10,000) . . Mortgage. Consideration $10,000 to $20,000 . . . Mortgage, each add'al $10,000 Passage Ticket Power of Attorney . . . . Probate of Will Protest Receipts of Money . . , . . Warehouse R'^pipt . . . . Legal Doc .... Writ for Col ^ence'o of Suit Act July 1, 1S62. 50. In excess of $20, 2c. At rate of 5c per $100. Below $150, 3c, above $150 at a propor- tional rate. 100. 10 to 50. 250 and 500. 250. 20 to 250. $3.00 to $10.00 100. 500. $1.00 to $20.00. $20.00. 10 to 30. 500 to $1.00. 250 to $1.00. 500 to $1.00. $1.00 to $5.00. Same as conveyances $15.00. $10.00. 500 to $1.00. 250 to $1.00. 500 to $20.00. 250. 250. 50? 2< _ XT. o.2 Act June 30, ISfl-t. 500 to $1.00. 100 to 250. $1.00 to $10.00. At rate of 50c. for each $500. At rate of 50c. for each $500. 250 to $1.00. At 50c. for each $200 of rent in excess Of $300. 50c. on every $500 of Consideration. 500 to $1.00. 250 to $1.00. $1.00, and 50c. on each $1,000 in ex- cess of $2,000. 250. 20.- 100 to 250. 50<*. In the Acts of Mar, 3, 1865, July 13, 1SCG, Mar. 2, 1867, no important changes were made, 276 APPENDIX II. J 5 g & S3 ► 11 ^ 1 s | - 5 s a 3 _i s !_ ^ = z c. c :s S — := £: — - hi* «o •d 1 -o 33 ■5 a 3 'i. 8 : v. ° SF - -3 ;,', S .S P. si© M O c? £.« H ^ ^ bl rt . £ « ja 3 n: -« -*> ^ .i. t* CO r3 ~ ^ 5 h3 £ ,_ e "S "3 Ti PhQCSUhJQW a i 3 §. § a 3 1 2' « u -S 2 -3 » o 5 * © -5 "3 H O W H J H 278 APPEXDIX II. _ n S X — s* •s. / < -CI lO €» § o S 3 3 a 3 n ^ > lis act t of til to san iw of 1 -< _ — .0) •w c3 :- CJO § - OS — i *■" . +* w g e g n h M '-. r ft ft « oS •a. ^ " _ ft Ph >o ,Q lO p, ~ €©-© jfi ft~ a> aj"i< o i . m ft « ;-< a> »ri O. n. ~ o -— -' s ft u X — — — = - o £0 'J '." O CO CO 03 •X X APPEXBIX II. 279 __; & a 0) * H ft 5 £ ® K 3 5 CD 3 ^ CD f=5 ft = — s • C^ ■-Z ^-, / o 5 5 2 ^i CO ;_, ■S m o « o a Pi > o ® s © ~- ■«k •e^ :~ _~ X^^ o - ^ €©= O o -t-t -T io ^. v - - - >&. s cN -1 CO -" a -d — o 09 09 +3 CD 99 - (4 39 09 o CO u | M 2 — ' > r^" i i . 5 -G CO 00 it z r- (D c3 G 09 w i s M P3 3 X X « > 2 ^ cc -S p* "3 t- *> j iS s o a ■" S S a 2 ® £ >> cS fe S3 S3 M rt ,3 « M O 3 280 AP PES I) IX 111. X - w - CC CI 1Q -* z co cc co •-T t~ CJ cc x CO X X X X CO x> co cc X X < 1-1 1-H T-( rH 1-1 1-1 1-1 1-1 1-1 1-1 s! >i t^" o" -f c CO CO CI O C£ CO cc E ;" CO CM CI > >. U >5 >, g 1^ ti h S fa ^: M "3 "s 5 1-5 1-5 CS p INO <-2 ■$ tH <* -H IS >o CO I-- t- 00 01 >0 -t co CO CO CC co v: I- I- X X X, X X X X X X X X x co cc 5 1-1 1—1 J-> T-l T-H r- 1—1 1— 1-1 1-1 1-1 rH IH "~ * « i-T t-T -' CI O CO CO CO c? CI CO CO X s < CO ?l CO CJ CI GO >> ^ CD 2 M '-' >> h u >> CD ■ EMI 2 ,3 - "rt ea rt "rt 5 rt ft ft z 'C o v .a o = < 03 4> > el IT > — O s 5 05 CD c3 C ED © — : : E3 CO a) CB CD ft ft CO CD & c3 CD > CD 03 ~ «-< ft ft ft h I £ "5 £ co" GO cx r. cS e3 bo 5 2 5 X ft M g C — a p r^ r-; rz , ■0 1^3 -r r& rd TJ -a B — I CD CO CD CD CD CD ^ ~ rr ~ ft ■^3 ~ 5 5 5 "43 en -3 