As soon as we say the words "income tax" people think of wages being taxed, so it's difficult to imagine an income tax like the 1893 Shearman/George "Just and Practicable Income Tax." It only taxed unearned income, and regarded wages as the personal property of the wage-earner (and Congress is prohibited from collecting property taxes under the Constitution's Direct Tax Clauses).

After George and Shearman proposed this 1893 tax (which was rejected by the Subcommittee on Internal Revenue) they referred to an income which taxed wages as a "general" income tax, and that was to distinguish it from the ideal Georgist income tax they had proposed in 1893. And of course, George strongly objected to the GENERAL income tax at all times during his life.

I transcribed it below because I think it’s one of the most important documents in Georgist history, and is, generally speaking, the kind of income tax we need today, updated to make it more relevant, of course.

I numbered the 14 sections so they can be referenced easily for future discussion.

Note that Shearman often refers to his proposed income tax as a form of direct taxation. This is incorrect and can be confusing, but just keep in mind that about 16 years after Shearman died, the Supreme Court ruled all income taxes to be indirect taxes, and therefore no income tax is a direct tax on the ownership of property. In other words, a tax on unearned gains derived from property is not a direct tax on property ownership itself.

Thomas Shearman must have a very high regard for his client, Henry George. In this proposal for a special income tax, he's meticulously addressing every concern that George had about income taxes: that they tax labor in the process of taxing ground rents, that they are inquisitorial, that they encourage fraud and evasion, that one's reported income is impossible to verify, etc.

A JUST AND PRACTICABLE INCOME TAX

Hon. Thomas G. Shearman before Ways and Means Subcommittee on Internal Revenue,

October 16, 1893, 53rd Congress

Subcommittee:

Benton McMillin, Chairman

Alexander B. Montgomery

Albert J. Hopkins

William D. Bynum

Sereno E. Payne

Committee on Ways and Means

Washington, D.C., Monday, October 16, 1893

The subcommittee on internal revenue of the Committee on Ways and Means met at 2 p.m. Hon. Benton McMillin in the chair, for the purpose of hearing Mr. Thomas G. Shearman on the subject of raising revenue by an income tax.

Mr. SHEARMAN addressed the committee as follows:

Mr. CHAIRMAN AND GENTLEMEN OF THE COMMITTEE: It is high time that some form of practically direct taxation should be resorted to by the Federal Government. Every form of indirect taxation is iniquitous, not merely because it is unjust and unequal, but because its injustice and inequality all bear with tremendous severity upon the poor in proportion to their poverty and favor the rich in proportion to their wealth. Thus the British tax upon wheat and other grain, which continued down to 1846, and was very properly called the “bread tax,” was a tax which bore, not figuratively, but literally, more than a thousand times as severely upon the poor as it did upon the rich; and wherever such a bread tax remains, as it now does in France, Germany, and Italy, its burden is still shared in that proportion. The average man, whose entire property would not sell for $1,000, would pay even more of a bread tax than the average man of the class whose property would sell readily for $1 million, or even $10 million, because the man of very small property generally has a larger and hungrier family than has the man of great wealth. But this, which is so obviously true with reference to the bread tax, is true in a very slightly less degree of all kinds of taxes upon food, drink, clothing, building materials, etc. Even taxes upon luxuries bear with greater severity upon those whose income and property are moderate than upon those whose wealth is very large. A tax upon champagne is no burden, it is true, upon those who are actually poor; but it is probably as great a burden upon the man who is worth $100,000 as it is upon the man who is worth $1 million or even more. Thus all indirect taxation, without any exception whatever, and under any conceivable system, is grossly unequal and unjust.

1. NECESSITY OF MORE REVENUE

We are confronted with the fact of a large deficiency in the national revenue, which cannot be filled up by any increase or decrease in tariff duties, unless sugar, tea, and coffee are to be taxed. Such taxes, it is true, would be revenue duties, but they are among the most objectionable of the class, because they are paid almost entirely by the poorer section of the people. They are as oppressive as a tax upon bread and salt. Their only merit is that nearly all the taxes thus raised go into the public treasury.

Any increase in the so-called protective duties would simply result in a further decrease of revenue. A reduction of the tariff upon articles now dutiable, so as to bring the duties down to an average of 40 per cent, would increase the revenue considerably, but not nearly enough to supply the present deficiency.

2. PROPOSED TAXES ON “LUXURIES”

It is suggested that the necessary revenue can be raised by additional taxes upon beer made and tobacco grown in this country. It is urged that liquors and tobacco are mere luxuries, which may properly be taxed as much as they will bear. No one, it is said, pay such taxes as a matter of compulsion, because such articles are of purely voluntary use.

But a gross fallacy lies underneath this plausible assumption. Rightly or wrongly, the use of tobacco and of some form of liquor has become so fixed in the habits of our people that it is, to a vast majority of men, as much as necessity as hats, coats, or shoes. I use no tobacco and scarcely any form of liquor, but none the less I recognize that my habits, convenience, or conscience are not to be made a law for other men. Nor is this all or even the most important consideration. It is utterly impossible to obtain any large amount of public revenue from taxes upon real luxuries—-that is, upon things with which the mass of men can easily do without all of which are consumed chiefly by the wealthy. If the masses could be educated into using as little liquor and tobacco as I do the public revenue from these sources would collapse. But so long as the public treasury relies upon indirect taxation as its main source of revenue this moral reform would not relieve the people from a scent of taxes. The government would simply be driven to tax the peoples food, and bread and meat would be heavily taxed among us, precisely as they are now taxed in some foreign countries, where the people are too poor or too abstemious to use spirits or tobacco. Indirect taxes, in short, must necessarily be collected from the masses, and can never be collected, in any important degree, from a luxurious class. Whether the masses use intoxicants or not, they will always pay nine-tenths of all indirect taxation. And thus, under any conceivable system, such taxation will always be unjust, unequal, and oppressive.

