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Home -> Merlin Harold Hunter -> Outlines of public finance -> Chapter 15

Outlines of public finance - Chapter 15

1. Preface

2. Chapter 1

3. Chapter 1 continue

4. Chapter 2

5. Chapter 2 continue

6. Chapter 3

7. Chapter 3 continue

8. Chapter 3 continue

9. Chapter 4

10. Chapter 4 continue

11. Chapter 4 continue

12. Chapter 5

13. Chapter 5 continue

14. Chapter 5 continue

15. Chapter 6

16. Chapter 6 continue

17. Chapter 7

18. Chapter 7 continue

19. Chapter 7

20. Chapter 7 continue

21. Chapter 9

22. Chapter 9 continue

23. Chapter 10

24. Chapter 10 continue

25. Chapter 10 continue

26. Chapter 11

27. Chapter 11 continue

28. Chapter 11 continue

29. Chapter 12

30. Chapter 12 continue

31. Chapter 13

32. Chapter 13 continue

33. Chapter 13 continue

34. Chapter 14

35. Chapter 14 continue

36. Chapter 14 continue

37. Chapter 15

38. Chapter 15 continue

39. Chapter 15 continue

40. Chapter 16

41. Chapter 16 continue

42. Chapter 17

43. Chapter 17 continue

44. Chapter 17 continue

45. Chapter 18

46. Chapter 18 continue

47. Chapter 18 continue

48. Chapter 19

49. Chapter 19 continue

50. Chapter 19 continue

51. Chapter 19 continue

52. Chapter 20

53. Chapter 20 continue

54. Chapter 20 continue

55. Chapter 20 continue



174. Different Causes Have Placed Special Taxes on
Corporations. The introduction of the corporate form of
industry was heralded with delight, and corporations were
looked upon and treated as a class of public benefactors.
Valuable concessions, in the form of bounties and exemp-
tions, were granted by municipal, state, and Federal legis-
lative bodies to foster the development of this form of
industry. These concessions have taken various familiar
forms. Protective tariffs, for example, have been granted
to the benefit of particular industries, while the financial
assistance and large land grants, by which the railroad
companies were subsidized, are familiar to all. Aside from
this, many exclusive and irrevocable franchises were
granted, while immunities were often extended from exist-
ing legislation. This was particularly true of tax laws in
their application to public utility companies. Provision
was frequently made that no taxes would be collected
until the company had been in operation a certain length
of time, nor even then, unless the net income were a cer-
tain per cent of the capital stock. Under such favorable
circumstances it is self-evident why these organizations
had a phenomenal growth, and why they became powerful

Hostile Attitude of Public. With the growth of their in-
dustrial and political strength, corporations began to as-
sume the attitude that the public existed for their benefit
rather than that they were brought into existence for the

benefit of the public. With the unfair practices which


arose, and the unreasonable demands which were pre-
sented, the public soon became convinced that special
immunities should no longer be granted. It was awaken-
ing to the fact that it was being exploited by companies
that had been granted long time or perpetual franchises,
with no reservations to protect the niter ests of the public.
A franchise, it began to appear, no longer primarily con-
veyed the idea of service to the public, but appeared to
grant the right to exploit the public. When the people
began to realize the value of these rights which they had
so lavishly bestowed, and when they turned to attempt
to correct the evil which they had brought upon them-
selves, no weapon seemed so readily available as increased
taxation. The first step was to abolish special favors and
immunities which had been granted, and then the attempt
was made to apply the existing tax laws to corporate

Use of Existing Taxes. Practically the only tax in
existence at this time was, of course, the general property
tax, and the attempt was made to reach the value of cor-
porate property through its channels. The tax laws of
most states made the property of all persons in the state
subject to assessment and taxation, and corporations fre-
quently attempted to escape on the ground that they
were not persons. The courts, however, uniformly took
the opposite view, and eliminated this difficulty.

The use of the general property tax, when applied to
corporations, was even less satisfactory than were the
results in reaching other kinds of property. The burden
of the assessment was placed upon the local assessor, who
was either incapable of making proper valuations, or else
unable to do so. The inequalities of assessment have been
outstanding. Assessors in some districts have either had
different bases of valuation, have possessed better facili-
ties for locating values, or have been more or less deter-
mined to secure a full valuation than assessors of other
districts. The stocks and bonds of corporations, which


were supposed to be assessed, generally escaped. The ac-
curate valuation of a large factory with its machinery,
raw materials, goods in the process of making, and stock
of finished products, is beyond the possibility of accurate
assessment by the average local assessor. Particular dis-
tricts, moreover, have frequently offered freedom from
heavy tax burdens, as a special inducement for corpora-
tions to locate in their midst.