S DC < -*- X T3 'C CO 1 do DQ •y: CB DC r. DO to o o b — h F4 ft Oh ft ft ft ft ft ft co qg ta CC DQ CO CO CO CO APPENDIX III. 281 B. Acts Imposing Tax on Fermented Liquors and Rates of Tax. Pee Bakrel. From September, 1862, to March 3, 1863 (act July 1, 1862) .' $1.00 From March 3, 1863, to March 31, 1861 (act March 3, 1863) 60 From April 1, 1864 1.00 The act of March 3, 1S03, provided that the tax on fermented liquors should be 60 cents per barrel from the date of the passage of that act to April 1, 1864. Hence, the tax of 60 cents per barrel having expired by limitation, April 1, 1804, the tax of $1 per bar- rel, under act of July 1, 1802, was again revived, which rate has continued in force under different acts since that date. The act of July 13, 1866 (14 Stat., 9S), changed the mode of assessing and collecting the tax on fermented liquors, and made the tax on them after Sept. 1, 1866, payable by stamps. A deduction of lh per cent is allowed on the tax upon fer- mented liquors, making this tax in effect 92^ cents per barrel. OR 9 APPENDIX 111. S H _ £ . « Lengt of Tim Rates WERE I Force. TS CO CO CM CO CO ec CM liO CN CM C5 OJ C5 CO CO rH r- 1 •o ■* CM c "# -* CO CO ** Ttl CO >o lO m co co — oc co g co cc ^: X CO cc CO CO CO CO CO CO CO X CO CO 3 -< 00 CO oc X CO X 00 00 oo oo CO 00 00 X oo oo ■" I- " »H rH r-1 rH i— 1 i—i i— ( rH rH rH K = -' ro CO" © CO CO co" co" CO~ co" co" M co" o" 00 L CO CO i*j M K CO a s •-a CO i-H a ,2" i-s i-s ^ fr4 rH rH ,1 >> >» _>, CM CM ft* 3 ^ O <4 1 i-s r3 03 8 c3 03 o3 ^ 'S i-o 3 s i-s i-s B> (M « Cl CM CI K CM «# tH t* ■* ITS HO ia lO CO g COO "C §2 CT CO CO CO CO CD CO CO CO CO CO oo co oo X oo DO co co CO 00 oo oo oo X CO 00 m o rH rl i-l 1-1 1-1 1-1 1-1 1-1 rH rH a" rH CO rH ^H co i-H O S <=> O CO CO CO CO CO co CO CO CO T— 1 H O •4 3 £ "3 t-s ^ i-s i-s (4 ^1 1-0 1-5 CO CO a 3 i-s i-s CO H u t-> § s s I-S («H Cj E» - O ~ cm « w O IC ia c W >C lO lOOlO o O >r £ rH - r^ CM CO CO CO CO T* ■* rH c m , ^ ec rt o o t* CD o CO CO o CO > CO CO 2 o - U n eg ■» : CO b o r= be o bo g a CO 03 be 03 "S ■M > ; g CO CO « a CO ,s CO .9 cd eS a 13 5 o .5 CO CO "5 CO - CO s X CO S CO c B CO r^ p-l oc I - CO 3 B _g CD CO o d o a. oc c i a C c CD It > b o eS "5 CO CO o CO CO GO* E a c CO cfl CB CO X 1 CO -2 B <£ -d s C3 ■73 CO a a O H > "is » > a > a ^ d tfl CD W o "+3 _ft i - n 6 CO z a m B K O 6 CO 00 GO 'a "i a cc ■d "5 cc B 1 -d S CO — ft "5 bi S P. 5 o ft t-i CO Bh 4» bi ft c 1 cf. ft O GO CO t3 "el O | H a a B" 'I CD u $ ft CO n 7. "r« bib ft B CC - > bi d ft CD BI CO CO CO ts GO o a GO b= B < rO O rd 'S.S fl b i b bB sc +f ■j. 00 r b . tc C ■a .^3 DO bi f c 5 c 13 o t3 CO fe- es CO CO CO c3 F 5 03 b- eS 09 1 = o a ■5 > c3 St B ^d CD > c3 a S CO GO to O o O •J. tz &0 o a H cc o CO CO APPENDIX 111. 