Conditions Necessary for Success. The ability of the
ad valorem tax to secure justice depends, according to the Virginia committee, upon the competency of the assessing
board, and upon the extent of the power conferred upon
it. The importance of this contention is at once evident.
It would be considered absurd to send a man or group of
men whose lives had been spent as sailors, to value an
automobile. And it would be considered just as absurd
to instruct men who were capable of valuing an automo-
bile to arrive at such value by taking into consideration
only the wheels, or motor, or top, or electrical system, or
tires. A particular automobile might have no top, or no
electrical system, or the wheels might have been newly
painted, or the tires might just be worn out, so that no
one of these could be taken as the determining factor in
its value. Likewise the bearings, transmission, and cylin-
ders should be examined to discover how much they are
worn in short, all parts should be taken into considera-
tion in determining its value.

In determining the value of a corporation, likewise, the
board must not only be competent, but it must have broad
powers. It must be allowed to consider all the factors
which may contribute to value franchise, earnings, re-
production cost, etc. Not only must it be given power to
consider all these items, but it must be given access to
them. In order to carry out its work efficiently, the books,
accounts, and records of the corporation must be placed
at its disposal. It should be given power to examine wit-
nesses and require reports in short, given every possible
privilege which will enable it to make a proper valuation.
With this combination a competent board with extensive
powers the prevalent objections to ad valorem taxation
are somewhat minimized.

Relation Between a Tax on Value and a Tax on Earnings.
Where corporations are under regulation, as in the case
of public utilities, there is not such a variance between a
tax on value and a tax on earnings as it might at first
seem. Where the charges for services are not regulated,
there may be no definite relation between the value of the



TAXATION OF CORPORATIONS 353

property in use and its earnings. Public utility commis-
sions are expected to fix rates so that but a fair return
will be realized. Of course there is no absolute rule for
determining the value upon which earnings shall be al-
lowed, and it is impossible to determine value so exactly,
or to fix rates so accurately in each case, that only a fair
return will be realized. But the more nearly this is ap-
proximated the more nearly will a tax on earnings corre-
spond to one on value.

It could make but little difference in a case of perfect
valuation and regulation of charges, where 10 per cent
were allowed as a fair return, whether 10 per cent of the
net earnings were taken or 1 per cent of the valuation.
Because of the indefinite relation between net and gross
returns, however, there could not be this close approxi-
mation between a gross earnings tax and a tax on value,
even if regulation could be such as to allow exactly a fair
return. Yet they would more nearly correspond than
under a system of no regulation.

Reform in Local Taxes. The adoption of some central
system of assessment would open the way for securing
reform in the local taxation of corporations, with but
little added burden of expense. The entire abolition of
local assessments might be secured if the localities could
be made to see that, by such a change, they would not
be the losers, and if legislators could be made to see that
greater equality could be secured thereby. Some states
have already recognized the advisability of having all
assessments made by central authorities, where the plants
extend into more than one taxing district. With the
central board and machinery already in existence and
making valuations, the addition of taxes for local pur-
poses could be made very easily, and the proceeds dis-
tributed to the local districts.

Difficulty might arise in choosing a basis for this
distribution. Possibilities would be the length of track-
age, line, or mains, the amount of business arising within



354 OUTLINES OF PUBLIC FINANCE

the district, or the amount of property found there. The
first basis appears the most equitable, since the others
involve the valuation of parts of a business and open the
way for inequalities. Where business is greatest, more-
over, tracks, lines, or mains are duplicated, so that the
amount of business is reflected in the extent of these
factors.

182. Taxes on Public Utilities Are No Longer Needed
for Regulation. The important function of securing jus-
tice between the public and the corporation, which be-
longed to the early taxes upon public utilities, no longer
remains. The public service commissions are expected
to secure justice between the utility and the public as to
rates and services, which deprives the tax of its regulatory
aspects and leaves it only as a fiscal measure. To con-
tinue a tax for the purpose of regulation reflects on the
ability of these commissions to accomplish their purpose.
If their purpose is accomplished, however, no excess values
appear to be taken by special taxes.

Under regulation, then, the question of taxation re-
solves itself into this : Are the corporations to be regarded
as existing for the benefit of the users, for the community
viewed as a body of taxpayers, or for both? If regarded
as existing for the former, then the rates will be low and
there will be nothing left, above a fair return, for taxes;
if for the community of taxpayers, then high rates will be
charged for service, with some curtailment of use; if for
both, moderate rates will exist with a moderate surplus
for taxes.

When a corporation pays a tax under a system of regu-
lation, it merely acts as a collector of that tax from the
user of the product. The net earnings must be large
enough to allow a fair return. In ascertaining net earn-
ings, taxes are one of the items to be deducted from gross
receipts. If taxes were abolished, the total income of a
company could be reduced by the amount of the taxes
and the net earnings would remain the same.



