Averaging of Income for Income-Tax Purposes

Abstract

IT HAS long been considered one of the principal defects of the graduated individual income tax that fluctuating incomes are, on the whole, subjected to much heavier tax burdens than incomes of comparable average magnitude which are relatively steady from year to year. That changes in the allocation of income, which often have no relation either to physical realities or to the real financial status of the taxpayer, should substantially affect his income-tax burden is obviously not in accordance with the principle of taxation according to ability to pay. Two notable attempts have been made to remedy this situation by the introduction of an averaging process. In the state of Wisconsin from 1928 to I932 the state income tax was assessed on the basis of the average income for the last three years, with certain adjustments at the transition years. However, legal difficulties arose in the collection of the tax from individuals who left the jurisdiction of the state and in the case of corporations dissolving; moreover, as incomes fell drastically with the onset of the depression, there was widespread objection to paying taxes during lean years based in part on the larger incomes of the more prosperous years. This experiment had therefore to be abandoned after only five years of operation.' The Commonwealth of Australia in I92i enacted a provision that the rate of tax to be applied to the income of the current year was to be determined by reference to an average of the income for the last five years. New South Wales had had a similar provision applying only to income from primary production (pastoral, agricultural, and mining) since I9I2. This type of provision seems