Address at the Auditorium in Denver, Colorado

Fellow Citizens of Colorado:

It gives me great pleasure again to visit the Centennial State, and to find here, as elsewhere, the signs of a coming period of prosperity which promises to be exceptional in the history of the country.

I have undertaken a trip of 13,000 miles, with a view to getting a somewhat more accurate and reliable impression of the needs of the country, and with the view to coming into personal touch with the people of the country, and especially in those States so far distant from the seat of government that their people are apt to suppose that their interests are forgotten in the conduct of the Government. It certainly serves to bring the Chief Magistrate into closer union with the eighty millions of people of this country, for he can at reasonably short intervals come into contact with those to whom he is responsible for the proper discharge of his duties during the temporary delegation of power with which they have honored him. The great difficulty and burden of such a trip upon the one making it is the indispensable accompaniment of speeches along the way. It may also be hard on the people to have to hear the speeches, but in a country where the people rule, discussion is necessary, and if the Chief Executive in going about among the people does not discuss something, he will seem to be in the position of wishing to avoid consideration of the interests of the public, or to be afraid of bringing to their attention and rendering account to them of what the Government has done or intends to do. For that reason I have attempted on this trip, at various centers of population of importance, to take up some topic of immediate interest, and explain my views upon it, and if it is a matter already acted upon, to show the wisdom of the action if I can, or if it is to be acted upon, outline what I deem to be the proper course to be taken. In the pursuit of this plan I have selected to-night for consideration and discussion the corporation tax which was embodied in the tariff bill recently passed, and the income tax proposition which at the same session of Congress, and really as a part of the tariff bill, though formally included in a joint resolution, was submitted to the States to amend the Constitution of the United States by giving to the Congress power to levy an income tax generally, without regard to the apportionment of the tax among the States according to population.

The necessity for the revision of the tariff arose not only because the rates in a number of the schedules had become excessive and were quite beyond the measure of the tariff set by the Republican platform, to wit, the difference between the cost of production of the article at home and that abroad, together with a reasonable allowance for profit to the American manufacturer, but also because within the last year or two the tariff had ceased to produce enough revenue in connection with the internal revenue law, to pay the expenses of the government.

There are two ways of meeting the difficulty which arises when your expenditures exceed your receipts; one is to reduce your expenditures, and the other is to increase your receipts. It is the proposal of the Administration and the Government to take both courses in this regard, and I have no doubt that the appropriations for that coming year will show a very considerable reduction in expenditures, perhaps reaching $40,000,000 or $50,000,000. But even this is not enough to make up for the probable deficit under the old tariff law, or under the tariff law as it has passed, unless accompanied by some additional method of taxation.

It was first proposed, and I recommended it in my Inaugural Address, that the central government impose a tax upon inheritances—a graduated inheritance tax; that is, a tax, the percentage of which increased as the inheritance was greater, in a certain proportion; but this was seriously objected to by many of the States, some of whose legislatures passed protests against it, on the ground that that was a field of taxation which the States had preempted, and in respect to which it would be rather unfair to impose a double burden. I have no disposition to quarrel with that conclusion, although I think a good deal might have been said in favor of the Federal inheritance tax because the truth is that even although the State and Federal Governments imposed the inheritance tax at the rate proposed, it would not have been particularly heavy. Still with the inheritance tax foreclosed, the question then arose as to what tax should be imposed in order to make up the deficit. This question arose in the Senate, for the inheritance tax had passed the House, and had been stricken out by the Finance Committee of the Senate. A part of the Republicans and all of the Democrats of the Senate united in pressing for consideration a general income tax on individuals throughout the United States. It left an exemption of those whose income did not exceed $5,000, but upon the rest it imposed a general income tax of 2 per cent. It also imposed a tax under the former income tax upon inheritances, and it was as inquisitorial as possible in subjecting the business of every individual in the community to investigation, and permitted the examination of his books and all private evidences of what his business consisted of, and what his income was; this investigation to be carried on by the collectors and deputy collectors of internal revenue. The law was as near as it could be made that income tax law which had once been considered by the Supreme Court some ten years ago, and which was held to be unconstitutional by a vote of five to four. It was conceded that the tax would probably raise $150,000,000 to $200,000,000, which was far in excess of the needs of the Government if the tariff bill was to retain its general form, as proposed, and so to produce revenues which should be reasonably expected from it. Our friends the Democrats favored the income tax with a view to substituting it for the tariff as an income-producing measure, thus minimizing the office of the tariff in protecting the industries of this country. In other words, the passage of the income tax bill would have lent support probably to the proposition to have a tariff for revenue only, and would have interfered with the protective policy to which the Republican party is pledged.

