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of the state and local expenditures, and that the same principle should apply in determining the share received by each of the subordinate political units. The entire question of distribution must necessarily be largely affected by local conditions, and the committee found it impossible to make other than general suggestions.

The business tax recommended by the committee was simply a moderate tax at a proportional rate (such as two per cent) upon the net income derived from business done in a particular locality.

The committee held that the combination of taxes recommended would give better results than any one tax. Inequalities which arise under the three separate taxes would not be concentrated at the same point, and there would almost certainly be a somewhat compensatory effect. The taxation of intangible property as property will be eliminated.

With regard to the amendment of state constitutions necessary for the introduction of these systems of taxation, the committee stated that "no more, and probably no less amendment of state constitutions" would be required than in the case of any other plan adequate to the needs of the

case.

After the publication of the preliminary report of the committee on model taxation attention centered largely on the committee's conclusions concerning the personal income tax. Little adverse criticism was heard, but the immediate incorporation of such recommendations into law progressed slowly. In the New York personal income tax law of 1919 may be seen the expression of similar ideas concerning equitable rates and proper administrative procedure. To a lesser extent the laws passed in the same year in North Dakota and New Mexico show that the recommendations of the committee on model taxation have

been effective. In September, 1920, at the annual conference of the National Tax Association at Salt Lake City, it developed that actual drafts of "model" personal income tax and business income tax laws would be useful to state officials who desired to have such laws considered by the legislatures of 1921. The committee consented to undertake the work, obtained the assistance as counsel of Mr. Henry H. Bond, of the Boston bar, who was in charge of the administration of the Massachusetts income tax for the first two years of its existence, and of Mr. George E. Holmes, of the New York bar, author of a treatise on federal taxation, and published the drafts of the two laws early in 1921. These drafts were prepared with great care, and an attempt was made to word the text and to number the various articles and sections so that the corresponding laws might be adopted by any state and subsequently enlarged or modified with a minimum of change.

The draft of a personal income tax law (Appendix II) contains few changes from the plan suggested in the committee's preliminary report, although the details are necessarily presented much more fully. The exemptions suggested in the draft of the law are higher, and conform to those permitted under the federal income tax law. The final draft includes no suggestions for the distribution of the proceeds of the tax, other than the suggestion that the localities should be notified of their share in time to take the sum into account in determining the local tax for the year, and the suggestion that a reasonable amount should be withheld for refunds. In presenting the draft, the chairman of the committee called attention to the fact that in such matters of administration it was impossible to bring the necessary provisions for the various states into the form of one suggested law. The draft of the model income tax law is in other respects full, detailed, and based on the best

modern income tax practice. The opportunity for flexibility in administrative matters which it offers makes its adoption in substantially its present form a practical possibility for almost every state.

The wave of popularity upon which the income tax has ridden during the past decade may subside to some extent, as it has subsided in the case of certain other features with which the American states have attempted to improve their revenue systems. Professor Lutz, who has been active in working for the adoption of an income tax in Ohio, gives the following warning:1

A few years ago separation of the sources of revenue was our revenue panacea. Today there is some danger of placing too great reliance upon the income tax as the chief agent of our fiscal salvation. Such expectations are doomed, and this failure will react unfavorably against the income tax in its proper place. It is more true today than ever that no one system will prove a cure-all. We must diversify our revenue system, combine property and income taxation, and strive toward a genuine and effective coördination of the widely diverse and different sources of

revenue.

If such recommendations as these are followed, and if the personal income tax is fitted into its proper place in a diversified revenue system in the states in which it is adopted, we may expect only temporary reactions, and in the long run a permanent and stable place for the income tax in the state revenue systems.

1 H. L. Lutz, Report on the Operation of State Income Taxes, in the Report of the (Ohio) Special Joint Taxation Committee, 1919, p. 125.

CHAPTER II

THE WISCONSIN INCOME TAX

1. History of the legislation

THE new phase in the taxation of incomes which opened with the adoption of an income tax in Wisconsin in 1911 was one of the results of years of effort for the reform of taxation in that state. Wisconsin's progressive attitude towards tax matters had become evident when the state tax commission was created in 1899. From that time forward the state had the advantage of the experience and advice of an able administrative organization with specialized functions, as a consequence of which several far-reaching improvements were brought about.

Agitation for an income tax had preceded the appointment of the commission by several years.1 A progressive income tax plan had appeared in the platform of the People's Party in the early nineties, but no legislation had resulted. The movement which culminated in the passage of an income tax law in 1911 first manifested itself in 1903, as a result of a discussion of the taxation of intangibles. In that year two members of the state tax commission re

1 The writer is indebted to Mr. Nils P. Haugen, who became a member of the Wisconsin Tax Commission in 1901 and who was its chairman from 1911 to 1921, for valuable information on the history of the income tax movement in Wisconsin.

2 T. S. Adams, "The Wisconsin Income Tax," American Economic Review, vol. i, no. 4 (Dec., 1911), p. 906.

commended the exemption of credits from taxation. The third member of the commission, Mr. Nils P. Haugen, opposed the flat exemption of credits without some substitute. In the discussion of possible alternatives Mr. Haugen suggested an income tax. At that time the Wisconsin constitution did not provide directly for an income tax and it was doubtful whether such a measure would be upheld; but the suggestion had been brought into the public attention as a live issue, and Mr. Haugen was requested by the assembly committee on the assessment and collection of taxes to draft a constitutional amendment permitting the imposition of a graduated income tax. With the assistance of Mr. Dahl, chairman of the committee on taxation, a draft was immediately made, and the legislature passed the amendment in the same year (1903). Through an error in advertising the amendment the next step was postponed for two years. The amendment was again approved by the legislatures of 1905 and 1907. It was voted upon by the people in the elections of November, 1908, and carried by an overwhelming majority. Two bills were introduced in the legislature of 1909,-one in the senate by Senator Paul Husting, later United States Senator, and the other in the assembly by Mr. Ingram. Both bills represented Mr. Haugen's income tax recommendations. Meanwhile a campaign of popular education had been proceeding; the subject was given wide publicity, and Mr. Haugen himself was a frequent contributor to the Milwaukee Free Press, writing in support of the proposed tax.

After a discussion of the two bills proposed in the legislature of 1909, the bills were referred to a special legislative committee which was instructed to report to the legislature of 1911. The committee presented a bill to the legislature of 1911, and after another prolonged discussion and the introduction of several amendments the bill became law in the

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