tion immediately arose for a change in the Constitution and eighteen years later, in 1913, the required three-fourths of the State legislatures ratified an amendment providing that "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." Pursuant to this Amendment Section II of the Tariff Act of October 3, 1913, provided for an income tax of 1% on all incomes over $3,000, and an additional tax on incomes of $20,000 and over. This additional tax was calculated as follows:

In all cases both the normal tax and the additional tax are laid only on the surplus above the figures mentioned. For example, an income of $3,700 would pay 1% on $700; an income of $25,000 would pay 1% on $22,000, plus 1% on $5,000. A married man living with his wife is entitled to an additional exemption of $1,000.

Returns are made by all taxable persons on the first day of March of each year and are paid on or before June 30. In this tax, the law adopts the principle of "collection at the source," by which the tax on the rent, or profits or mortgage interest, or similar income, is deducted by the agent, or company, paying it and transmitted to the collector of internal revenue. Appeals from the decision of the local district collectors of internal revenue may be made to the Commissioner of Internal Revenue at Washington. Corporations, companies, and associations pay a tax on their net income also; and, in order to avoid double taxation, their shareholders are exempted from paying any tax on the dividends from such companies.

In order to ascertain net income, the following deductions are made from gross income:-First, the ordinary necessary expenses in maintenance and operation of business, second, the losses actually sustained within the year and not compensated by insurance; this includes a reasonable allowance for depreciation and wear and tear, third, interest on indebtedness of the company, fourth, taxes. Each taxable person or company makes a return to the collector. Assessments are based upon these returns and further upon the additional information which the collector in any district may consider necessary to secure, in case there is reason to believe that a false statement has been made. The assessments of corporations are filed in the office of the Commissioner of Internal Revenue and constitute public records, but are open to inspection only upon the order of the President. The purpose of this provision is to enable the govern

ment and other authorities to secure accurate information as to corporate finances and conditions. Collectors and deputy collectors, agents and clerks, and other employés of the government are forbidden to divulge or make known to persons not concerned, the operations, apparatus, methods of work, etc., of any manufacturer, or the sources of income, profits, losses, and expenditures of any person, or corporation, or to permit any income return or copy thereof to be seen by any person except as provided by law. The provisions of the income tax law governing corporations and companies supersede those of the corporation tax.

The Constitutionality of the Corporation Tax.-Meanwhile the corporation tax had been ruled on by the Supreme Court in Flint v. Stone Tracy Co., 220 U. S. 611, 1911; here Congress had levied an excise tax on the corporate method of transacting business, the tax to be measured by the net income of the corporation. The taxpayer claimed that the levy was, in substance, an income tax and under the previous ruling in the Pollock case, an income tax being direct, must be apportioned among the States according to population, whereas Congress had failed to apportion the corporation tax according to the population of each State. He therefore contended that the corporation tax was direct and not apportioned and hence unconstitutional. The Supreme Court, however, held that the tax was not an income or direct tax, but rather a levy upon a peculiar form of organization, to wit, the corporation, and that Congress, wishing to tax the peculiar advantages arising from this form of doing business, was in substance not levying a direct but an indirect excise tax. If so, such a tax, being indirect, need not be apportioned according to population. The tax was accordingly held to be valid and now nets the Federal Government about $30,000,000 yearly. In its new form as a part of the direct income tax it is also constitutional because of the 16th Amendment.

(b) Indirect taxes "must be uniform throughout the United States." By uniformity is not meant the same rate on all goods but the same rate on the same goods throughout the country,―i. e., territorial uniformity. The "United States" however, means, not a distant territory or possession of the nation, but only that part of the country which is located on the mainland; so for example a tax may be levied in Porto Rico, the Philippines, or Hawaii, with a different rate from that levied on the mainland in California or Pennsylvania. This question arose after the Spanish War in connection with the new territories, and it was decided that the term "throughout the United States" did not apply to territories or distant dependencies, but meant throughout the States.1

1 In Downes v. Bidwell, 182 U. S. 244; 1900, this question came up in the form of a duty paid, under protest, by Downes, the owner, upon certain oranges consigned to him in New York from Porto Rico. Under the act of 1900, creating a government for Porto Rico, Congress had provided that goods shipped from Porto Rico into the United States should pay 15% of the foreign customs duty to be collected on imports into the United States. Downes objected to the

Whatever the soundness of the legal reasons for such a decision may be, the decision itself is of the greatest practical benefit in the administration of our colonial possessions; it leaves Congress free to deal with each dependency according to the special conditions existing there.

(c) The reason for prohibiting taxes on articles exported from any State is to prevent the destruction of the foreign trade of the States and also to avoid possible discrimination. The colonies had suffered severely from attempts made by Parliament and the Crown to suppress their exports and it was desired to make such oppressive measures impossible. Here again the territories and dependencies are not included, and an export tax may be levied for example on articles leaving the Philippines.

(d) In declaring that no preference should be given to the ports of one State over those of another, the Constitution aimed to prevent discrimination by means of administrative rules and port regulations as well as by general legislation. In 1787 the States did not trust each other to the same extent that they now would, hence their efforts to exclude all opportunity for unequal regulation and favoritism. The rule does not apply to territories or dependencies, but only to ports of the States. Furthermore, the coastwise trade from one port to another must be free of taxation. It was to establish this freedom from State taxes that the new Constitution was proposed as far back as 1785. To protect this interstate trade from burdensome Federal taxes it was provided that the national government should not compel vessels engaged in such trade to pay duties when passing from one State to another. This clause together with the prohibition of export taxes and of State taxes on imports and exports insures the complete freedom of trade between the States.