283 r r 00 CM CI 35 lO ~ CT O :r CO L— 1— i- i- ■'/ C3 • i X 30 CO r •/> 30 oo i 00 ^H tH i-H tH 1-1 i—i 1-1 1—1 O O O CO CO r-l CO •-i U fcl - -v a. ~ a a OOOCOOOWNWOIWO CO CO CO O O O CO CO r-l CO i-H H rl H N « tl s9 a ^ ~B ~5 a k 5i5j5'5 2 2 2 £! 3 f J ° 'f '-2 <» « CO Ttf ■* CO i-H CO CN N r-l Trt o. m 93 03 = 93 u c EC Si M '3 a be '5 a CO 03 03 — Si CO 03 +a 33 Si cd to a a CO to -r bf m t; 39 93 m CJ •n 3 ta -1 o — a cd — C : a -w O 93 33 Ed cd o o o Ed 6 93 93 o jg CO o cd (0 a — 2 73 a a oT a 93 on .bjD to '3 c : o n 03 ,0 o -a 93 t-l cd 6 03 a cS £ *a a *** o cd S S3 U5 o o - o O C3 t* t~ & « <1 ^ W * a o c 03 r ~. to cd CO to 03 l- g U (j M fl3 _0 ^ to | «« ^J -S IS! ^ O <^> A O w ^ o § of !4 *» 9 oo < ^ ^ S „ <£ « ^ a ^ 'C 03 & cd J2 "o 50 «m CD fcJO 03 cd o ... OS C5 rt b/D t- a oo 'S to CO ^-i >> o cd ^ 03 ^ O M O 03 5 to 03 a go 03 o o O CO 284 APPENDIX III. Sag 5 &« ■S N (N N 01 6 7) ji n c< S* D S m m ta to — "° ^ ^ '-5 J2 J2 P cooorooooocooocococooococe 3? gf o" © © co eo eo co" co co" eo* eo co* eg" © o > >> >> 2 2 2 ^oooocooocooo "^OOOOOCOOCOOO '; — ci ci co' co co oo irj id © r-5 co' - - ft - ,- z -^ o > >. > o o 2 a « S e© = " O O o o 5- >■> t* 03 m c3 cj "rt "2 s a o " ci ft ' .el ' O rS 03 2 • O C3 6* ® • cj »ri X CI . © ^ • S to K 5 ° . • & j © © 5 H O 2 ► o ft ' © © > > o o 5 flto c .. «3 .. fe- ■3 - ~ "3 ■* -; T3 t: d p s a .3 s o 5 ,i „ „ o . ^ 5 ^J © - IS Ri ~. — CS Ml >>> o C3 ff> CJ r") O *T! - S © cj cj Ci ^ r^ -^ r-( ci ej > > O O "3 2 "3 £ M Ml 5 o o APPENDIX III. 285 to -o CO t- I- t- t- Si CT5 O CO CO CO r-1 i- l- t- - ~. r. (O CO CO t- t- t- - 00 >0 >o »o CO CO CO CO CO CC '-= l- 1 - t- - X, X CO cc x x x X X X X X CO CC X X p. * - - „ - „ „ ^ „ ^ CO CO -.- CM 01 o CO 1-1 i-H 01 j>> >» t- u ? ^ c3 3 oi o3 — -H i-a ^ ^ & S <■ !-S <=; <; s > >5 j>> t; >> >. r cS a 1: S 0! — — 5 ?i ~^ i-s - — rt -o - - f=H s ^ S r=H f=. c i-0 S o o - o o o r o 10 o o © o _ © ~ q 5 — q c lO z 5 t- q i-o q - oi •* -T K5 o " IC CO " " o cc 01 © CO ^-1 o CO — s © it c3 o c3 ft -:' l_l CO z Cj © 1-0 01 ED 1 l«5 © X ■■/* — _5 S — 1 ~. § - «H cS CO © CD it z z o O - "-i — co 01 OB / CO CO c/ u © o o -r "Z © '■-!. O o a © cj = m u © > 03 5 ft ? _o ft ? ■o .— ? P. © o — — V. O O - © o O 03 CO — g CO z CO © > z o = a © i CJ CO ; ; 1 Pi o o 1 z © ft >0 o _>- o P s Pi a - "3 °o S * o o v E r - : o _ CO O ci =£? > 03 co" s Pi P 00 CO O M : : _cc O hi v a C if. .5 CO © - « — 1 C Tr. > C M t ;- .I f ' 3 o cj o : — I c I o 3 s | C © 03 ~ © 03 © 'S : c '8 b ) t bC tn -a CO a if. — 1 if. ~r CO ~ CO CO -^ o Pi - t K a © cC !> as - - cr. *5 3 tx CD "re z '5 03 M CO if. o if. 'I r. § 00 03 ir. © 3 if. ^ r. - a © © 3 r. :r. '3 O O o O o a s i^ * 5 o s s T- 1 © O rH O PI s Pf 7. CO © ill IS " ?r 30 33 286 APPENDIX IV. APPENDIX IV. Schedule of Articles and Occupations subject to Tax under the Internal Revenue Laws of the United States in Force August 28, 1894. SPECIAL TAXES. Kate of Tax. Rectifiers of less than 500 barrels a year $100.00 Rectifiers of 500 barrels, or more, a year 200.00 Retail liquor-dealers 25.00 Wholesale liquor-dealers 100.00 Retail dealers in malt liquors 20.00 Wholesale dealers in malt liquors 50.00 Manufacturers of stills 50.00 and for stills or worms, manufactured, each 20.00 Brewers, annual manufacture less than 500 barrels . . 