Since, then, new revenue must be had, since no further extension of protective duties, if such were possible, and no mere reduction of duties now imposed would produce the needed revenue, and since nine-tenths of all existing Federal taxes are paid out of the earnings of labor, may we not reasonably ask men of all parties to unite in supplying the deficiency by a tax upon the income of accumulated wealth alone?

3. DIRECT TAXATION NECESSARY TO TARIFF REFORM

But there is an additional and urgent reason appealing to the party in power for the immediate adoption of at least some measure of direct taxation. It is impossible to reform our present tariff upon imports, in accordance with the explicit pledges of that party, without having the assistance of some considerable revenue from direct taxes. Indirect taxes, of necessity, fluctuate greatly in the amount of revenue which they produce. Upon the whole, it is a constantly increasing revenue, and such revenue will increase all the faster in proportion as each particular tax is reduced. If, therefore, our tariff and internal revenue taxes are fixed at a rate which will produce sufficient revenue for the fiscal year 1894, they will infallibly produce an enormous surplus by the end of fiscal year 1897, with a tolerable certainty of a considerable surplus in both 1895 and 1896. Any attempt to reduce this surplus will meet with precisely the same opposition with which every attempt to reduce the tariff was met in 1880 and in every succeeding year.

The opponents of such change will have an additional legitimate argument of enormous power. They will say “The Democratic party, having supreme power, decided in 1893 upon the proper amount of reduction to be made in the tariff. That reduction being made, we manufacturers have a right to rely upon the new tariff remaining unchanged for at least five years. Business cannot be carried on successfully if the tariff, which affects business so vitally, is to be radically changed every year or two.” We may make many replies to this argument; but we shall never be able to convince the majority that it is without foundation.

On the other hand, some wave of depression in business may reduce the revenue for one or two years below the necessities of the Government, as it did in 1874 and 1875, under an enormously high tariff. Whenever this is the case, the inevitable tendency of legislation is toward a sudden increase of duties, intended only for revenue purposes, but which immediately create protected interests. Then the clamor against reduction becomes powerful, and is supported by the same argument, with, as experience has thus far showed, uniform success.

There is, therefore, no possible way of putting the tariff upon a genuine revenue basis, other than by cutting it down at once to such an extent as to reduce the revenue below the present public necessities. So long as the national increase is derived only from the tariff and internal revenue taxes, there never was and there never can be such a thing as an equal balance between revenue and expenditure. There must always be a few years of deficiency, to the extent of $20 million to $50 million with many years of an annual surplus, exceeding $50 million. The corruption and disorder which are introduced both into politics and business by such a fluctuating income, and especially by a constant surplus, have been demonstrated within the memory of all of us so effectually as to need no statement. In order to avoid these evils, it is absolutely necessary to cut down the revenue from all indirect taxation to a figure which will be perpetually below the need of government, and to supply the deficiency by some form or practically direct taxation, which can be increased or diminished from year to year without any disturbance of business, and especially without any withdrawal or increase of protection to domestic manufacturers.

The experience of other nations confirms this view of the case. In Great Britain and Ireland the great Whig party, which, with the aid of Daniel O’Connell and his Irish followers, governed the kingdom from 1834 to 1841, was strongly in favor of a large reduction in the tariff, and a gradual abandonment of the protective policy. O’Connell himself was a thoroughgoing free trader. Yet every attempt of the Government to abandon the protective policy was a failure, and it was actually compelled to increase duties, though greatly desiring to reduce them, for the simple reason that it had not the courage to propose any kind of direct taxation, and was confronted by a constant deficit, which it knew not how to fill up otherwise than by new tariff taxes. Thus the Government, which was at heart strongly inclined to free trade, was actually driven to increase protection and fell in overwhelming disaster in July, 1841. It was succeeded by an administration nominally pledged to a protective policy.

But Sir Robert Peel always maintained a free hand, and was so powerful that he could afford to do what he thought best. In 1842, while retaining protection upon articles of food, he introduced a tariff for revenue only, upon most other articles, and abolished duties altogether upon about 700 articles, which were used in manufactures. But, finding it impossible to do this without producing a deficit, he courageously revived the income tax, which had been abolished immediately after the close of the great French war. By rightly increasing or diminishing this tax, he was enabled to supply the annual deficiency, without ever creating an excessive surplus; and the income tax has been maintained for this very purpose, ever since. When more revenue is wanted, nobody thinks of increasing tariff taxes, even though they are levied for revenue only; the government adds a penny or two to the income tax. When the revenue is large, and there is a surplus, the government takes a penny or two off the income tax. When it reduces the income tax, the payers of that tax are pleased; and when it increases that tax, no other class of the community is offended, and no kind of productive industry is interfered with, in the slightest degree.

