To the Senate and House of Representatives:
It is the constitutional duty of the President from time totime to recommend to the consideration of Congress such measures as he shalljudge necessary and expedient. In my inaugural address, immediately precedingthis present extraordinary session of Congress, I invited attention to thenecessity for a revision of the tariff at this session, and stated theprinciples upon which I thought the revision should be effected. I referred tothe then rapidly increasing deficit, and pointed out the obligation on the partof the framers of the tariff bill to arrange the duty so as to secure anadequate income, and suggested that if it was not possible to do so by importduties, new kinds of taxation must be adopted, and among them Irecommended a graduated inheritance tax as correct in principle and as certainand easy of collection. The House of Representatives has adopted the suggestionand has provided in the bill it passed for the collection of such a tax. In theSenate the action of its Finance Committee and the course of the debateindicate that it may not agree to this provision, and it is now proposed tomake up the deficit by the imposition of a general income tax, in form andsubstance of almost exactly the same character as that which in the case ofPollock v. Farmers' Loan and Trust Company (157 U. S., 429) was held by the SupremeCourt to be a direct tax, and therefore not within the power of the FederalGovernment to impose unless apportioned among the several States according topopulation. This new proposal, which I did not discuss in my inaugural addressor in my message at the opening of the present session, makes it appropriatefor me to submit to the Congress certain additional recommendations.
The decision of the Supreme Court in the income-tax casesdeprived the National Government of a power which, by reason of previousdecisions of the court, it was generally supposed that Government had. It isundoubtedly a power the National Government ought to have. It might beindispensable to the nation's life in great crises. Although I have notconsidered a constitutional amendment as necessary to the exercise of certainphases of this power, a mature consideration has satisfied me that an amendmentis the only proper course for its establishment to its full extent. I thereforerecommend to the Congress that both Houses, by a two-thirds vote, shall proposean amendment to the Constitution conferring the power to levy an income taxupon the National Government without apportionment among the States in proportionto population.
This course is much to be preferred to the one proposed ofreenacting a law once judicially declared to be unconstitutional. For theCongress to assume that the court will reverse itself, and to enact legislationon such an assumption, will not strengthen popular confidence in the stabilityof judicial construction of the Constitution. It is much wiser policy to acceptthe decision and remedy the defect by amendment in due and regular course.
Again, it is clear that by the enactment of the proposed law, theCongress will not be bringing money into the Treasury to meet the present deficiency,but by putting on the statute book a law already there and never repealed, willsimply be suggesting to the executive officers of the Government their possibleduty to invoke litigation. If the court should maintain its former view, no taxwould be collected at all. If it should ultimately reverse itself, still notaxes would have been collected until after protracted delay.
It is said the difficulty and delay in securing the approval ofthree-fourths of the States will destroy all chance of adopting the amendment.Of course, no one can speak with certainty upon this point, but I have becomeconvinced that a great majority of the people of this country are in favor ofvesting the National Government with power to levy an income tax, and that theywill secure the adoption of the amendment in the States, if proposed to them.
Second, the decision in the Pollock case left power in theNational Government to levy an excise tax which accomplishes the same purposeas a corporation income tax, and is free from certain objections urged to theproposed income-tax measure.
I therefore recommend an amendment to the tariff bill imposingupon all corporations and joint stock companies for profit, except nationalbanks (otherwise taxed), savings banks, and building and loan associations, anexcise tax measured by 2 per cent. on the net income of such corporations. Thisis an excise tax upon the privilege of doing business as an artificial entityand of freedom from a general partnership liability enjoyed by those who ownthe stock.
I am informed that a 2 per cent. tax of this character wouldbring into the Treasury of the United States not less than $25,000,000.
The decision of the Supreme Court in the case of Spreckels SugarRefining Company against McClain (192 U. S., 397) seems clearly to establishthe principle that such a tax as this is an excise tax upon privilege and not adirect tax on property, and is within the federal power without apportionmentaccording to population. The tax on net income is preferable to oneproportionate to a percentage of the gross receipts, because it is a tax uponsuccess and not failure. It imposes a burden at the source of the income at atime when the corporation is well able to pay and when collection is easy.
Another merit of this tax is the federal supervision which mustbe exercised in order to make the law effective over the annual accounts andbusiness transactions of all corporations. While the faculty of assuming acorporate form has been of the utmost utility in the business world, it is alsotrue that substantially all of the abuses and all of the evils which havearoused the public to the necessity of reform were made possible by the use ofthis very faculty. If now, by a perfectly legitimate and effective system oftaxation we are incidentally able to possess the Government and thestockholders and the public of the knowledge of the real business transactionsand the gains and profits of every corporation in the country, we have made along step toward that supervisory control of corporations which may prevent afurther abuse of power.
I recommend, then, first, the adoption of a joint resolution bytwo-thirds of both Houses proposing to the States an amendment to theConstitution granting to the Federal Government the right to levy and collectan income tax without apportionment among the States according to population,and, second, the enactment, as part of the pending revenue measure, either as asubstitute for, or in addition to, the inheritance tax, of an excise tax uponall corporations measured by 2 per cent. of their net income.
WILLIAM H. TAFT