New-York tribune., 1910-01-22
STILL PULLING.

The ruling of Attorney General Wick
ersham that income from United States
bonds held by banking and other cor
porations can be taxed under the pro-
visions of the corporation tax section of
the Payne tariff law will, we think,
greatly surprise the general public The
bonds of the United States are exempted
OH their face and by virtue of federal
statute from either state or federal tax
alton. and it has been believed by most
people that income from the bonds was
similarly protected. The Democratic
Congress which passed the Wilson-Gor
man law Of 1894 tried TO impose tax
on incomes, individual and corporate,
but it expressly excluded from the ag-
gregate of income subject to taxation
interest derived from United States
bonds. 1t is true that nothing in the
Constitution prohibits the government
from taxing its own securities. But tax
ing ones own securities, except as IN
afterthought and at the expense of
creditor who cannot help himself is like
trying to lift ones self by the boot
straps. Interest derived from federal
bonds was subject TO taxation under the
income tax legislation of the Civil War
period. But at that time Congress had
the excuse of not having given a pledge
of exemption TO the holders of the gov
ernments obligations. When, however,
the national debt was refunded after
the war the government contra cted with
the purchasers of bonds that they should
be free from all taxation. and when the
Nllson-Gorman act was prepared it's
trainers held that taxing income from
these exempted securities would be
breach of faith involving practical re-
pudiation.
Whether Intentionally or by accident,
the corporation tax section of the Payne
law did not except income from such
bonds as a source of taxable corporate
earnings. The Attorney General now
seems TO hold that though the contract
with the bondbolder might protect the
bonds themselves from taxation it does
not protect the income drawn rs inter
est, after that income has been merged
with other gross receipts subject to tax
alton. He seems to draw q legal dis
tlnction between the bond, as property
directly taxed, or even the interest, aS
income directly taxed. and the interest
as an item entering into the gross re-
ceipts or profits of corpora ton taxable
on an excise basis in proportion to their
volume But the ordinary mind will find
it hard to follow that distinction. Most
people are disposed TO think that if a
bond is exempted from taxation the in
come from it ought also to be exempt,
since taxation Of the income affects the
value of the bond and that value could
be entirely wiped out if a tax of 100
per cent were to be levied on the i'll
come. There is also something puzzling
in the argument that income from Il
bond not subject to taxation. although
possibly protected from direct taxation
as income, becomes taxable when it
undergoes a bookkeeping change and
appears as one Of numerous entries on
the profit side of the ledger.
The Supreme Court held in the Pollock
case that income from bonds issued by
states, counties and cities ought not to
be subject to federal tax. 1t did not
admit that though the bonds were pro-
tected the income was subject to attack.
Yet Attorney General Wickersham
seems to depend largely on a refine
ment of that sort in holding that fed
eral bonds are secure but that the in
terest which they yield can be treated
like any other contribution to corpora
uon's treasury. Study of the opinion In
its complete form may help to clear up
some Of these mysteries. Meanwhile. it
may be profitable TO recall that the dis
hot ha
to bond and the protection given to the
interest accruing from it was very
plausibly elaborated by the late Senator
James Z. George, of Mississippi-a law
Yer much given to subtleties-in the de-
bates in the Senate in 1894 over the
Wilson-Gorman income tax scheme. Mr..
George was opposing the exemption
from taxation of income from state,
county and city bonds, and his argument
could have been applied as well-so far
as the distinction itself goes-to fed
eral securities and income from them.
He said on June &c, 1894:
1t seems to me. Mr.. President, that n
fundamental fallacy underlies all the ar
guments which I have heard this morn
ing urged against the constitutionality OF
the income tax, so far as any part of
that income might come from the in
terest upon state bonds. The case has
been argued as if the proposition were
to tax state bonds 60 nomille as so much
property; as if this were an excise tax
levied under the Constitution, under
which the bonds issued by the states
are made subject to taxation for the
benefit of the federal government IL
that were the question before the Sen
ate. it would be a very different one
from the one really before it. If | am
not mistaken, there is a vast difference
as it appears to me- between taxing in
comes derivable from a non- taxable
thing and a tax upon the thing itself.