The income tax may be doubled or trebled, or it may be cut down to the smallest possible amount; yet manufactures, trade and commerce will go on precisely as before. But if five percent were to be added to or taken away from the duties upon imports, in order to meet the same emergencies, all business in the kingdom would be upset.

We have already paid far too dearly for our national folly, in refusing to learn lessons from the experience of other nations. Let us abandon this folly, and be content to learn from the experience of others, without paying dearly for it ourselves. Not only Great Britain, but also France, Germany, Austria, and Italy, maintain very considerable direct taxes, sometimes as a supplement to their indirect taxes, for the purpose of enabling the Government to modify these as may be found expedient, and sometimes as a principal source of revenue. We cannot possibly reform our indirect taxes, except by imposing some form of fluctuating direct tax.

4. AN INCOME TAX THE ONLY PRACTICABLE DIRECT TAX

Now, under that unfortunate provision of the Federal Constitution which forbids the imposition of what it calls “direct taxes,” except in proportion to population, it is impossible for Congress to levy a direct upon accumulated wealth of any kind, in proportion to its value, without apportioning this tax among the States according to their population, instead of according to their wealth. This apportionment would be so manifestly unequal that no substantial support could be obtained for such a proposal. Under such a rule land in South Carolina would be taxed nine times as heavily as land in Rhode Island. The Constitution ought to be amended so as to remove this provision; and, undoubtedly, it could be so amended if any number of real statesmen undertook the task, because its injustice is so palpable as to admit of no argument. But so long as it stands there is no form of direct taxation available which can be made to fluctuate from year to year except an income tax.

The Supreme Court of the United States has decided that an income tax is not a “direct tax,” within the meaning of the Constitution, although undoubtedly it is a direct tax within the definitions of economic law. When the Constitution was adopted income taxes were unknown, and the framers of the Constitution only meant to regulate such direct taxes as they did know. Without discussing the questions further, it is sufficient to say that it has been settled by the Supreme Court in Springer v. United States (102 U.S. 586) (1881).

5. DIFFERENT FORMS OF INCOME TAX

The only question which remains, therefore, is what kind of an income tax should be adopted. Several different kinds naturally present themselves for consideration. (1) The tax may be laid upon all incomes, derived from any source whatever, at one uniform rate for all incomes which are taxed at all, exempting, of course, incomes so small that the tax will not pay for the trouble of collection. (2) There may be a similar uniform tax upon all incomes over some considerable figures, say $2,000 or even $5,000. (3) There may be a graduated tax, increasing upon larger incomes, as, for example, 2 % upon incomes between $1,000 and $5,000; 5% on larger incomes up to $10,000; 10% on still larger incomes up to $20,000; and so on. (4) There may be an income tax levied solely upon incomes derived from invested wealth, and exempting all other kinds. (5) There may be an income tax levied upon the income derived from natural and artificial monopolies alone.

A consideration of immense importance, affecting all these different forms of taxation, is that while all of them may be nominally assessed by means of individual returns made by each person as to the amount of income received by him, some of these taxes can be collected without the use of such individual returns and by means of returns made without the intervention or knowledge of the person who finally pays the tax. An income tax upon personal earnings cannot, in general, be enforced otherwise than by obtaining and depending upon the returns made by the person in receipt of such earnings. The amount of his return will, therefore, depend upon the elasticity of his conscience, limited only by the necessity under which he may be put of keeping accounts open to official examination. Salaries, it is true, may be ascertained in the same manner as the other sources of income which will presently be mentioned, but it is probable that most salaries would be exempted under any income tax system.

All income derived from invested wealth can be ascertained, with more or less difficulty, without requiring a single return from the persons receiving such income. Returns can be required from the persons paying such income to the investors, and the tax can be collected by requiring debtors to pay the tax in the first instance and afterwards deduct it from what they are bound to pay to their creditors. All dividends upon stock and interest upon the bonds of corporations, and, in general, all income which is in any way paid through corporations can be easily reached and taxed in this manner; and in every country which maintains an income tax other than the graduated tax this system is pursued.

6. THE GRADUATED TAX IMPRACTICABLE

The idea of a graduated income tax should not be entertained. By this is meant, not that small incomes should not be exempted altogether, because that is really a different question, but that no attempt should be made to charge 5% upon one class of income, 10% upon larger incomes, 15% upon incomes still larger, and so on. The reasons for this are very simple. We need not discuss the question whether such graduations would be just or unjust. The more important question is whether such a system is practicable, and could be put into operation without provoking enormous and unpreventable frauds, defeating its purpose and producing relatively small revenue, with enormous public demoralization. As I shall presently undertake to show, no tax on incomes can be fairly collected by means of sworn returns from the receivers of those incomes. If no system can be devised by which the Government shall have better means of ascertaining income than by the mere oaths of interested persons it will be a disgraceful failure. Now, one of the principle methods by which an income tax must be collected, if it is to be made at all successful, is by taxing dividends, coupons, and similar forms of income from corporations, THE TAX TO BE PAID BY SUCH CORPORATIONS AND DEDUCTED BY THEM FROM THEIR PAYMENTS TO THE INDIVIDUALS LIABLE THERETO. This is one of the most important sources of such income in any country.