One further objection to the income tax amendment was that it had been declared to be unconstitutional by the Supreme Court, and to invoke a second decision upon that issue was to question the uniformity of the decisions of the Supreme Court and to drag the Court into a political discussion which, whatever its decision, could not make for its standing as an impartial tribunal before the people. It indicated a diversity of view between the Congress and the Court — two coordinate branches — with reference to the constitutionality of the law which it seemed unwise to perpetuate in a formal statute. But the income tax amendment seemed quite likely to pass by the vote of all the Democrats and a sufficient number of Republicans. Therefore those who were opposed to the income tax amendment looked about to see if a compromise could not be proposed less objectionable than the income tax amendment, which would satisfy enough Republicans who were advised to favor the income tax amendment to prevent the passage of that amendment, and such a compromise was found in a proposal to pass the present corporation tax, and also the joint resolution already referred to, proposing to the States an amendment authorizing the General Government to impose an income tax without apportioning it as a direct tax according to the population of the States. When Congress assembled, the Ways and Means Committee of the House had adopted a bill in which they made up the proper deficit by an inheritance tax and also by a tax upon tea and coffee. There were serious objections to the tax on tea and coffee on the ground that it increased the expenses of living, especially among those least able to bear such expense, and therefore the Ways and Means Committee was induced to omit the coffee and tea tax. And then the question arose, what should be substituted for that tax in the bill?

In my Letter of Acceptance of the Republican nomination for the Presidency, I said I thought that an income tax could be devised which could conform to the Constitution of the United States, and therefore that the income tax amendment was not necessary, and when this situation arose which I have described, I directed the Attorney-General to prepare a law which should impose what in effect would be an income tax and still conform to the Constitution. The Attorney-General did so, and I recommended the imposition of that tax to the Committee on Ways and Means. After some deliberation, the committee concluded that even without the coffee and tea tax the income produced would be sufficient, by means of the inheritance tax, to make an additional form of taxation unnecessary. So the matter went to the Senate, where the situation became changed, as I have described it, and the question arose whether we could find some substitute for a general income tax that would satisfy the majority of that body and prevent the passage of a general income tax held by the Supreme Court to be unconstitutional. Accordingly a compromise was reached by which the present corporation tax was passed, and the amendment to the Constitution proposed.

For the sake of clearness, I may say that the Constitution does not forbid the levying of an income tax by the Central Government. The section of the Constitution involved in general terms forbids the levy of a direct tax by the Central Government unless such direct tax is apportioned among the States according to their population. The Supreme Court, in the last decision referred to, held that the income tax was a direct tax, and if levied at all by the Central Government must be apportioned according to the population of the States. This made the imposition of such a tax utterly impracticable, and so construed in effect forbade a general income tax at all. But there are decisions of the Supreme Court authorizing an excise tax to be levied on business corporations and to be measured by the gross income or the net income of the business; and therefore it seemed to the Attorney-General, as it has to a great many excellent lawyers, entirely within the decision of the Supreme Court as constitutional to provide that all corporations engaged in a business for profit should pay to the Central Government an excise tax equal to one per cent. of their net earnings. At first it was thought that two per cent, would produce about $25,000,000. Subsequent investigation seemed to show that this was a very decided underestimate, and that one per cent. would produce that amount, and that that amount would be sufficient to meet the probable difference between the net receipts from the internal revenue and tariff bill and the expenditures of the Government. The provisions for the corporation tax in the bill exempt all corporations whose net income does not exceed $5,000. It is, therefore, in effect an income tax; that is it taxes earnings actually made. It is a tax upon success and not failure.

Complaint is made that it is a discriminating tax in that it taxes business conducted under a corporate form, whereas when the business is conducted by a partnership the business escapes taxation altogether. The justification for the distinction arises from the advantages which the business enjoys under a corporate form, first in that the individuals who really own the business by being the share owners of the corporation have only a limited liability and are not bound to meet the debts of the corporation beyond their stock investment, or in some States more than 100 per cent, beyond their stock investment; and, on the other hand, the advantage of a permanent establishment in the business, because no matter whether the present owners and managers die or not, the business continues in its corporate form without a settlement thereof in the administration of the estate of the deceased owners.

