State Of New York et al v. Mnuchin et al

Filing 47

DECLARATION of Owen T. Conroy in Support re: 44 CROSS MOTION for Summary Judgment .. Document filed by State Of Connecticut, State Of New York, State of Maryland, State of New Jersey. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6, # 7 Exhibit 7, # 8 Exhibit 8, # 9 Exhibit 9, # 10 Exhibit 10, # 11 Exhibit 11, # 12 Exhibit 12, # 13 Exhibit 13, # 14 Exhibit 14, # 15 Exhibit 15, # 16 Exhibit 16, # 17 Exhibit 17, # 18 Exhibit 18, # 19 Exhibit 19, # 20 Exhibit 20, # 21 Exhibit 21, # 22 Exhibit 22, # 23 Exhibit 23, # 24 Exhibit 24, # 25 Exhibit 25, # 26 Exhibit 26, # 27 Exhibit 27, # 28 Exhibit 28, # 29 Exhibit 29, # 30 Exhibit 30, # 31 Exhibit 31, # 32 Exhibit 32, # 33 Exhibit 33, # 34 Exhibit 34, # 35 Exhibit 35, # 36 Exhibit 36, # 37 Exhibit 37, # 38 Exhibit 38, # 39 Exhibit 39, # 40 Exhibit 40, # 41 Exhibit 41, # 42 Exhibit 42, # 43 Exhibit 43, # 44 Exhibit 44, # 45 Exhibit 45, # 46 Exhibit 46, # 47 Exhibit 47, # 48 Exhibit 48, # 49 Exhibit 49, # 50 Exhibit 50, # 51 Exhibit 51, # 52 Exhibit 52, # 53 Exhibit 53, # 54 Exhibit 54, # 55 Exhibit 55, # 56 Exhibit 56, # 57 Exhibit 57, # 58 Exhibit 58, # 59 Exhibit 59, # 60 Exhibit 60, # 61 Exhibit 61, # 62 Exhibit 62, # 63 Exhibit 63, # 64 Exhibit 64, # 65 Exhibit 65, # 66 Exhibit 66, # 67 Exhibit 67, # 68 Exhibit 68, # 69 Exhibit 69, # 70 Exhibit 70, # 71 Exhibit 71, # 72 Exhibit 72, # 73 Exhibit 73, # 74 Exhibit 74, # 75 Exhibit 75, # 76 Exhibit 76, # 77 Exhibit 77, # 78 Exhibit 78, # 79 Exhibit 79, # 80 Exhibit 80, # 81 Exhibit 81, # 82 Exhibit 82, # 83 Exhibit 83, # 84 Exhibit 84, # 85 Exhibit 85, # 86 Exhibit 86, # 87 Exhibit 87, # 88 Exhibit 88, # 89 Exhibit 89, # 90 Exhibit 90, # 91 Exhibit 91, # 92 Exhibit 92, # 93 Exhibit 93, # 94 Exhibit 94, # 95 Exhibit 95, # 96 Exhibit 96, # 97 Exhibit 97, # 98 Exhibit 98, # 99 Exhibit 99, # 100 Exhibit 100, # 101 Exhibit 101, # 102 Exhibit 102, # 103 Exhibit 103, # 104 Exhibit 104, # 105 Exhibit 105, # 106 Exhibit 106)(Conroy, Owen)

Exhibit 23

THE TARIFF OF 1913.