The State Taxing Power.-The States in their turn have also found their taxing powers limited by the Constitution. In general they may tax anything except

tax, claiming that Porto Rico was a part of the United States in the sense of Article I, Section 8, providing that "all duties, imposts and excises shall be uniform throughout the United States." The Court held that this part of the Constitution, together with the clauses forbidding preferences between ports of different States and forbidding taxes on articles exported from a State, were all originally placed together in drafting the Constitution but were later separated in arranging the document for the purpose of style. Their object was identical and their intention is clearly to prevent Federal discriminations between the States as States, and not to apply to other territory outside the States which would be subject to the regulation of Congress. "Throughout the United States" therefore meant and still means throughout the States and does not include the territories or dependencies. Accordingly, Congress has the power to tax the dependencies as it sees fit.

"We are therefore of opinion that the Island of Porto Rico is a territory appurtenant and belonging to the United States, but not a part of the United States within the revenue clauses of the Constitution; that the Foraker Act is constitutional, so far as it imposes duties upon imports from such island, and that the plaintiff cannot recover back the duties exacted in this case."

interstate commerce,

imports and exports,

the tonnage of ships entering their ports,

and the agencies of the national government.1

Tonnage taxes and import and export duties are expressly prohibited in the Constitution (Article I, Section 10) but the prohibition of a tax on agencies of the Federal Government while not expressly mentioned in the Constitution, is implied by the nature of the government itself. This prohibition was first declared by Chief Justice Marshall in the celebrated case of McCulloch v. Maryland, 4 Wheaton, 316; 1819; in which a State tax upon the notes of the United States Bank was declared unconstitutional. It was held that the United States Bank had been chartered by Congress as a means of carrying out certain national powers; it was therefore an agency of the national government. If the State of Maryland could tax such an agency, it might by excessive taxation prevent the national government from exercising its powers within the State boundaries. Said the Chief Justice, "the power to tax involves the power to destroy." If Maryland could tax the United States government all the other States could do the same and the government could be taxed out of existence. Such was clearly not the intention of the framers of the Constitution, hence a State tax on the national government agencies of any kind is unconstitutional. The ruling in this case corresponds with the Federal tax case of Collector v. Day, 11 Wallace, 113; 1870, already mentioned.

With these exceptions, the State is free to levy on whatever it chooses, but it may not tax so heavily as to confiscate property, nor may it single out special kinds of property for unusual taxation in such a way as to amount to discrimination and thereby deprive persons of the equal protection of the laws, as guaranteed in the 14th Amendment. These questions of State taxation have become much more important in recent years; a more complete explanation of the principles involved and of their application to private business is given in the Chapter on Constitutional Protections of Business.

The General Welfare Clause.-In two parts of the Constitution the expression "general welfare" is used,-the preamble states that one of the purposes of the new government is to "promote the general welfare," and Section 8 of Article I gives to Congress the power to tax "to provide for the common defense and general welfare of the United States." These general phrases have been more widely misunderstood than any other part of the instrument, although their meaning is clear upon a moment's reflection. They have wrongly been supposed to confer on Congress a separate and

1 For inspection purposes such as quarantine, etc. they may levy a tax on imports or exports to an amount sufficient to pay the cost of the quarantine or inspection, but any surplus of the taxes over and above this amount must be paid into the national treasury, Article I, Section 10.

distinct power, that of promoting the general welfare. If Congress could promote the general welfare in addition to its other powers, there would be practically no limits to its authority. It might establish schools, regulate marriage and divorce, change the laws of contract and govern manufacturing and farming conditions; but all these subjects are in reality regulated only by the States, not by Congress. What is the true meaning of this clause? The words "general welfare" explain the purpose of taxation. Congress may tax in order to provide for the general welfare. This is readily seen from the other purposes of taxation given in the same clause,"to pay the debts and provide for the common defense." The whole bearing of the phrase "general welfare" becomes clear if we insert the words "in order to,"-Congress has power to tax in order to pay the debts, and in order to provide for the common defense and the general welfare of the United States. When therefore we see it stated that a power of Congress, other than taxation, is derived solely from the "general welfare" clause, we may know immediately that such a power does not exist.

Regulation of Business by the Taxing Power. The taxing power is usually construed in a broad free spirit by the courts, and Congress is given the benefit of the doubt in disputed questions of constitutionality. This has enabled the Federal Government to use its taxing authority to regulate in many ways that would otherwise be illegal. For example, by the acts of 1886 and 1902 Congress laid a tax of 10 cents per pound upon artificially colored oleomargarine. The law was passed on the urgent insistence of the farming interests, which naturally sought to prevent the manufacture and sale of imitations of butter. This at once raised the question, can Congress do, by the taxing power, what it has no other constitutional authority to attempt, that is, to discourage the manufacture and sale of any article? If Congress has no authority over manufactures nor even intrastate sales, how can it use taxation as an indirect means to accomplish this end? In the leading case on this point a licensed dealer in oleomargarine, McCray, had purchased for the purpose of re-selling, a 50-lb. package of oleomargarine artificially colored to resemble butter, upon which internal revenue duties of only 4c per lb. had been paid. When prosecuted for failure to pay the full 1oc tax he claimed that the latter was unconstitutional because it was an attempt to discourage the production and sale of oleomargarine, which as a purpose was unconstitutional, since it was a regulation of manufactures. But the Supreme Court (McCray v. U. S., 195 U. S. 27; 1904) refused to see in the law any attempt to regulate, and held that the levy was well within the taxing powers of Congress; "the judiciary cannot restrain the exercise of lawful power on the assumption that a wrongful purpose or motive has caused the power to be exerted. Therefore we find no merit in the argument that the purpose of Congress in levying this tax was to suppress the manufacture of oleo and not