Finally in 1912 the sixteenth amendment to the federal constitution was ratified, which provides: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."

The troublous history of the federal income tax has been briefly traced because it illustrates clearly the conditions under which the American people must frame and administer tax laws. Income taxes were introduced during the Civil War and millions of revenue collected under them before their repeal in the early seventies. When revived in 1894 the income tax was invalidated by the Supreme Court in a decision which had momentous political consequences. The adverse decision was then, by a play of words, evaded in the corporation excise tax; and later the entire principle was legitimatized by the sixteenth amendment. Finally, the Supreme Court decided that the income tax is not a direct tax, but under certain circumstances acts substantially like a direct tax. Nothing could illustrate more clearly the metaphysical complexities introduced into tax legislation by constitutional limitations whose final interpretation rests not with the legislature but the courts. Much may be said for the necessity of such constitutional restrictions under the American form of government, but none can deny the enormous difficulties which they throw in the way of consistent, simple, and wise tax legislation.

Use of Direct Taxes by the Federal Government. Until the twentieth century, the constitutional limitations which we have been discussing served to concentrate federal taxation almost wholly upon consumption, since direct taxes when apportioned according to population have shown themselves to be unjust, unproductive, and exceedingly difficult of collection. Congress has made use of direct taxes only five times during the history of the national government. Two million dollars was apportioned in 1798; $3,000,000 in 1813; $6,000,000 in 1815;

excise..." and was invalid only because it acted enough like a direct tax in practical effect to be subject to the requirement of apportionment according to population.

$3,000,000 in 1816; and $20,000,000 in 1861. Except in the tax of 1798, Congress has always permitted any state to assume its quota and raise the money as it saw fit, although provision was always made for its collection by federal officers, in case the quota was not assumed by the state government. It would be difficult to exaggerate the unsatisfactory character of such taxation. In no case has the federal government ever collected the full amount of the tax. The taxes levied in 1814-1816 continued to be collected until 1839. The last payments on the direct tax of 1861 were not received until 1888; and in 1891 a law was passed abolishing further collections and authorizing the amounts which had been collected under the act of 1861 to be returned. Considerable scandal arose out of this refunding act, owing to the enormous commissions paid to certain lobbyists for their work at Washington in securing the passage of the law. Until the adoption of the sixteenth amendment, therefore, the federal government relied almost exclusively, in ordinary years, upon customs duties, excises, and similar taxes.

Customs Duties. - Among federal revenues, customs duties held the place of first importance until very recently. From the foundation of the federal government in 1789 until the Civil War, with the exception of a few excise taxes collected between 1791 and 1802, the federal government derived nearly all its permanent regular revenues from customs taxation, and since the Civil War considerably more than 50 per cent of the permanent revenue has, on the average, been derived from this source. From the very beginning, moreover, our customs duties have been in spirit, if not always in effect, protective; and it thus becomes necessary to consider the connection between the protective and revenue principles, in addition to the more strictly fiscal aspects of customs duties.

Protective duties are imposed in the hope of diminishing imports and substituting in their stead the products of home manufacturers. To the extent, therefore, that they are successful in their purpose, they reduce the customs revenues and justify the statement that there is a fundamental antagonism between the protective and revenue principles. However, the reduction of

importation does not signify that the consumers of the article in question are not taxed. So long as the price remains higher than it would be if no duty were imposed, the people are taxed to the extent of the difference, the proceeds of the tax going to home manufacturers in the form of an unmeasured, unregulated bounty, whose burden upon the taxpayers is no less real because unperceived.

It is equally evident that no protection is given unless the price is raised. The popularity of customs duties is largely explained by the belief that the foreigner can be made to bear the burden of the tax. He can in some cases, but not in the majority of cases. For the most part it is very certain that the burden must be borne by the home consumer. But whatever the extent to which the foreigner can be made to pay the tax, to that extent the tariff fails to replace foreign by home products; in short, fails to “protect." We cannot have our cake and eat it too. The more the protection or bounty to the home manufacturers, the greater the tax upon the consumers, the less the shifting of the tax to the foreigner, and the less the revenue to the home government. The protectionist is logically deprived of the time-worn argument that the foreigner foots the bill.