III

In what has been said during the former discussions of the
tariff of 1913, reference has been had almost exclusively to the
provisions of the law relating to duties, to customs administration, and to clauses affecting foreign trade relations. The tariff
act of 1913, however, was not only a measure for the revision of
import rates and for reorganizing the conditions of importation,
but was also a revenue law in the larger sense. As has been incidentally noted in the former discussions already referred to, it was
recognized from the beginning that very great tariff changes would
necessitate a recourse to new methods of revenue raising, or else
to a severe cut in expenditures. That a cut could be successfully
and effectively attempted few believed. The overgrown expansion
of the federal government, the undertaking of many new functions,
and the constant hungry struggle at the patronage trough had
swollen annual expenditures to a volume never before dreamed of.
To check this tide of extravagance, it was seen, would necessarily
be the work of years; and congressional leaders, probably wisely,
concluded that they would do well to recognize the facts in the case
and to seek for the moment simply to get from some source the funds
needed to meet expenditures upon the existing basis. The way
had already been pointed out by the Republican Congress which
passed the tariff act of 1909. In that Congress, to provide for the
ever-growing outlays with which even the tariff was not sufficient
to cope, the corporation tax had been proposed and enacted, and
its yield during the succeeding years had reached the estimated
level. It had proved an easy means of providing at least $30,000,000 on the average.
To expand this corporation tax so as to include
individual income was a natural and logical step. The plan had,
besides, the warrant of past experience; since, in the tariff act of
1894, the notion of redressing the balance of taxation had been
given scope through the introduction of an income tax designed
to supplement the reduced yields of the tariff act of that year, and
estimated to produce $40,000,000. For both logical and historical
218

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JOURNAL OF POLITICAL ECONOMY

II
As was noted in the first paragraphs of this discussion, the
income-tax sections of the tariff of 1913 were the successors of a
measure tentatively adopted by the House of Representatives a
year earlier and known as the excise income tax. This excise tax
was formulated prior to the adoption of the federal constitutional
amendment providing for an income tax, but was intended as a
genuine income tax. It was in fact the lineal predecessor of the
income-tax sections of the tariff. A brief historical review of its
terms will show, therefore, by what gradual stages the final
provisions were developed.
The excise income tax in the form at first adopted did not
answer the purpose which it is desired to serve by the present
legislation, for the following reasons:
r. It failed to make any adjustment with the existing corporation tax.
2. It was based upon a plan of legislation framed prior to the
adoption of the income-tax amendment.
3. It was defective in principle and detail at many points.
All these difficulties it was felt should be considered in framing
a new law and it seemed necessary to begin (a) by repealing the
corporation tax, on the ground that, as an inclusive income tax
is to be adopted, it should bear upon all income, not merely upon
that of corporations, and not upon their income except in the same
degree as upon other incomes; (b) by laying aside the older
excise income tax in the form in which it was put through the
House, and making a completely fresh start.
When the ground had thus been cleared it was planned to map
out a general income-tax measure upon the principles now recognized in financial literature and embodied in European incometax systems, adjusting such tax, however, to the state systems of
revenue in so far as circumstances would permit. The chief points
to be disposed of were as follows:
r. The fundamental necessity in income-tax legislation, it was
believed, is to arrange wherever possible for the collection of the
revenues at the source from which they are drawn. The excise
income-tax bill of the preceding session did not satisfactorily do

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THE TA RIFF OF r9r3

225

this. It was therefore open to serious criticism. The excise
income tax called fundamentally for an annual return to be made
by the individual with reference to his income, after deducting a
minimum of exemption and certain allowances for expenses and
offsets. This of course threw the whole burden upon the accuracy
with which return was made by the person who was to pay the tax.
Experience unfortunately shows that taxpayers cannot be relied
upon to be honest under such conditions and that they ought not
to be subjected to the strain, as the effect of such strain is to
penalize the honest man or the relatively honest man and to aid
correspondingly the man of questionable integrity. It was admitted to be a doubtful question how far the principle of collection at the source can satisfactorily be extended by the federal
government, but it was seen that the plan certainly could be carried
to a far more advanced point than had been done in the excise
income-tax bill. In that measure it was applied to some incomes,
as seen in section 5 of the original bill whereby officials in the
employ of the government were to have the tax deducted from their
income and whereby corporations, etc., were to make returns in
certain cases. This principle is the only effective one in connection with income taxation and it was felt that it should be applied
as broadly and thoroughly as the Constitution and laws of the
federal government would possibly allow. There was no weaker
feature in the excise income-tax bill than this very failure to do
what was needed toward insuring the successful levying of the tax
by making certain that all doubt so far as possible was eliminated
with respect to the accuracy of tax returns. It was thought that
the principle of collection at the source could be applied in the
following classes of cases at least:
(a) All corporations doing an interstate business, interpreting
the word interstate in the broadest possible manner.
(b) Other classes of corporations chartered under federal law,
e.g., national banks.
(c) Other classes of corporations over which the United States
might in any manner be deemed to have the power of requiring
information, or which act as agents for the performance of governmental functions.