50.00 annual manufacture 500 barrels or more . . . 100.00 Manufacturers of oleomargarine 600.00 Retail dealers in oleomargarine 48.00 Wholesale dealers in oleomargarine 480.00 DISTILLED SPIRITS, ETC. Distilled spirits, per gallon 1.10 Wines, liquors, or compounds known or denominated as wine, and made in imitation of sparkling wine or champagne, but not made from grapes grown in the United States, and liquors, not made from grapes, currants, rhubarb, or berries grown in the United States, but produced by being rectified or mixed with distilled spirits or by the infusion of any matter in spirits, to be sold as wine, or as a substitute for wine, in bottles containing not more than one pint, per bottle or package -10 APPENDIX IV. 287 Rate of Tax. Same, in bottles, containing more than one pint, and not more than one quart, per bottle or package .... $ 0.20 And at the same rate for any larger quantity of such merchandise, however put up, or whatever may be the package. Stamps for distilled spirits intended for export, for ex- pense, etc., of, each 10 TOBACCO AND SNUFF. Tobacco, chewing and smoking, fine-cut, cavendish, plug or twist, cut or granulated, of every description; tobacco twisted by hand or reduced into a condition to be consumed, or in any manner other than the ordinary mode of drying and curing, prepared for sale or consumption, even if prepared without the use of any machine or instrument, and without being pressed or sweetened ; and all fine-cut shorts and refuse scraps, clippings, cuttings, and sweepings of tobacco, domestic or imported, per pound .... .06 Snuff, of all descriptions, domestic or imported, and snuff-flour, sold or removed for use, per pound ... .06 CIGARS AND CIGARETTES. Cigars and cheroots, of all descriptions, domestic or im- ported, per thousand 3.00 Cigarettes, domestic or imported, weighing not over three pounds per thousand, per thousand .... .50 Cigarettes, domestic or imported, weighing over three pounds per thousand, per thousand 3.00 FERMENTED LIQUORS. Fermented liquors, per barrel, containing not more than 31 gallons 1 1.00 And at a proportionate rate for halves, thirds, quarters, sixths, and eighths of barrels. More than one barrel of 31 gallons, and not more than 63 gallons, in one package 2.00 1 A deduction of Ih per cent is now allowed on the sale of stamps for fer- mented liquors, which reduces this rate to 92J cents per barrel. 