Corporations, as a general rule, and especially large corporations having many stockholders, are managed by officers whose personal interest in keeping down returns of income for purposes of taxation is too small to tempt them very strongly into frauds upon the Government. It is impossible for them to conduct their business successfully without keeping full and correct accounts. They must keep a record of their earnings and expenses, and especially of all dividends and interest paid. There is a considerable amount of fictitious bookkeeping in such concerns, resorted to for various purposes; but such methods of concealment will not avail for the purpose of evading the income tax where the Government officials exercise ordinary sagacity and diligence. The experience of this and other countries in the collection of an income tax shows that the amount lost by false returns from corporations is practically nothing.

On the other hand, all experience proves that the loss of revenue through frauds in the returns of INDIVIDUAL RECEIVERS is enormous. In no country is it computed at less than one-third of the revenue actually collected, and in our own country, during the last years of the income tax, it was very much more than this.

If, then, a graduated income tax is adopted, let us say, of 5, 10, 15, and 20% according to the amount of income, it is obvious that the very highest rate must be levied upon the dividends and interest paid by corporations. For, if all dividends or interest paid to a single person below $5,000 were taxed at 5%, and similar payments made to a single person in excess of $5,000 were taxed at 10%, it is easy to see that, after the first year of the tax, at all events, no individual would stand registered as the owner of more shares or bonds than would produce a revenue of $5,000. Any man who owned shares in excess of this would simply divide up his stock among a number of persons sufficient to cut down the dividends of each to $5,000, he taking an assignment of the stock and an order for the payment of each dividend to him, then taking checks in their names and having them endorsed over to him. Under such a mode of administration the Government would never get more than the lowest rate of tax from the holders of corporate stocks and bonds.

On the other hand, if the Government taxed all dividends and interest at the highest rate, it would be absolutely necessary to provide for a refund of the difference between the lowest and the highest rate to all stockholders and bondholders who made affidavit that their total income was less than the amount on which the lowest tax was imposed. This would bring the Government back to a position in which there would be little use in collecting the revenue through corporations, because practically every unscrupulous person would swear down his income. In short, without going into further details, the graduated income tax would a complete failure as applied to dividends and interest paid by corporations; and the Government might just as well fall back upon the general method of individual returns, with all the inevitable evasion and fraud consequent upon that system.

Moreover, in the case of individual returns, the effect of the increased tax could be evaded to an immense extent without perjury and by methods which would justify themselves even to conscientious men. For example, let us suppose that the tax is 5% upon incomes below $10,000 and 10% on incomes above that. Very few men whose incomes amount to $20,000, or over, expend the whole of that income upon themselves. A large majority of them do note even spend that much upon their immediate families. In fact, they do not spend more than half their income at all. A man so situated could keep his income for a time within the $10,000 limit in various ways. He could assign a portion of his income to some relative or friend so obscurely situated as never to be called upon for an income tax return, taking an agreement from such friend to apply the income thus assigned in accordance with the wishes of its real owner. Even if his friend were obliged to make a return, yet the return of each would be within the $10,000 limit, and so would escape the extra tax. An income of $100,000 could be divided among ten persons, each holding as a trustee for the benefit of the same person, but each making a separate return as trustee, and thus the whole amount would be subject only to 5% tax. These are illustrations of an almost endless variety of evasions which would be practiced. Nor must we delude ourselves with the vain idea that men would not resort to perjury, to almost any extent, in order to get rid of this additional tax.

7. TAX DEPENDENT ON INDIVIDUAL RETURNS ENCOURAGES FRAUD

Let us next consider whether an income tax should be collected at all by means of private individual returns from receivers of income. It is quite true that this method has been partially adopted thus far in every country where an income tax has been imposed, but it is also true that in every such country the result has been to put a premium upon perjury and to develop an enormous amount of fraud. In our own country, as in every other where the experiment was tried, the returns of taxpayers for the first year or two were remarkably full and honest; but as time passed on these returns grew more and more fraudulent until, in the last two or three years of the tax, the amount of income returned from the whole country was ridiculously below what every observant businessman knew to be the truth. It became simply a tax upon honesty and truthfulness. A majority of those whose incomes were legally taxable made no returns at all, and a large majority of the returns made were not truthful. The officials who collected the returns, in many cases, received small bribes in consideration of accepting returns which they knew to be far below the truth; and in some cases they even demanded false returns or made forged returns as a means of compelling bribes from taxpayers who would not offer them. The last years of the American income tax were a carnival of fraud, perjury, and blackmail.

The experience of other countries is but little more encouraging. The honesty of officials charged with the collection of income tax in Great Britain and Germany is not suspected, and arbitrary powers of assessment are placed in their hands which would hardly be tolerated in this country; yet it is universally admitted by these officials themselves that fully one-third of the income tax due to Government is never collected. This is expressly stated in the published reports of the commissioners of revenue in Great Britain, Prussia, and Saxony; and it is undoubtedly true everywhere else. About twenty years ago a number of wealthy firms in London whose business had been broken up by city governments presented and conclusively proved claims for damages, showing that their annual profits had amounted to from three to five times as much as they had returned for income tax in the same period. They recovered the damages from the city, and the only punishment which it was found possible to inflict upon them was the collection of the deficient tax, with the legal penalty added. In Italy the income tax is notoriously a farce. It is not supposed that anybody makes a true return or one even approximating thereto.