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JOURNAL OF POLITICAL ECONOMY

(d) Other classes of business, not incorporated, falling within
any of the above groups.
(e) Persons having to do with the collections of rentals or
incomes arising from lands.
(j) Persons having to do with the registration and enforcement of legal instruments securing debts contracted on the strength
of lands.
It was thought that if the principle of collection at the source
could be applied to these and perhaps to other payers of interest,
dividends, wages, and rents, the ground would be very largely
covered, and the field remaining to be dealt with solely through
individual returns would be relatively small.
Of course in this connection the difficulty had to be faced that
the persons who pay such interest, dividends, wages, or rents
would not know whether the people to whom they pay these incomes
are or are not within the limit of exemption. For example, if the
Pennsylvania Railroad is called on to deduct an income tax from
the earnings of its bondholders before paying their interest, a
case like this might arise: A may own Pennsylvania Railroad bonds
sufficient to entitle him to interest of, say, $6,ooo, while B may
have an equal income from various bonds, of the Pennsylvania
and of other railroads. In that case, presumably, the Pennsylvania
would deduct the tax on A's interest and would not deduct it
on B's, while the other roads would not deduct anything from B's
interest because B did not get from any one road an income
in excess of the exemption. This could be met only by providing that the tax should be collected in every case and that a
voucher should be supplied to the person from whom the money
was thus taken, or that when interest was paid a record of ownership should be required. Then this person should be allowed to
collect back from the government the sums cut off from his income
if such income was clearly shown to be below the exempted minimum, or he should be compelled to pay in future if the tax were not
deducted at the time the interest was paid. This would also call
for a statement on the part of the individual which might or might
not be true, since he would have to show that his income was within
the minimum. Thus there might be a field for dishonesty there,

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THE TARIFF OF 1913

227

but it would be greatly limited. The plan, it was seen, would be
inquisitorial without a doubt, but it was recognized that all income
taxes are so, and the more effective they are the more inquisitorial
they are.
2. It was desired that the question of interference with state
taxes should be very carefully safeguarded. For some years past
several states have had income taxes, many of them inefficient, and
falling back upon exactly the sources of revenue that were to be
drawn upon by the proposed act. Few legislators thought it would
be a wise plan that would allow the double taxation of such incomes.
In some way, it was believed, the field ought to be shared with the
states. The best way to do this seemed to be to allow an offset
in those states that have income taxes, equal to the amount paid
in such states upon those portions of income which are in excess
of the minimum exempted under federal law. A state receipt
would release the taxpayer from the payment of the federal tax
to the extent that the state tax coincided with the federal; but
this allowance could be made only in those states that already had
tax laws that duplicate the federal income tax, and the plan could
not be so applied as to allow the states to pre-empt this field for all
future time. This, it was thought, was a matter requiring to be
worked out in a good deal of detail; but in the final form of the
act provision was made only for the general deduction of state and
municipal taxes in computing income.
3. There was also a strong feeling that the minimum of exemption provided under the old bill ($5,000) was too high. A study
of incomes showed that the number above $s,ooo is not nearly so
great as many persons would suppose, and that this exemption
might well be lowered to, say, $4,ooo. It was urged that if necessity required it, $3,ooo would not be unreasonable. The whole
question of exemption, it was felt, needed to be considered with
very great care in order not to impose the tax upon portions of
income that are not properly taxable at all, and at the same time
to avoid exempting incomes that ought to pay the tax. An
insufficient amount of study had been given to this subject in
nearly all efforts at federal income-tax legislation. Moreover,
in section 2 of the old excise income-tax bill, the exemptions or

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