Again, objection is made that the tax is really a tax upon the dividends of the corporation, and that in the stock of the corporation may be interested a great many people having but little property — widows, orphans and others. I am not disposed to deny that theoretically it would be better to impose a higher rate of taxation upon those having large fortunes than upon those having only a competence. As I shall elaborate farther on, I am very much opposed to exempting incomes above the actual living wage, because I think every one in the Government ought to pay something toward its sustenance, because every one derives benefit from it, and while an increase in the percentage of the tax, as the fortune of the individual taxed increases, is fair, it is fair because the burden of the taxation at the same rate is heavier upon a man with a small income than upon a man with a large income or fortune. Still it is not practical with such a tax as the corporation tax, where you tax the sources of the income before it reaches the individual who is to pay the tax, to impose a graduated tax, and the tax upon the net earnings of the corporation of one per cent. or two per cent. is so small that small holders of the shares will feel the burden to be very light. In all probability it will hardly affect their dividends at all, because most corporations do not declare all their earnings in dividends, and will simply take the tax out of the surplus.

We have had very little experience with income taxes in this country, but those we have had have shown the inquisitorial feature of the tax to be most harassing; that is, the power given to collectors of internal revenue and deputy collectors to look into a man's private affairs and to compel him to produce his private papers in order that his actual income may be ascertained. Moreover, the most objectionable feature of the tax is the premium upon perjury which it offers to those who were willing to conceal their income — a matter not at all difficult to do — and who thus subject to a much heavier proportionate burden, those who are conscientious in making their returns and who pay the tax as the law intended. So great was this evil in the levy of an income tax in England that when that tax was imposed directly upon individuals, as was proposed here in the so-called income tax amendment bill, it was found that the proceeds of the tax at 10 per cent. were less than the proceeds of an income tax of 5 per cent. imposed as our corporation tax is, not upon the individuals directly but upon the income before it came into their hands. This is a practical argument in favor of the corporation income tax as against an individual income tax that is altogether unanswerable.

In England, after a hundred years of experience, the income tax is levied in only exceptional instances on the individual directly. It is first levied on the declared dividends of corporations; secondly, on rents before they leave the hands of the tenants, and, finally, on the individual with respect to matters that are not covered by rents and corporate investments.

Another distinction which is made in the English law, and which commends itself to every one with a sense of justice, is that the income tax on passive and permanent investments like the stocks and bonds in a corporation, should be higher than on earned incomes, that is, incomes earned by the services of the individual as salary, or as a professional income. Earned incomes thus described are really the proceeds of an application of the capital of the individual which is being consumed and will be entirely used up at the end of his professional life of twenty or thirty years, whereas the income from corporate and business investments will continue permanently without regard to whether the owner lives or dies, and will pass on by succession of law undiminished and without reducing the capital. This distinction justifies making a difference between a tax upon the income of corporations and that of individuals where they earn their income by services, either by making the rate less or by not taxing the earned incomes at all. The latter is the effect of the corporation tax.

Another criticism of the corporation tax in the present bill is that only shares of stock in corporate interprises are thus taxed, and that those who own bonds secured by mortgage upon the entire property or plant of the corporation, do not pay any tax at all. This is true, and the defect was fully recognized by those who drafted the corporation tax. They would have been glad if possible to impose a tax upon the bondholders who are only less interested in the earnings and success of the corporations than are stockholders; but the difficulty of including them and of collecting from the corporation before the payment of interest on the bonds, an income tax proportioned to a percentage of the interest to be paid on the bonds, was that Congress could not authorize a corporation to recoup itself in the payment of such a tax from the interest to be paid, because thus to impose a tax on the bondholder proportioned to the interest he received would be in violation of the Constitution as interpreted by the Supreme Court, as an income tax not apportioned among the States. Now, if the proposed amendment to the Constitution authorizing the imposition of an income tax without apportioning it among the States according to population passes, it will be possible to add to our corporation tax the feature of imposing a tax on the bonded interest in that corporation by a percentage tax upon the interest to be paid, thus reducing the amount of interest which the corporation would pay to the bondholder to the extent of the tax collected. This would make the corporation tax a more beneficial measure, and one reaching interests that ought to be reached, because under modern systems of financing corporations, the bondholders and the stockholders are all of them in a sense joint investors and a corporation income tax ought to include them all. Under the conditions that existed with reference to the Constitution it seems to me clear that the corporation tax is an equitable burden — one reaching active business not too heavy to retard it, but enough to collect a substantial revenue from those who are successful in business. It is a tax easily collected — one that no corporation can escape—one in which perjury can not play any important part at all in an effort to escape it.

Another feature of it is that incidentally it will give the Federal Government an opportunity to secure most valuable information in respect to the conduct of corporations, and their actual financial condition which they are required to show in general terms in a public return. In addition, the law provides the means under proper limitations of investigating fully and in detail their course of business. This is to be done only after the Commissioner of Internal Revenue shall have ascertained from evidence that their returns required by law are not correct. Then the evidence which he secures by his investigations of books and papers and examination of witnesses is not to be made public but is to be held in the secret archives of the Government until the President shall deem it of public interest and according to justice to make the facts known. Up to this time we have no adequate statistics concerning our corporations. Even the stockholders, whatever their right may be to know the course of business of corporations, are generally in a state of complete ignorance, and any instrumentality by which the corporation shall be compelled to disclose with accuracy a general statement of their condition certainly makes for the public good. Indirectly it would help very much in another revision of the tariff, whenever that shall come, because corporations engaged in business said to be affected by the tariff will have upon record in Washington their exact financial condition from year to year in the matter of their income, their expenditures and their debts.