The statesmanship and ingenuity of European governments have been strained to the utmost in the effort to produce different results; but thus far all these efforts have been in vain, and there is not the slightest reason to suppose that they will ever succeed. Roughly stated, it may safely be said that the uniform experience of all governments is that one-quarter to one-third of the returns are strictly honest; that about as many more return on an average half their real income, and the remainder less than one-quarter.

Thus the income tax, so far as it depends upon the personal returns of individual taxpayers, is a grievous burden upon the honest and a direct premium to the dishonest. It is as bad as the personal property tax, which is still maintained by our States generally. It stands upon precisely the same footing with the abominable listing system of Vermont, Ohio, Indiana, Connecticut, Georgia, Kentucky, and numerous other States, where the great majority of taxpayers have no hesitation about making false returns, and yet are stupid enough to imagine that their neighbors will not keep pace with them in lying.

8. AN INCOME TAX POSSIBLE WITHOUT ANY FRAUD

What then? Is it impossible to devise any income tax which shall not be subject to these objections? It is as if we insist, as all governments thus far have insisted, upon taxing EARNINGS. It is not if we can be content, as we ought to be content, with taxing POSSESSIONS.

It is my desire to be intensely practical in all these suggestions. We will not discuss any system of taxation which has never been put into practice, or any abstract theory whatever. May we not learn from the experience of the past in matters of taxation precisely as we learn from every other experience in life? Nature tells us nothing affirmatively. She teaches everything negatively. She opens no door to us and calls our attention to no good thing. She leaves us to push and bruise ourselves against door after door, only to find these locked and bolted against us, until finally we push the right door, which proves to have been all the time set loosely upon its hinges and ready to yield at the slightest pressure. Wisdom consists in ability and willingness to learn and profit by the mistakes of others. He is the wise man who watches others pushing hopelessly against bolted doors until he sees some other man push against the right door, which immediately flies open.

The experience of this country from 1863 to 1872, and the experience of European countries from 1812 until this day, prove conclusively that certain large classes of income can be ascertained and taxed with ease and certainty, while other equally large sources of income cannot be ascertained with any reasonable correctness.

9. PAYERS OF INCOMES, NOT RECEIVERS, TO MAKE RETURNS

The fundamental distinction, from a practical point of view, between the incomes which can be ascertained correctly and those which cannot be, may be ascertained by the application of this simple test: Can the proper amount of tax be ascertained and collected from some person who will have nothing to gain by misrepresentation? If it can, then the tax will be accurately levied and paid. If it cannot, the income will never be truly ascertained, and the tax will never be fairly collected.

Reflection will show, and experience proves, that a vast amount of income is received under circumstances which enable others than the income receiver to know precisely how much he receives. Now, if the Government, instead of inquiring from the person who RECEIVES the income how much he receives, would inquire of the person who PAYS it to him HOW MUCH HE PAYS, it is obvious that the latter will nothing to gain by a false statement, and that if he makes a false return to the Government he will insist upon being paid handsomely by this creditor. This at once complicates the scheme of fraud by interesting the secret to two distinct persons, either of whom may, after a short time, quarrel with the other, and, from motives of revenge or under the promise of reward, might at any time betray his accomplice. In such cases, as a matter of course, the Government would constantly avow its intention to reward the informer and to punish severely the one who fails to inform. The amount of fraud which would be committed upon the Government under such circumstances would be so small that it may be left entirely out of account. The soundness of this theory is demonstrated by universal experience.

10. DIVIDENDS AND INTEREST

All dividends upon the stock and all interest upon the bonds of corporations would obviously fall into this category. This is so universally recognized, that every government which collects an income tax at all makes it a prime object to collect that tax as far as possible through the medium of corporations, requiring them to deduct the tax from all dividends and interest paid. Not only have the officers of such corporations no motive for withholding such returns or falsifying them, but they actually gain some advantages by paying the tax in this way. For they withhold the tax from dividends and coupons, long before the tax itself is payable to the government; and thus they gain the use of a large sum of money for several months, without interest. Even in those exceptional cases where stock is held in a few hands and the owners control all the details of the corporate action (thus feeling the loss of the tax upon their dividends quite as much as any one else could do), the difficulty of keeping false accounts and the impossibility of keeping no accounts have always sufficed to prevent any serious fraud. There has never been any real suspicion, in this on in any other country, that the income tax has not been properly collected from corporations. There have been disputes, of course, as to what constituted dividends; but the government has never found any difficulty in ascertaining the facts which were necessary to be known in order to decide that question. Thus when, in 1869, the New York Central Railroad Company declared a scrip dividend of 80% and refused to pay income tax thereon, the dispute was public, and the question was settled by the courts in a regular judicial way.

We may, therefore, at once set down THE ENTIRE INCOME OF CORPORATIONS as something which can be, in the long run, fully and fairly ascertained and taxed.

11. RENT OF LAND AND HOUSES

But in addition to this there is a vast source of income, which is governed by precisely the same principle, and that is RENT. Every one who collects rent must needs have one or more tenants, and those tenants have no interest whatever in deceiving the government as to the amount of rent which they pay. No doubt, there is a vastly greater amount of work involved in following up tenants and requiring returns from them than there is in collecting returns from corporations. But there is no more work involved in this than is involved in any other method of collecting income taxes. When the tenants are found, their returns may be depended upon to state the full amount of rent paid.

