1

189. The taxation of corporations ? There is a widespread feeling among tax experts that under our Why corpo

rations are present laws, business corporations are not made to bear their full

inadequately share of the tax burden. The chief reason for this feeling is that taxed. our tax laws are largely the legacy of primitive conditions, and so do not adequately weigh upon such recent developments as corporate business. The corporation has recently become an important source of wealth, but our tax laws have not yet taken general notice of this new source of revenue. Some of the striking elements in this situation are discussed in the following extract from the proceedings of a taxation conference held in Indiana in 1910: While in primitive society property may be the best available The test of

tax-paying test of ability in taxation, the true test is always ability and not

ability. property. ... The ability and the duty of the owner of property to support the government to the same extent and for the same reason that he supports himself and his family is measured most fairly and accurately by income or productive ability. As society develops, economic and industrial conditions become Significance

of industrial more complex, property and industry assume more varied forms,

changes. and the capacity of the individual or corporation can no longer be fairly determined merely by property ownership. Whether a person is supporting his family on a salary income or from property investments he is equally able and responsible for the support of the government. ... Property, therefore, must be classified as to its form and productive capacity if we are to have a fair, uniform and comprehensive system of taxation, based on ability to pay and universal in its application. ... The bulk of our intangible property, which has generally escaped Relation of

corporate paying its fair share of taxes and which is increasing . out of all

de proportion to other property ... is invested or deposited with to intangible

property. corporations. The general tendency and natural effect of corporate investment is to concentrate property for the purpose of increasing its earning capacity; thereby collecting into a relatively few organizations or industrial systems, practically all of the intangible, together with a large portion of the tangible, property.

i From Indiana University, Extension Division, Proceedings of a Conference on Taxation in Indiana, February 5 and 6, 1914. Bloomington, Indiana, 1914; pp.52-54.

The proper

way of

upon the

the corpo

The small number of corporations as compared to the large number

of owners of their securities affords a most compelling argument taxing corporations of convenience and economy for the taxation of the corporation is to ignore

rather than its securities in the hands of their numerous and widely the stock holders and scattered owners, many of whom are never found, so that the porthe actual

tion who are taxed are required to pay in addition to their own property of the corpo

fair share of taxes an even greater amount which belongs to the ownration,

ers of those securities which are not returned, with a resultant rate of taxation imposed on that portion actually paying, frequently

approaching the earning capacity of the security itself. and to levy By taxing all such intangible property at its source or the place

of investment, the expense and difficulty of assessing and collecting income or earning the tax would be reduced to a minimum and the tax could be practicapacity of

cally uniformly levied and universally collected.... In other words, ration. let us take the income or earning capacity of the corporation as the

measure of its duty and ability to pay taxes and not attempt the impossible and inequitable assessment of its stock or property as such, especially when so much of the property is intangible in form and so incapable of assessment except on the basis of income or

earning capacity. .. Conclusion. A tax on corporations measured by corporate income should in

clude every subject of taxation that is legitimately taxable from the economic point of view, for income covers all property and reflects all value necessarily and properly belonging to the corporation. As income or earning capacity determines the value of the property belonging to corporations and furnishes the best measure of taxpaying ability, why not tax it as such, or use it directly as the measure of value in assessing such property? It is fixed and definite, not susceptible of evasion, easily and conveniently ascertained at slight expense to the state as well as to the corporation itself, and furnishes a practical basis of assessment. ...

1

190. Social significance of taxation There is no more significant development in recent tax discussions than the proposal to use income and inheritance taxes as a' method

1 From Theodore Roosevelt, Annual Message to Congress, December 3, 1907.

to use taxes

of leveling the inequalities of wealth. Not all students of the sub- Growing ject admit the desirability of taxes designed to level the inequalities tendency of wealth, but certainly there is no doubt but that there is an increas- to level the ing tendency to use taxes for this purpose. In a message to Congress,

inequalities

of wealth. December 3, 1907, President Roosevelt noted and approved this tendency in the following words:

When our tax laws are revised the question of an income tax and President an inheritance tax should receive the careful attention of our legis

Roosevelt

advocates a lators. In my judgment both of these taxes should be part of our Federal system of Federal taxation. I speak diffidently about the income

income tax, tax because one scheme for an income tax was declared unconstitutional by the Supreme Court; while in addition it is a difficult tax to administer in its practical working, and great care would have to be exercised by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man. Nevertheless, a graduated income tax of the proper type would be a desirable feature of Federal taxation, and it is hoped that one may be devised which the Supreme Court will declare constitutional.1

The inheritance tax, however, is both a far better method of tax- as well as a ation, and far more important for the purpose of having the fortunes Federal tax

on inheritof the country bear in proportion to their increase in size a cor- ances. responding increase and burden of taxation. The Government has the absolute right to decide as to the terms upon which a man shall receive a bequest or devise from another, and this point in the devolution of property is especially appropriate for the imposition of a tax. Laws imposing such taxes have repeatedly been placed upon the national statute books and as repeatedly declared constitutional by the courts.