288 APPENDIX IV. OLEOMARGARINE. Rate of Tax. All substances heretofore known as oleomargarine, oleo, oleomargarine-oil, liutterine, lardine, suine, and neu- tral ; all mixtures and compounds of oleomargarine, oleo, oleomargarine-oil, butterine, lardine, suine, and neutral ; all lard extracts and tallow extracts ; and all mixtures and compounds of tallow, beef-fat, suet, lard, lard-oil, vegetable-oil, annotto, and other color- ing matter, intestinal fat, and offal fat made in imi- tation or semblance of butter, or when so made, calculated or intended to be sold as butter or for butter, domestic, per pound $0.02 Same, imported from foreign countries, per pound . . .15 OPIUM. Prepared smoking opium, per pound . . ' 10.00 BANKS AND BANKERS, OTHER THAN NATIONAL. Circulation issued by any bank, etc., or person, per month is of 1 p. ct. Circulation exceeding 90 per cent of capital, in addition, per month I of 1 p. ct. Banks, etc., on amount of notes of any person, State bank or State banking association, used for circula- tion and paid out 10 per cent. Banks, etc., bankers, or associations, on amount of notes of any town, city, or municipal corporation, paid out by them 10 per cent. Every person, firm, association other than national-bank associations, and every corporation, State bank, or State banking association, on the amount of their own notes used for circulation and paid out by them, 10 per cent. Every such person, firm, association, corporation, State bank, or State banking association, and also every national banking association, on the amount of notes of any person, firm, association, other than a national banking association, or of any corporation, State bank, or State banking association, or of any town, city, or municipal corporation, used for circulation and paid out by them 10 per cent. APPENDIX IV. 289 PLAYING-CARDS. Rate of Tax. Playing-cards, per pack, containing not more than fifty- four cards $0.02 Note. — The internal revenue taxes on imported manufac- tured tobacco, snuff, cigars, and cigarettes are in addition to the import duties thereon. The only taxes under the laws now in force not payable by stamps are as follows : — Tax on deficiencies in production of spirits. Tax on excess of materials used in production of spirits. Tax on circulation of banks and bankers. Tax on notes paid out by banks and others. Penalties of 50 per cent and 100 per cent. 200 APPENDIX V. Table showing Receipts from each Specific Source of ARTICLES AND OCCUPATIONS. FISCAL YEARS ENDED JUNE ; Distilled spirits Tobacco, cigars, snuff, etc Fermented liquors Banks and Bankers Penalties, etc Adhesive stamps Manufactures and products of iron, wood, glass, paper, cotton, wool, leather, oils, gas, mineral products, etc Gross receipts, — Advertisements, canal, express, ferry, railroad, insurance, telegraph com- panies, theatres, museums, etc. . . Sales, — Auction, broker, apothecary, butcher, 1863. 5,176,530.50 3,097,620.47 1,628,933.82 27,170.14 4,140,175.29 16,524,989.24 1S64. 