Accordingly, in Great Britain, the income tax is collected upon all rents above $50 per annum in the manner here suggested. The landlord is not called upon to make any returns, and they pay the tax, which in turn they deduct from their rent. There does not seem to be any ground for suspicion that these returns are not correct or that the tax is not fully collected. Tenants are made liable for all arrears of income tax attaching to the premises which they enter, and therefore no one will accept a lease, or enter upon leased premises, without seeing a receipt for the last installment of income tax. In Ireland, for special reasons, a different system is pursued, but those reasons have no application to this country. An income tax could be assessed and collected upon all American rents without serious difficulty. In the practical working out of this rule, when applied to tenement houses, it might be found more convenient to make the tax a lien upon the premises, having priority over mortgages and every other form of lien, rather than to follow up each tenant of one or two rooms. In Great Britain, something of this kind is done, but the general result is worked out with the same accuracy as in other cases.

Thus, alike from sound theory and practical experience, we reach the conclusion that ALL INCOME DERIVED FROM CORPORATE STOCK OR BONDS, OR FROM THE RENT OF LAND AND HOUSES, can be fully ascertained and fairly taxed.

12. TAX MONOPOLIES AND PRIVILEGES ONLY

The only question which remains is: Shall we stop here? Why should we NOT stop there? Nay, why should we not stop even short of that point, and be content with an income tax upon rents and upon so much of the income of corporations as partakes of the nature of rent? If we stop there, we should include all the profits of corporations owning railroads, canals, transportation privileges, telegraphs, telephones, pipe lines, mines, quarries, gas works, electric light plants, steam heating pipes, and, in short, all corporations having EXCLUSIVE PRIVILEGES of any kind whatever. In other words, we should TAX ALL THE INCOME WHICH IS DERIVED FROM MONOPOLIES, WHETHER NATURAL OR ARTIFICIAL. I am making no complaint about monopolies, and certainly for present purposes have no desire to enter upon a crusade against them. There is no question of their destruction involved. It is simply a question whether they shall pay a tax of 5% upon their annual values; for this is the outside figure which would be required, in order to meet all the present wants of the Government.

Under such a system there would be no proper place for any exemptions. Assuming that monopolies are necessary and even beneficial, yet there is no form of property which it is so clearly not only the right but the DUTY of the Government to tax. No matter whether the income which one derives from a monopoly is $100,000 a year or $100, he ought to contribute from that income to the support of the Government which gives and guarantees to him his source of income. It is not only fair and just that the Government should tax every species of monopoly or exclusive franchise, it is a crying shame that such incomes are not now and always taxed. These are, in fact, THE ONLY KINDS OF PROPERTY WHICH OUGHT TO BE TAXED, because they are the only valuable things which men do not create by their own industry. The Government creates and gives away these franchises. It may be convenient, and even necessary that it should be so; but none the less it ought to collect just as much of its revenue as possible from this source, before demanding any from other people, who have received no favor from the Government and who have earned every dollar of their income by their own skill and labor.

What is the value of railroad stock? In ninety-nine cases out of a hundred nothing, except the value of the exclusive privilege given to it by the Government of running over hundreds or even thousands of miles over an unbroken strip of territory. All other values are represented by bonds and mortgages. What is the value of street railroad stock or gas stock? Nothing, except the value of the exclusive privilege of using the streets for their rails or pipes. This is plainly seen by the disastrous effect upon such stock which follows the laying of rails or pipes by a rival company in the same street. What is the value of stock in electric light companies, steam heating companies, and pipe line companies? Precisely the same thing. What constitutes the value of telegraph and telephone stock? Nothing but the privilege of running over both public and private land without compensation, and the possession of patent rights, which are monopolies, granted by the Government. All corporations having patent rights ought to pay income tax upon the annual value of such patents; and, as valuable patent rights are practically owned by corporations, the vast patent monopoly, itself a great evil, although apparently a necessary evil, would thus be made to yield some compensation.

The principle, in short, here proposed is that monopolies in every form, including exclusive franchises, patent rights, and every form of special privileges, no matter how widely extended, should be subjected to the income tax, and that this tax should be assessed upon and collected from the people who pay to the beneficiaries of such monopolies the income derived therefrom, the payers to deduct the tax from what they owe to such creditors. The details by which this principle can be worked out can be easily ascertained from the voluminous reports made by commissioners of taxes in other countries, where a large part of the income tax is collected from these sources and in this manner. In fact, the only difference which is here proposed to be made between the income tax of this country and the income tax of other countries is that the tax should be confined within narrower limits, and concentrated upon those persons who OUGHT to pay and who can infallibly be MADE to pay. We should abandon all effort to tax the earnings of labor and skill, and ask nothing from our citizens, except that they shall return to the Government a small part of the wealth which the Government has created for them.

13. REVENUE OBTAINABLE

The question remains: How much revenue can be collected from such a tax as is here proposed? The best method of obtaining an answer is to ascertain how much is actually collected from such sources in other countries, and then to compare the resources of of the respective countries. . . .

14. CONVERSATION BETWEEN MR. SHEARMAN AND COMMITTEE MEMBERS

Mr. HOPKINS: Take the case of stock in a street railway. When you take a tax out of a street railway, would not that company take it out of the patrons of the road by increasing the charges, or out of the employees by decreasing their wages?