The European War has deeply impressed upon the people of the United States the strength of the argument for protection based upon military grounds and briefly discussed on page 370 above. It is likely, therefore, that we shall have more and not less protection in the immediately ensuing years, particularly for those industries whose products are believed to be indispensable to national security in times of war. So long as war is a real possibility there is probably no logical rejoinder to this argument for protection; but at least we should realize that we are paying for our self-sufficiency, and that the difference between the cost of the protected products and what they would cost if imported from foreign countries, represents an additional item in the budget of "preparedness" which has already reached colossal proportions.

The shifting of import duties may be best explained by noticing separately the immediate and ultimate incidence. (1) The immediate effect of the tax

will be to discourage certain foreign producers from shipping their products to the newly restricted market, and prices will tend to rise because of diminished supply. If the product is controlled by a foreign monopoly, the price may not increase; but where the foreign production take places under competitiv conditions, and in most cases where the production is monopolized, the price will be raised. The increase of price may be more or less than or equal to the tax according to the readiness with which foreign producers find a new market, but in a large majority of cases the burden of the tax will be shared by the producer and consumer, the latter, according to the majority of authorities, bearing most of the burden. That the burden, however, is partially borne by the foreign producer accords not only with the best theory, but with the great interest displayed by exporters everywhere in the tariff legislation of foreign countries, and the sacrifices which protectionist governments are willing to make in reciprocity treaties for the purpose of obtaining advantageous terms for their own producers.

(2) Eventually, however, the initial increase in price may stimulate home production, and this can only take place when the increase of price is less than the duty, because if the price rises by the whole amount of the tax, the foreigner will still possess his initial advantage. If the home producer totally ousts the foreigner, then the consumer bears all the difference between the existing price and the price that would rule if no duty were imposed although, of course, the treasury receives nothing. If the home producer secures only a part of the home market, it is plain that, under ordinary circumstances, the foreigner pays part of the tax, i.e. the amount per unit of product by which the duty exceeds the increase of price; while, as before, the home consumer pays, on every unit consumed, a tax equal to the difference between the old and the new prices. When, however, we attempt to go further and take account of the indirect effects of protection, the problem becomes almost hopelessly complex. Modern economists, however, are substantially agreed that the foreign producer bears a somewhat larger share of the average customs duty than the English economists of the first half of the nineteenth century were willing to admit.

From the standpoint of revenue, American customs duties. have the great virtues of high productivity, convenience of payment, and cheapness of collection. Along with these important virtues are associated almost all the vices to which indirect taxes are subject.

1. The most important defects of our customs taxes are their unreliability and uncertainty. Historically, they have shown a pernicious variability, expanding when increased revenue spelt extravagance, contracting when the country sorely needed larger revenue. In 1791, for instance, the customs revenues exceeded

the total ordinary expenditures by over 41 per cent, while in the very next year they fell short of the expenditures by 58 per cent. Between 1791 and 1860 inclusive, the customs receipts actually exceeded the expenditures in thirty-four years; varied between 50 and 100 per cent of the expenditures in twentyeight years; and fell below 50 per cent in eight years. In 1860, more than 84 per cent of the expenditures were secured from this source, but in 1863 less than 10 per cent, so inadequate is the customs revenue in a serious war when money is most needed. In 1864, Congress made desperate attempts to increase the customs revenue. In the tariff act of that year about fifteen hundred articles were enumerated, and the average rate approximated 50 per cent; yet the receipts dropped from something over one hundred and two millions in 1864 to less than eightyfive millions in 1865, constituting only 6.5 per cent of the total expenditures in the latter year. During the history of the national government, the customs revenues have varied with the industrial condition of the country, the prospects of peace or war, the power of the tariff lobby, the prosperity and commercial policy of foreign nations, but almost never in nice accordance with the financial needs of the federal government. Where the tariff is controlled by revenue rather than protective purposes, it can be made strikingly stable and responsive to the control of the treasury. "The English revenue from this source has kept very near £20,000,000 per annum for the last thirty years. In the period 1815-1895, it has only varied between £24,000,000 and £10,000,000, notwithstanding the extensive remissions of taxation."1

2. From the fiscal standpoint, our tariff system is far too complex and cumbersome. Whether we tax many imports or few, the major part of the revenue comes from comparatively few imports, so that by extending the list of dutiable articles we merely add to the cost of collection and increase the interference with commerce, without materially augmenting the yield of the tax. Before the European War, Great Britain imposed import duties on less than fifty articles, and nearly all of her revenue 1C. F. Bastable. Puis Finance, p 3: written in 1895).