30,329,149.53 8,592,098.98 2,290,009.14 2,837,719.82 193,600.48 5,894,945.14 1S65. 18,731,422.45 11,401,373.10 3,734,928.00 4,940,S70.90 520,362.70 11,162,392.14 36,222,716.67 73,318,450.37 etc. Special taxes (licenses) on all occupa- pations Income (persons and corporations) . . Legacies Successions Articles on Schedule A, pianos, billiard tables, carriages, plate, etc. . . . Miscellaneous collections, — Slaughtered animals, special Income Tax (1864), bank circulation, etc. . 1,661,273.51 3,426,446.32 64,003.87 4,799,195.73 2,741,858.25 56,592.61 365,630.93 719,218.57 141, 231. 5S 5,205,508.94 20,294,731.74 311,101.02 696,878.43 709,550.73 TOTAL 41,003,192.93 117,145,748 52 9,853,377.12 4,062,243.54 9,800,914.25 32,050,017.44 500,751..% 39,951.32 780,266.53 30,220,207.40 ! 211,129,529.17 APPENDIX V. 291 Revenue by Fiscal Years, from September 1, 1862. FISCAL YEARS ENDED JUNE SO. 1866. 1867. 1868. 1869. 1870. 1871. $ $ $ $ • $ 33,268,171.82 33,542,951.72 18,655,030.90 45,071,230.80 55,606,094.05 46,281,848.10 16,531,007.83 19,765,148.41 18,730,095.32 23,430,707.57 31,350,709.88 33,578,907. IS 5,220,552.72 6,057,500.63 5,955,868.92 0,090,879.54 0,319,120.90 7,389,501.82 3,463,988.05 2,040,562.46 1,866,745.55 2,190,054.17 3,020,083.01 3,644,241.53 1,142,853.20 1,459,170.80 1,256,881.59 877,088.79 827,904.72 030,980.35 15,044,373.18 16,094,718.00 14,852,252.02 16,420,710.01 10,544,043.00 15,342,739.40 127,230,608.66 91,531,331.31 61,649,902.50 3,345,302.95 3,017,027.70 11,262,420.82 7,444,719.00 6,280,009.34 0,300,998.82 0,894,799.99 2,800,503.44 4,002,282.91 3,999,360.31 4,595,909.04 8,200,839.03 8,837,394.97 3,049,642.08 14,144,418.05 13,627,903.25 11,889,549.09 9,940,917.02 11,020,787.78 5,002,452.85 72,982,159.03 60,014,429.34 41,455,598.36 34,791,855.84 37,775,873.63 19,162,650.75 924,823.97 1,128,744.96 1,518,387.64 1,244,837.01 1,072,582.93 1,430,087.34 246,154.88 636,570.19 1,305,023.00 1,189,756.22 1,419,242.57 1,074,979.79 1,693,122.73 2,116,074.37 1,134,339.98 893,653.46 907,442.09 376,800.45 3,750,037.32 354,089.90 34,310.37 29,453.00 22,756.00 8,205.00 310,906,984.17 265,920,474.65 191,180,564.28 160,039,344.29 185,235,867.97 144,011,176.24 292 APPENDIX VI. Receipts from Several Sources SPIRITS, Including Special License Fees and Other Charges. Tobacco in- all Forms, Including Special License Charges. Fermented Liquors, Including Special License Charges. adhesive Stamps. Banks Manu- and factures Bankers and (Not Na- Products. tional). (1) 9 i § $ $ $ 1870 55,606,094 31,350,708 6,319,127 16,544,043 3,017,028 3,020,084 1871 4G,281,848 33,578,907 7,389,502 15,342,739 3,631,516 3,644,242 1872 49,475,516 33,736,171 8,258,498 16,177.321 4,616,145 4,628,229 1873 52,099,371 34,386,303 9,324,938 7,702,377 1,267,470 3,771,031 1874 49,444,089 33,242,876 9,304,6S0 6,136,845 764,880 3,387,161 1875 52,081,991 37,303,402 9,144,004 6,557.230 1,080,111 4,097,248 1876 56,426,365 