Mr. SHEARMAN: If you consider, in the first place, that the street railways charge 5 cents fare, when it is well known that the cost of operating is only about 3 to 3 1/2 cents, you will see that they have little excuse for increased charges. They charge already as much as the law allows. They could not increase their fares. We are not proposing to place any very heavy tax burden upon them. Nothing more than 5% on net earnings is contemplated.

Mr. HOPKINS: Would they not use that as an excuse to depress the price of labor?

Mr. SHEARMAN: It would be an absurd excuse. Nothing but increased competition among laborers could reduce wages.

Mr. HOPKINS: Would not the tendency of such a tax be to furnish a leverage by which the railroad companies would depress the price of labor?

Mr. SHEARMAN: I think not. I think that a railroad president, who reasoned with his employees upon that basis, could not keep a straight face. The amount of the tax would be so minute that it would be invisible. They would cut down wages, tax or no tax, if they could. I do not think an income tax of 5% would make the slightest impression upon wages or even raise a question about them.

Mr. HAUGEN: Would you impose 5% on the gross or the net income?

Mr. SHEARMAN: I would impose it on the net income only. I do not mean that an income tax upon railroads, telephones, telegraphs, and gas companies alone would be sufficient. I have simple taken these as illustrations of the artificial monopolies which local laws sustain.

There is a vast source of income, other than these, and that is, a similar tax upon the landlords of the country. I am interested in all these different things, in land, in bonds, and stock. Therefore, I am arguing against my own interest, from a selfish point of view. But the time has come for taking broad views of these questions.

The possession of land in this country must, in my judgment, always remain a matter of private property. I believe that landlords serve a public purpose, and I, for one, have no desire to abolish landlords. They are useful in their proper place. They are instruments which nature has provided to raise revenue, and they ought to be made to subserve public use. You must remember that we do not propose to absorb all or any large part of the rent of land. It is only a question of absorbing, at the most, one-twentieth part of it, perhaps only one-fortieth. You are thinking of taxing everybody on both wealth and earnings. We ask that all earnings be exempted, and that no one be taxed except the holders of special and exclusive privileges. We would tax landlords, railroads, telegraphs, express and transportation companies, etc., because they are in their nature monopolies, and are owners of vast privileges of enormous value. You propose to tax them in any event. All that we propose different from you would have in any income tax law whatever is simply not to tax people who have no monopolies and no privileges, but are earning, by their own labor, every dollar they get. Why tax any man on his earnings when you can collect all the revenue you need from a small tax upon special privileges? People who live upon incomes of this kind are living upon the taxation of other people. They should be required to contribute what is reasonable and necessary to the support of the General Government.

The CHAIRMAN: Have you made any calculation as to what a tax of 1% on the gross receipts of corporations would produce and what a tax of 5% on the net income would yield? I have not been able to make the calculation.

Mr. SHEARMAN: I have made no calculation upon gross receipts; but, roughly speaking, I think that the net receipts of railroad companies average about 35% of their gross receipts. Therefore, if you tax gross earnings 1 3/4%, it would produce as large a revenues if you taxed the net receipts 5%.

Mr. PAYNE: You take no account of the expenses of railroads in the matter of interest on indebtedness in your estimate of net receipts?

Mr. SHEARMAN: No; because I assume that they would not be allowed to deduct interest in estimating net receipts under an income tax. I deduct operating expenses only. The companies would deduct their income tax from interest as well as from dividends.

Mr. HOPKINS: The tendency is where taxes are imposed to transfer that burden to somebody else. If John Jones is required to pay $100 in taxes the tendency is for John Jones to transfer that $100 to the people with whom he deals.

Mr. SHEARMAN: That is so. It is a tendency. He will do it if he can.

Mr. HOPKINS: In the case of railroads, would not the tendency be to put that burden upon the patrons of the road in the way of increased freight and passenger rates?

Mr. SHEARMAN: They might do so if we taxed gross receipts and were allowed by law to add the tax, as in 1863 to 1870. But they could not do it if you taxed only net receipts. Railroads charge as high prices now as the traffic will bear and the law will allow. The only inducement to raise passenger or freight rates is to get more money; and often the raising of rates would not increase the receipts, but would lessen them. Railroads limited by statute to their present rates would not be allowed to increase them on account of an income tax. Other roads would not attempt to do so, because they would lose through competition much more than they could thus charge to their customers.

Mr. PAYNE: At what rate does Great Britain tax incomes?

Mr. SHEARMAN: I think about 8 pence on the pound, or about 3 1/3%. It has been as high as 6%, and even 7%.

Mr. HOPKINS: If I understand you you would not tax such a firm as Marshall, Field & Co., who are engaged in the dry goods business in Chicago?

Mr. SHEARMAN: If they have any invested wealth from which they derive a regular income without labor it would be taxed, not otherwise.

Mr. PAYNE: Suppose it is a corporation in the same business?

Mr. SHEARMAN: There you have me in a difficult position. Personally I would not tax such a corporation. It would have no monopoly and no special privilege. But many of my friends insists that all corporation should be taxed.

Mr. HOPKINS: Suppose it is not a corporation. Mr. Cummings is a wealthy man, and has as much as $900,000 invested in wealth, engaged in mercantile business, and that amount would not be taxed, but if I should happen to invest $20,000 in the bonds of the Chicago, Burlington and Quincy Railway I would be taxed.

Mr. SHEARMAN: Is Mr. Cummings doing no business whatever?

