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Income Tax for 1918
as levied by the
Revenue Act of 1919 1918
The Sixteenth Amendment to the Federal Constitution became effective in February, 1913, and gave to Congress the power "to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States," etc. The first income tax law enacted thereafter became effective in October, 1913, and in January, 1916, the Supreme Court of the United States upheld its constitutionality in the case of Brushaber v. Union Pacific Railroad.
There was a new income tax law in 1916 and in October, 1917, the so-called War Revenue Act of 1917 was passed. This Act, among other things, levied a "War Income Tax,” which was in addition to the taxes levied by the law of 1916. Thus, for 1917 the total rate of taxation was the combined rates of the 1916 and 1917 laws.
In February, 1919, Congress passed the Revenue Act of 1918 which levies rates of tax upon income which are much heavier than those imposed by the laws applying in 1917, or by the law of 1916. The new Act is not supplementary to the preceding laws, but takes their place, and they are repealed in so far as they affect income accruing after December 31, 1917. For Porto Rico and the Philippines the rates of the law of 1916 as amended still apply.
Rates of Tax in
Individual Income Tax
Individuals are taxed and the provisions of the law relating to them are applied accordingly as such individuals come within either of the two named classes: (a) Citizens of the United States wherever residing; and Residents of the United States, no matter of what countries they may be citizens or subjects;
(b) Non-resident aliens.
The taxable income of the first class, citizens or residents of the United States, includes that which arises from every source, within or without the United States. Taxable income of non-resident aliens includes only that which arises within the United States. As to what income “arises within the United States" reference is made subsequently.
2. The 1913 Statute levied a basic or normal tax of one per cent. and surtaxes or so called additional taxes of from one to six per cent. on successively higher ranges of income. This made the tax under the 1913 Act, then considered heavy, range from one to seven per cent. These rates applied to income for the years, 1913, 1914 and 1915. The 1916 Act, which applied to income for that year, levied a normal tax of two per cent. and a graduated surtax of from one to thirteen per cent., making a total range of from two to fifteen per cent.
During 1917 the Law of 1916, as mentioned above, was combined with the War Income Tax Law. The Tax rate for 1917 therefore, was the sum of the rates of 1916 and 1917, the total tax range being from two to sixtyseven per cent.
3. The Revenue Act of 1918, just enacted, levies a new normal tax of six or twelve per cent. and a surtax
of from one to sixty-five per cent., thus making great additions to any preceding tax rate. The surtax starts at one per cent. on income in excess of $5,000 and not more than $6,000; increases one per cent for each $2,000 until the surtax is forty-eight per cent. for $100,000; and then by varying degrees goes to sixty-five per cent. for $1,000,000 and over. These rates apply to the calendar year, 1918, and are payable in 1919.
A graphic presentation of the greatly increased rates of tax under the present Law, as compared with the rate applying under each of the previous three Laws, appears on the Charts, pages 22 and 23.
4. One of the distinctive features of the new Act is the plan to define the taxes to be paid in 1920 (on the basis of income for the year, 1919). This section calls Rates for for a lower normal rate,-eight or four per cent., rather than the twelve or six for the year 1918.
Surtax rates are scheduled to remain unchanged. Of course as a practical matter it is difficult or even impossible to make a well considered forecast of the financial requirements of the Government for 1920 and Congress therefore, at the next session, may entirely revamp the Revenue Law including the rate schedule.
This statement of the contemplated change in tax rates is necessary for an analysis of the new so-called "dual plan" law, just enacted. Hereafter in this book, however, all discussion will concern the Act of 1918 as it relates to the taxes payable for the calendar year of 1918.
5. Under the law of 1917, the non-resident alien was Non-Resident not subject to the normal tax of two per cent. levied by Aliens that law, but was subject to the normal tax of the Law
"Normal" or Basic Tax
of 1916. Under the Revenue Act of 1918 he is liable to both normal tax and surtaxes, the range of tax which he must pay on his American income being the same as for a citizen or resident, except that the rate of his normal tax is always twelve per cent. He does not have the advantage of the lower normal rate of six (after 1919 four) per cent. upon the first $4,000 in excess of credits. He pays the same surtaxes as a citizen or resident. A general discussion of the rights and liabilities of the non-resident alien, for his greater convenience, will be found in a special section later in this analysis.
6. In connection with the gradually increasing rates of tax, it should be recalled that each successively higher rate applies, not to all of an individual's income, but only to that particular part of his income which falls within a certain range fixed by the Statute. For example, the tax rate of sixty-eight per cent. applies to the amount of income which exceeds $150,000 but does not exceed $200,000, i. e., on the top $50,000 of income. The next higher rate then applies to income falling within the next higher range fixed by the statute, and so on up.
7. Table No. 1, appearing on pages 19 and 20, shows the rates and amounts of taxes to be paid by citizens or residents on amounts of taxable income from $2,000 to $10,000,000. An example showing the method of computing the tax, appears on page 21.
8. In originally designating any income tax rate as the "normal" tax, the theory was presumably that that rate was the basic tax applied to all forms of taxable income. Exemptions were allowed in certain cases; but disregarding allowances, the rate of the "normal" tax was the basic rate levied against all taxable income, whether in one form or another, and whether it accrued to an