39,795,340 9,571,281 6,518,488 509,631 4,006,698 1877 57,469,429 41,106,547 9,480,7S9 6,450,429 238,261 3,829,729 1878 50,420,815 40,091,755 9,937,052 6,380,405 429,659 3,492,032 1879 52,570,285 40,135,003 10,729,320 6,706,384 299,094 3,198,884 1880 61,185,509 38,870,140 12,829,803 7,668,394 228,028 3,350,9S5 1881 67,153,975 42,854,991 13,700,241 7,375,256 3,762,208 1882 69,873,408 47,391,989 16,153,920 7,569,109 5,253,458 1883 74,368,775 42,104,250 16,900,616 7,053,053 3,748,995 1884 76,905,385 26,062,400' • 18,084,954 442 1885 67,511,209 26,407,088 18,230,782 25,000 1886 69,092,266 27,907,363 19.076,731 1887 63,829,322 30,108,067 21,922,187 4,288 1888 69,306,166 30,662,432 23,324,218 4,203 1889 74,312,206 31,866,860 23,723,835 6,214 1890 81,687,375 33,958,991 26,008,535 70 1891 83,335,964 32,796,271 28,565,130 1892 91,303,984 31.000,493 30,037,453 1893 94,720,261 31,889,712 32,548,983 1894 85,259,252 28,617,899 31,414,788 226 1895 , 79,862,627 29,704.908 31,640,618 1 • • • (\) The collections from National Banks have never been returned to the Commissioner of Internal Revenue, and are not included above. (2) Collections from this source after 1873 are from penalties. APPENDIX VI. 293 of Revenue from 1870 to 1895. Collec- Oleomar- garine. Ol'IUM. tions not Previ- ously Enu- merated AND Penalties. (2) Total Collections FEOM Internal Sources. Total Collections FEOM Customs. Net Ordinary Receipts FEOM ALL Sources. (3) $ s •S 9 $ 9 69,378,784 185,235,863 194,53S,374 395,959,834 34,142,422 144,011,176 206,270,408 374,431,105 14,879,067 131,770,947 216,370,287 364,694,230 5,523,965 114,075,456 188,089,523 322,177,074 364,216 102,644,747 163,103,834 299,941,091 281,107 110,545,154 157,167,722 284,020,771 409,284 117,237,087 148,071,985 290,066,585 419,999 118,995,184 130,956,493 281,000,642 346,008 111,097,725 130,170,680 257,446,776 279,498 113,918,467 ' 137,250,048 272,322,137 611,783 123,981 ,916 186,522,065 333,526,501 383,241 135,229,912 198,159,676 360,782,293 281.3S9 146,523,274 220,410,730 403,525,250 377,656 144,553,345 214,706,479 398,287,582 536,859 121,590,040 195,067,490 348,519,870 247,042 112,421,121 181,471,939 323,690,706 226,510 116,902,869 192,905,023 336,439,727 723,048 249,488 118,837,301 217,286,893 371,403,278 864,140 165,316 124,326,475 219,091,174 379,266,075 894,248 91,070 130,894,434 223,832,742 387,050,059 786,292 153,434 142,594,697 229,668,585 403,080,983 1,007,924 260,127 146,035,416 219,522,205 392,612,447 1,266,326 700 242,589 153,857,544 177,452,964 354,937,784 1,670,644 125 175,266 161,004,990 203,355,017 385,819,629 1,723,480 410 152,619 147,168,450 131,818,531 372,802,498 1,409,211 551,583 143,246,078 152,158,617 390,373,203 (3) Net ordinary receipts includes all of above collections as well as Pub- lic Land Sales, Miscellaneous Sources, and Dividends. 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