Mr. HOPKINS: That $900,000 represents his surplus capital. He cannot personally use it. He has invested it in a store. It is managed by reliable agents and it yields him a return. You propose to relieve him of the tax on his $900,000, and you would tax me on the $20,000 which I have invested in the Chicago, Burlington and Quincy stock.

Mr. SHEARMAN: Excuse me for drawing a line between the plan which I approve, but which I am afraid you will not adopt, and other plans which I have mentioned as equally practicable, though not equally just. Upon your statement I should say that the money of Mr. Cummings is not invested in any monopoly, and therefore ought not to be taxed. He is receiving no privilege from the Government. He is not taxing his fellow citizens, but is employing human skill. But your investment in the Chicago, Burlington and Quincy road is necessarily an investment in a monopoly. That road is using an immensely long strip of land which is of enormous value. Every railroad company, like every other land owner, is given a privilege of taxing the community for permission to use the land. I see no reason for taxing any incomes of a different nature. But I am bound to say that there is a strong sentiment in Congress against exempting corporations from taxation, and that you can successfully tax them if you will. If you hold to that opinion you would tax every corporation whether it has special privileges or not. In that event you could tax Mr. Cummings on his investment in or out of a corporation, because you can require every man to make a return of what he pays to other people as interest on their investments. But I would not do it.

Mr. HOPKINS: In the case of Marshall Field & Co., the business may not pay a large interest. They each own a certain percentage of that concern, and each may not get 2%, or each may get 20%, on the $900,000 invested. The amount depends on the success of the business during the year.

Mr. SHEARMAN: Then his income depends upon labor and skill and should not be taxed.

Mr. HOPKINS: Would not that lead people, instead of investing in bonds of railroads and things of that character, to invest in other business, in order to avoid this taxation?

Mr. SHEARMAN: Suppose it did; we shall never dispense with railroads and other various forms of invested wealth. They are altogether too profitable. If some people withdrew capital in them because it was taxed, the interest on the remaining capital would rise so much higher as to draw in fresh investors.

Mr. HOPKINS: If the railroad company has trouble in selling its bonds, it may to sell them at a discount, or to pay some kind of brokerage or commission. Could it not get that back by charging higher rates; and would it not come directly out of the great mass of the people, instead of out of the railroad company?

Mr. SHEARMAN: All revenue comes out of the masses. But owners of land and railroads get it, whether you take any of it or not. The railroad companies will charge just as much as the traffic will bear and the law and competition will allow, as we all know. They cannot charge any more than they do now. Whether they are taxed or not, they charge all that they can. If you invented a tax which would drive some railroads out of existence, then the remaining railroads being free from competition might charge more, and the people would have to pay it. But a tax upon net profits can never drive any concern out of business; although a tax on gross receipts might. If the net profits are large, no income tax will frighten a railroad company out of business. If the profits are small, the tax will be a bagatelle.

Mr. HOPKINS: Would not this tax become in the nature of a fixed charge upon the railroads, which they would compel the public to pay?

Mr. SHEARMAN: I freely admit that the people who work with brain or muscle finally pay all taxes; because they are the producers of all wealth. But the owners of monopolies collect all which can, by any human ingenuity, be extracted from the people for the services rendered. You cannot, by taking part of such receipts by taxation, enable the monopoly owners to increase a burden, which is already as large as it can possibly be made. This is the well-known law of economic rent.

Mr. MONTGOMERY: If you tax railroad incomes, and then tax the dividends, would you not be imposing a double tax?

Mr. SHEARMAN: Yes; but I do not recommend that. The tax should be levied on all the net profits; and then the corporation be authorized to collect the same rate of tax from all interest or dividends paid by it. That is the way in which it was done formerly. I am proposing absolutely nothing new, except that you should not attempt to do as much as was attempted under the tax laws of 1863-1872.

Mr. MONTGOMERY: Under the former law, you exempted dividends on stock owned by counties, cities, states, and municipalities. Would you adopt that feature?

Mr. SHEARMAN: If you adopt a plan for the exclusive taxation of natural and artificial monopolies, I should say, certainly not. There should then be no exemptions. Even if you tax invested wealth generally, I still see no reason why interest on city and county bonds should not be taxed, except that the States might consider it an interference with their rights. The fact that such a question might arise furnishes an additional reason for confining the tax to rents and monopolies.

Mr. MONTGOMERY: How would it be, where counties or cities take stock in railroads? Under the old law they exempted dividends when the stocks were owned by counties or cities.

Mr. SHEARMAN: They certainly should not be exempted, municipalities, investing in private monopolies should not be treated differently from individuals.

Mr. PAYNE: Under the old law, railroad corporations were allowed to make additional charges, on account of their taxes. I do not know whether that was a State law or a United States law.

Mr. SHEARMAN: It was a Federal law. But that had nothing to do with their income taxes. There was a separate tax on gross receipts. In consideration of that, they were allowed to add to their charges the amount of that tax, but of that only.

Mr. PAYNE: I know that plank roads in New York raised their rates.

Mr. SHEARMAN: The street railroads got enormous profits out of the tax on gross receipts, by raising fares 1 cent, when the tax was only one-fifth of a cent. One railroad in New York made, in that way, $300,000 a year over and above what it paid in taxes. I hope this committee will not recommend any such laws.

I thank you for your kindness in listening to me so patiently.

Thereupon the committee adjourned.