Having said this much with respect to the corporation tax as it is, I want to say a few words in favor of the passage of the income tax amendment as proposed by Congress to the States. Assuming the constitutional authority to have been given, I am opposed to a general individual income tax law except in times of great national stress. I am opposed to it because of the difficulty already alluded to, that it puts such a premium on perjury as to have led other governments to abandon that method of levying an income tax and of imposing the tax wherever possible on the sources of income in the hands of those who are not ultimately to pay it. The instance I have already given of an increase of 100 per cent. in the proceeds of the tax when changed from a personal tax to one upon the sources of the income, like our corporation tax, is a most forceful argument in favor of the proposition — that the inquisitorial feature of an income tax levied directly upon the person, together with the inevitable opportunities for escape from the tax by use of perjury, make it desirable if possible to avoid such a direct method of levying an income tax.

But I am most strongly in favor of the adoption by the States of the amendment authorizing Congress to impose an income tax without apportioning it among the States according to population; and I am strongly in favor of this because in times of great stress, if war or some other calamity were to visit this country and we should need to strain our resources, the income tax would be one of the essential instruments by which we could collect a large amount of money to enable us to meet the exigency. It has been so in the past, for during the Civil War it was understood that the levy of an income tax without apportionment was constitutional, and such a tax was levied and was collected. And I consider it in the Constitution, as at present construed, an elemental weakness on the part of the Central Government not to be able in times of emergency to levy such a tax.

Of course, it will be said by those who are opposed to the income tax that there will be a disposition to impose a direct income tax merely as a means of collecting ordinary income taxes in normal times and that no distinction can be made in the Constitution by which the power to levy such a tax can be limited to times of emergency, because it is impossible to describe what the emergency should be. I agree with that, and I agree that there is a probability that at times the desire to tax accumulated wealth will lead to the movement in favor of a direct income tax, but I am also confident that its inquisitorial character, and the fact that in time the opportunity for perjury will show it to be so ineffective in reaching the persons whom it is sought to reach by a proportionate burden, that it will be wise to adopt the course taken in England and other countries having great experience with such a tax, and to follow the course of our corporation tax rather than by direct personal imposition, except in great emergencies.

If the income tax amendment passes, as I hope it may, we can then enlarge the corporation tax so as to include a proper burden on the bondholders in corporations as well as upon the shareholders; and this will make this instrument of taxation even more equitable than it now is.

Those who favor a directly personal income tax to use it for the purpose of permanently restraining great wealth will probably find it ineffective for the reasons given. I have already considered in a speech which I made at Columbus in 1907 how our great fortunes could be divided without drastic confiscatory methods. It seems to me now, as it did then, that the proper authority to reduce the size of fortune is the State rather than the Central Government. Let the State pass laws of inheritance which shall require the division of great fortunes between the children of the decedants, and shall not permit a multi-millionaire to leave his fortune in trust so as to keep it in a mass; make much more drastic the rule against perpetuities which obtains at common law; and then impose a heavy and graduated inheritance tax, which shall enable the State to share largely in the proceeds of such large accumulations of wealth that could hardly have been brought about save through its protection and its aid. In this way, gradually but effectively, the concentration of wealth in one hand or a few hands will be neutralized and the danger to the Republic that has been anticipated by a continuation through generations of such accumulating fortunes, will be obviated. The use of the income tax itself for this purpose will, I think, never be very successful because of the defect already indicated — the difficulty of finding the income upon which to impose the tax and the opportunity that perjury will offer to escape it. An inheritance tax can not be thus escaped because when a man dies his property must come before some court for consideration and adjudication with a view to its legal transmission, and therefore those who are to succeed, however reluctant, must always make a showing of just what the deceased left in order that they may acquire valid title to the succession.

It seems, therefore, that the present Congress has taken the wisest course in adopting as much of the feature of an income tax as conforms to the Constitution, and by recommending an amendment to the Constitution which shall enable us to round out and perfect this corporation tax so as to make it more equitable, and so as to make it an instrument of supervision of corporate wealth by Federal authority. I doubt not that the information thus obtained may be made a basis for further legislation of a regulative character, applicable only to those corporations whose business is so largely of an interstate character as to justify greater restrictions and more direct supervision.