These principles are recognized already in the leading civilized The inheritnations of the world. In Great Britain all the estates worth $5,000

ance tax is

being used or less are practically exempt from death duties, while the increase in European is such that when an estate exceeds five millions of dollars in value countries,

1 Since the above message was written, an amendment to the Federal Constitution has been passed, permitting the levy of a Federal income tax directly upon the people. — Editor.

and ought
to be ap-
plied by our
Federal
Government.

Social significance of heavy taxes on large fortunes.

and passes to a distant kinsman or stranger in blood the Government receives all told an amount equivalent to nearly a fifth of the whole estate.

[Similar taxes are applied in France and Germany.].

There is no reason why in the United States the National Government should not impose inheritance taxes in addition to those imposed by the states, and when we last had an inheritance tax about onehalf of the states levied such taxes concurrently with the National Government, making a combined maximum rate, in some cases as high as 25 per cent.

A heavy progressive tax upon a very large fortune is in no way such a tax upon thrift or industry as a like tax would be on a small fortune. No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity. ... Our aim is to recognize what Lincoln pointed out: The fact that there are some respects in which men are obviously not equal, but also to insist that there should be an equality of selfrespect and of mutual respect, and equality of right before the law, and at least an approximate equality in the conditions under which each man obtains the chance to show the stuff that is in him when compared to his fellows.

191. Need of thorough study of the tax problem 1 The real- A study of American taxation reveals two widespread tendencies: ization of

In the first place, there is an increasing tendency for tax experts the defects of American and tax officials everywhere to admit that American taxation is highly taxation has been

defective. In the second place, there is a more or less definite tendfollowed by ency to attack the tax problem by advocating specific reforms. piecemeal reform.

Many states have, in this way, solved important phases of the tax problem, and yet the conviction is growing that the tax problem is so complicated and so fundamental that it cannot properly be solved

1 From Indiana University, Extension Division, Proceedings of a Conference on Taxation in Indiana, February 5 and 6, 1914. Bloomington, Indiana,' 1914; pp. 163–165.

a

without a wholesale reorganization of the tax system. The necessity of approaching this reorganization through a state-wide survey of the whole field of taxation is set forth in the following address by Mr. John A. Lapp before the 1914 conference on taxation in Indiana:

One thing is evident, that is, that cannot settle this problem But the by piecemeal. It must be taken in its complete aspects. It must be problem of

taxation solved as a unit in order that the system shall be comprehensive and cannot be at the same time honest and fair. If we want to get that sort of

settled by

piecemeal. system, we cannot depend upon individual initiative, either of private citizens or of public officials. Nor can we depend upon the unaided efforts of the General Assembly. Each man, whether he be a private citizen or an office holder, has many more problems to consider and can give only a minimum of time to the thought and effort which are necessary to work out the matter to its final analysis.

We must depend, therefore, upon some organization, or somebody Need of a working exclusively and efficiently to the end of collecting, analyzing, thorough

investigation and setting forth the main facts which must underlie the solution of of the this problem. The work requires long study. It requires expert

subject. assistance. It requires the opinions of men in every walk of life, and it requires that all the facts shall be gathered together and set forth in such manner that out of the facts may come a logical and complete system of taxation. . . . We shall need a special investigation representing all classes of people who are concerned with this problem, who shall be appointed for reasons of knowledge, experience and interest in working out from the accumulated experience of this and other states an adequate and fair system of taxation for the State of Indiana. Such an investigation must be thorough, or else it might better Importance

of this. not be had. A partial solution of the problem is not what we are after. Nothing short of a full survey and a practical and complete working plan of taxation will satisfy the state permanently. . . We do not want to substitute some different system of taxation just merely because it is different. We want, rather, to comprehend and solve the whole problem, but, most of all, we want to make the people of the state comprehend it. The best system cannot be adopted, nor will it work, unless the people have been educated to its purposes, and are willing to educate themselves to its administration.