Outstanding Inequalities. These inequalities are es-
pecially marked where the property of a corporation is
located in different assessment districts, as is the property
of railroads. Assessors have no satisfactory way of placing
a value upon such part of the road as lies within their
jurisdiction, and yet some valuation must be made. Ex-
amples are numerous in which the assessed valuation per
mile in contiguous districts has varied many thousands
of dollars. Some districts have sought to pay the school
expenses from such taxes; others, the maintenance of
highways, while others have been negligent in attempting
to realize any return from corporations.

The stipulation has usually been made that the capital
stock is to be taxed at the location of the principal office,
which one would naturally suppose would be located
where the majority of the business is to be found. Cor-
porations, however, soon discovered the advantage of
stipulating that the principal office of the company be
in some out-of-the-way district, where the taxes were low,
or where the assessors had no idea that a corporation had
its principal office in their midst. The capital stock of
some corporations was consequently burdened with taxes
while that of others escaped.

The result of these situations was that corporations, as
a whole, were so unequally and inadequately taxed that
the public began to demand that special taxes be placed
upon them. From the above sketch it might be said that
this demand arose from three causes: the rapid growth in
extension and power of the corporations, the change ha


the attitude of the public toward their nature, and the in-
ability of existing methods of taxation to reach corpo-
rate values.

175. Special Corporation Taxes Take the Form of Fran-
chise Taxes. Corporations usually have not been re-
lieved from the assessments of local taxing districts, but
the demand for heavier burdens against them has resulted
in the imposition of additional taxes, usually by the state,
which are designated as franchise taxes. As the name
indicates, they represent an exaction for some special
privilege, which a corporation is supposed to possess.
These privileges may be of a different nature, but so far
as concerns the levy of taxes, three classes are usually
distinguished the franchise to become, the franchise to be,
and some form of a special franchise other than these two.

Kinds of Franchises. A franchise to become a corpora-
tion is a comparatively simple concept. It is the right
which the state gives to an organization to pose and act
as an individual. It is an act of the state, done once and
for all, but which has a value to the organization. A
condition of much greater importance, however, is the
continuance of the corporation from year to year, and the
enjoyment and advantage which this form of organiza-
tion gives over the individual or partnership. It can be
readily seen that this is the important form of corporation
franchise, and it is in connection with the taxation of this
franchise that many of the difficult problems have arisen.
Special franchises arise when some outstanding advan-
tage is granted to particular corporations that are not
enjoyed by others. The best example of this form of
franchise occurs in the use of public highways and streets
by such public utility companies as telegraph and tele-
phone companies, water and lighting companies, and street

The Incorporation Fee. The taxation of the privilege
to become a corporation is comparatively easy, and is
usually accomplished through the collection of an incor-


poration fee. No uniformity exists in the various states
as to the amount of this fee. Since it is paid only once,
however, this variation has little to do in determining
the location of corporations, for location is determined
by factors of greater moment than the size of the incor-
poration fee. In some states a fixed amount for exam-
ple, twenty-five dollars is exacted from every corpora-
tion for profit chartered in the state. A more general plan
is to levy a tax which varies directly with the amount of
capitalization, after a fixed minimum fee has been reached.
The amounts exacted under this incorporation fee have
never been so large as to be burdensome, and have occa-
sioned practically no difficulties. Difficulties have arisen,
however, hi assessing the other franchises, which will be
given a more extended treatment.

176. Taxation of the Franchise to Be Presents Serious
Problems. The taxation of corporations presents difficul-
ties in addition to those which arise in the taxation of
individuals. One of the first situations which presents
itself is that an artificial individual has been created
which can own property and conduct business in which,
however, the interest of natural individuals is centered.
While the corporation is a separate entity, yet it is one
owned by the stockholders, and if a part of the capital has
been raised from the issue of bonds, one upon which a hen
is held by the bondholders. When, then, these three
interests are found in conjunction, the problem immedi-
ately arises as to where the tax burden should be placed.
Should it be placed upon the corporation alone, upon both
the corporation and the stockholders, upon the bond-
holders as well, or upon all three classes of interests?

Assessment Difficulties. Difficulties continually arise
because of the overlapping of political jurisdictions. One
of the first which appears is the inhibition placed upon
the states from interfering with interstate commerce.
This has made particularly difficult the taxation of public
utilities, the lines of which extend into different states.


Where a corporation has property in various states, or
where the situs of the property and the residence of the
stockholders and bondholders may be in different juris-
dictions, and attempts are made to tax the three forms,
the serious problem of the double or treble taxation of the
same property arises.

