12 
INCOME TAXATION IN THEORY 
We are now ready to apply our concept to the problem of 
income taxation. Let us imagine the case of three brothers, each 
of whom inherits the same fortune, say $100,000. Let us assume 
that interest is 5 per cent. The first brother invests his $100,000 
in an annuity of $5,000 a year forever which he does not re- 
invest.? The second puts his in trust to accumulate at 5 per cent 
for fourteen years, at which time, having doubled in value, it is 
to be invested in a perpetual annuity of $10,000 a year which he 
does not reinvest. The third, being of a spendthrift type, buys 
an annuity of $20,000 a year for (nearly) six years and does not 
reinvest. 
According to the concept here advocated, the first has a per- 
petual income from his supposed investment of $5,000 a year; 
the second has no income for fourteen years, and thereafter an 
income of $10,000; the third has an income of $20,000 a year for 
six years and thereafter none at all. This mode of viewing the 
matter also squares with ordinary reckoning. 
If, now, we suppose a ten per cent income tax laid on the 
three brothers, we shall find that, according to the different pos- 
sible interpretations sometimes given to the term “income”, the 
results will be startlingly different. If the income be taken in its 
true sense, namely, as consisting of those items whose capital- 
value is the $100,000 with which the three brothers started, then 
an income tax of ten per cent will yield from the first brother 
$500 a year; from the second, nothing for fourteen years, after 
which it will yield $1,000 a year; and from the third, $2,000 a year 
for six years* and nothing thereafter. The burden of the three 
taxes on these three brothers will, under these conditions, be ex- 
actly equal, when the three are compared by means of their cap- 
italized values. Each brother could theoretically “compound” for 
his taxes (that is, could pay a fixed sum in advance in lieu of the 
annual sums) at the same cost, namely, $10,000. That is, $10,000 
is the sum in present cash which is equivalent respectively to $500 
a year forever; to $1,000 a year beginning fourteen years hence; 
and to $2,000 a year for six years. But, turning now to the spur- 
ious interpretation of income as the value of uses plus the ac- 
cumulation of capital, or the value of uses less the depreciation 
of capital, we find that the three brothers would be very un- 
equally taxed. The first would, as before, pay $500 a year in- 
+ For fuller analysis see The Nature of Capital and Income. In brief, this assumes 
that the net income from all other sources is zero, including the net income from 
his pantry stock, wardrobe, etc. 
Or, to be exact, $2000 a year for five years and $1800 in the last year, inasmuch as 
the capital will be exhausted in a little less than six vears.