The normal tax of one per cent, is to be levied upon the income of corporations.  In effect this provision of the law merely continues the corporation or “excise” tax which was already in existence.  But that tax now becomes an integral part of the income tax, covering the income which accrues to the stockholder and is distributable in the form of dividends.  On the theory that this income is reached at the source by the tax upon the net earnings of the corporation the dividends as such are exempt.  They are not to be included, so far as concerns the normal tax, in the taxable incomes of the individual stockholders and the law does not provide that the tax paid by the corporation shall be deducted from the dividend.

It is perhaps a question whether under these conditions income which consists of dividends should be considered as subject to the normal tax or as exempt.  It may be contended that a tax upon the net earnings of corporations is virtually a tax on the stockholder’s income, and in theory this is true.  But so long as the tax is not actually withheld from the dividends, or the dividends are not reduced in consequence of the tax, the stockholder’s current income is not affected.  The imposition of the tax might indeed affect his prospective income and might depreciate the value of his stocks.  It is hardly likely, however, that such effects will be perceptible, at least as regards the stocks of railroads and other large corporations.  If, however, it be considered that income consisting of dividends pays the tax, it follows that the stockholder’s income is taxed no matter how small it may be.  No minimum is left exempt.  On the other hand, if it be considered that all dividends are virtually exempt, the stockholder would seem to be unduly favored under this form of taxation in comparison with people whose incomes are derived from other sources.  Doubtless in future the investor will look upon dividends as a form of income not subject to the normal income tax.

In the levy of the normal income tax there is to be a limited application of the method of assessment and collection at the source of the income.  This method is applied very completely in the taxation of income in Great Britain.  It may be well to recall summarily the essential features of the British system.  The tax is levied upon the property or industrial enterprise which yields or produces the income.  But the person occupying the property or conducting the enterprise, and paying the assessment in the first instance, is authorized and required to deduct the tax from the income as it is distributed among the persons entitled to share in it either as proprietors, landlords, creditors, or employees.  Under the English system, an industrial corporation, for instance, pays the income tax upon its gross earnings and then deducts it from the dividends, interest, salaries, and rents as these payments are made.  The householder pays an assessment levied upon the annual value of his dwelling (less an allowance for repairs and insurance) and then if he occupies the premises as tenant deducts the tax from his rent.  The income from agriculture is reached by a similar assessment upon the farmer, based upon the annual or rental value of the farm and with the same right of deduction from the rent if he is a tenant farmer.