An income tax was opposed as sectional taxation by many in the Eastern states where the owners of most of the larger fortunes reside.  But to this Senator Elihu Root replied that the states where there was the greatest ownership of wealth pay the largest taxation under any scheme, and ought to.

Sec. 7. #Main features of the law.# The law as enacted[9] imposes (a) a “normal” tax of 1 per cent on the entire net income of every corporation (engaged in business for profit);

(b) a “normal” tax of 1 per cent on the excess above $3000 of every unmarried individual’s income (or $4000 for husband and wife, as indicated in the next section); (c) an “additional tax” (often called a super-tax) ranging from 1 to 6 per cent on individual incomes of larger amounts than $20,000.  There are thus eight classes of persons, those entirely exempt, those paying only at the normal tax rate, and six different classes paying a super-tax.[10]

A person with an income of $1,000,000 thus pays $60,020, this being the amount indicated, $25,020 for the first half million plus 7 per cent on the second half million.

Sec. 8. #Exemptions and stoppage at source#.  There are various exemptions, the first being that of $3000 on every individual income and of $4000 on the aggregate income of husband and wife living together.[11] Among other exceptions are sums paid for taxes (except assessments for local benefits), necessary business expenses, losses sustained, and (for the normal tax only) those parts of individual incomes derived from corporations which have paid the tax on them.

The difficulty of getting an honest and complete assessment of incomes is great.  All taxation is deemed by the taxpayer to be “inquisitorial” in some degree, and this is particularly true of an income tax.  In England had been developed the plan called “stoppage at source.”  In our law the taxation of corporations at the rate of the normal tax, while requiring them to report the names of those receiving dividends and interest payments, affords an ingenious way of checking up the returns of individuals in respect to a class of investments which is steadily increasing in importance.

Sec. 9. #The graduation principle#.  The most disputed feature of the income tax is the principle of graduation, or of progression.  It is upheld in part because in this case it but offsets regression, that is relatively heavier taxation on the smaller incomes, in the case of the other kinds of taxes (tariff, property taxes, etc.).  It is urged further that those of larger incomes, especially the largest, have marked advantages over others in making investments.  Further it is urged that the higher the income the less does a certain rate cut into “the amount necessary for good living” (as was said in Congressional debate).  This is in accord with the psychological principles of choice, of value, and of diminishing gratification.  Finally, there is a widespread approval of the progressive rate just because it in so far acts as a leveling influence upon fortunes.  The “additional” tax is already important fiscally, yielding over one-half of the total paid by individuals and one-fourth of the total from corporations and individuals.