Difficult problems are found, also, within each state.
In some states the constitution contains what is known as
the uniform tax clause that is, that all taxation must be
uniform. This has prevented any taxation of corpora-
tions other than by the general tax system. Again, some
states have been fortunate in having progressive and wide-
awake officials, while other states have been burdened
with reactionaries. This causes a wide difference in the
tax methods used in the different states, and consequently
introduces the condition of varying tax burdens upon
similar, and often competing establishments in the vari-
ous states.

With these problems and difficulties, as well as many
others, existing in forty-eight jurisdictions, and with as
many sets of officials offering solutions, it is obvious that
anything but uniformity exists in the method of taxing
corporations. Not only is the general system different,
but the method of taxing the various classes of corpora-
tions differs. A wide variation also exists in the extent to
which the different states resort to corporation taxes for
revenue. Some states secure practically the whole amount
of the revenue for the budget of the state from this source,
while hi others the return is insignificant. It is impossible
to generalize accurately on the methods used in taxing
corporations, and it is undesirable, in a book of this nature,
to enter into the details of the various methods which are
in use. It will be profitable, however, to review some of
the more widely used plans for reaching corporate values,
and to note some of the problems which have arisen.

177. Taxes upon Capital Have Been Most General.
In attempting to impose an extra tax upon corporations,


one of the first schemes hit upon was to place a levy of
some nature upon the capital stock. This continues to be
in use more than any other single plan, and is found in
more than half the states. Some of the schemes in vogue
are exceedingly complex, while others attempt no more
than to exact a small percentage each year on the amount
of capital stock. Since the state of New York is consid-
ered one of the most progressive states in matters of
taxation, an outline of the Annual Franchise Tax used in
that state may be given as an example of one of the more
detailed methods in which capital stock is used as the
basis for determining taxable values.

Annual Franchise Tax of New York. The annual fran-
chise tax, which was first adopted in 1880, and took prac-
tically its present form in 1906, does not replace the local
taxation of corporations, so that the inequalities of local
assessment still remain. Under the annual franchise tax
corporations which are subject to the tax are required to
make yearly reports to the comptroller, stating the amount
of authorized capital stock, the amount of stock paid in,
the date and rate of each dividend declared, the entire
amount of capital, and the amount of capital employed
in the state. The tax is to be paid in advance, and is to
be based upon the amount of capital stock employed
within the state during the preceding year. The capital
stock employed within the state is that proportion of the
entire capital stock that the assets within the state bear
to the entire assets.

The capital stock is classified, for the purpose of assess-
ing the tax, as follows: (1) If dividends have amounted
to 6 or more per cent upon the par value of the stock, the
tax rate is one fourth of a mill for each per cent of divi-
dends made or declared. (2) If dividends have been less
than 6 per cent and (a) assets do not exceed liabilities, ex-
clusive of capital stock, or (b) the average selling price of
the stock during the year has been below par, or (c) if
no dividend was declared, then the "rate of tax is three


fourths of a mill. (3) If dividends have been less than
6 per cent and (a) assets exceed liabilities, exclusive of
capital stock, by an amount equal to or greater than the
par value of the stock, or (b) if the average selling price
of the stock has been above par, the tax rate is one and
one half mills: but the valuation of the stock shall not be
less than (a) par value; (b) difference between assets and
liabilities, exclusive of capital stock; (c) average selling
price of the stock during the year. (4) If a part of the
capital stock has paid more than 6 per cent dividend,
while a part has paid no dividend or less than 6 per cent,
the above rules are to be applied to each portion of the
stock as if it existed alone. (5) Corporations not assess-
able under the above rules are to be taxed by an amount
not less than would be produced by an assessment of (a)
one and one half mills on the actual value of the capital
stock, or (b) one and one half mills on the average selling
price during the year. 1

It is not intended that the reader will thoroughly under-
stand this system, nor is it the intention of the author to
attempt to clarify a system that has been involved in
litigation ever since its adoption. It is seen that the basis
for the tax is capital stock, while the rate is determined
by a number of variable factors dividends, market price
of the stock, and the financial condition of the corpora-
tion. The difficulties and uncertainties which arise from
the numerous complexities of the plan neutralize, to a
great extent, any advantages which are expected to come
from such a minute classification.

Massachusetts Plan. In contrast to the New York plan,
one may be cited which has been used for many years,
which is comparatively simple, and yet has given a large

1 Not all corporations are subject to the annual franchise tax. The
exemptions comprise banks, savings banks, insurance companies, trust
companies, manufacturing and laundering companies, mining companies,
and agricultural and horticultural associations. Public utility companies
are also exempt from this law, but are taxed upon the basis of earnings
and dividends by a system almost as complex as the annual franchise tax.

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