TAXATION OF CORPORATIONS 355

Since taxes increase the burden to the consumer, some
have advocated the abolition of taxes on public service
corporations, while others would make the taxes com-
paratively light. Such taxes are, of course, class taxes
taxes upon the particular class of individuals using the
product. This abolition would but mean a larger tax to
be paid by the owners of other property. When consid-
ering all classes of property, it would seem no more than
fair to tax the property of these regulated corporations
to the same extent that other property is taxed, and in
such a way as to equalize the burden on the different
classes of property.

183. New York Furnishes the Best Example of Special
Franchise Taxation. The system for taxing public utili-
ties in New York may again be called upon to furnish the
best illustration of an attempt to tax the special franchise
of a corporation. This is found in what is known as the
Special Franchise Tax law. The law was adopted in 1899
largely through the influence of Governor Roosevelt, and
with but little agitation from the public. The law at once
received extended favorable comment, and was heralded
by many as the last word in public utility taxation. Con-
trary to expectations, however, the principle has not been
adopted by other states, and has proved one of the most
troublesome features in New York's tax laws.

The provisions of the law are somewhat as follows:
Under the term "real estate" is included the value of all
franchises, rights, or permissions to construct, maintain,
or operate in, under, through, or above the streets, high-
ways, or public places. Each of these franchises is to be
assessed annually by the board of state tax commissioners,
and the value sent back to the clerk of the assessment dis-
trict where the franchise is located, as the tax is to be
collected for local purposes. All assessments by the com-
mission are subject to court review. Assessment difficul-
ties led to the modification of the original law, so that all
uses of public property outside of incorporated villages,



356 OUTLINES OF PUBLIC FINANCE

of less than two hundred feet in length, are not considered
special franchises.

Problem of Valuation. The problem of finding a satis-
factory method of valuing these franchises has proved
almost insurmountable. The companies have not been
satisfied, and have filled the courts with litigation. In
New York City, where most of these franchises appear,
nearly one fourth of the taxes assessed against them from
the beginning still await final adjustment. Many rules
have been submitted for the proper mode of reaching the
special franchise values, but none has proved satisfactory.
The task of placing an annual value by a centralized
board upon some fourteen thousand special franchises
scattered over the state, presents a problem of some
magnitude. In reality, moreover, if the regulation by the
public service commissions be a success, there is no place
for these special franchise values to appear. Their re-
tention simply means that higher rates must be allowed
for services in order that the companies get what is con-
sidered a fair return.

184. Some Corporations Have Been Taxed in Special
Classes. Other kinds of corporations besides public utili-
ties have been put in special classes for the purpose of
taxation. Some of the most general of these classes are
banks, insurance companies, and, frequently, manufac-
turing industries.

Taxation of Banks. With the passage of the National
Banking Act, the taxation of banks by the states became
entangled with constitutional restrictions, and Federal
legislation and court decisions were necessary to establish
the status of bank taxation. This taxation by the various
states has been very unequal, varying from very lenient
legislation in some to almost repressive legislation in
others. This situation exists because of the difference in
the attitude which has been taken toward the taxation of
banking capital. Some have advocated a high tax, while
others favor complete exemption. The one class looks



TAXATION OF CORPORATIONS 357

upon banks as favored creatures of the government,
while the other looks upon them as essential to business
prosperity, and seeks to establish them more extensively.

All sorts of productive capital might be more remu-
nerative if it were not taxed, yet the state must have
revenue. The banking business is not of such a nature as
to suggest any clear reason why it should bear especially
high or especially low taxes. The granting of franchises
to such institutions in no sense gives them a monopoly or
increases their earning power. Moreover, banks render
a necessary service and are essential to business opera-
tions. By furnishing credit when needed they help to
develop productive business enterprise, and thus enlarge
the basis of taxation. If banks are unduly burdened,
banking facilities will be correspondingly lessened. It
would seem reasonable, therefore, not to tax them to such
an extent as appreciably to hinder capital from seeking
that form of investment. Care should also be taken that
discriminating tax burdens are not placed upon essen-
tially competing institutions. The modern trust com-
pany, for example, has developed so many banking prac-
tices as to be a competitor with banks, and should be
treated as such by tax laws.

Taxation of Insurance Companies. Much discussion
has arisen over the proper method for taxing insurance
companies, especially those doing a life insurance busi-
ness. It is often contended that insurance companies
should be taxed very lightly, if at all, since the burden is
shifted to the policyholder. Life insurance is looked upon
as an institution which makes for the public welfare be-
cause, in providing for many who might otherwise become
dependents, it has cut down the burden of state expendi-
tures. In opposing such taxation, the beneficent features
are extolled; the provision for widows and orphans is em-
phasized; this wise provision for the future is pictured;
the incentive to providence and thrift is pointed out;
the assets of the company are shown to be the accumu-



358 OUTLINES OF PUBLIC FINANCE

lated savings of the policy holders. A tax upon life in-
surance companies, then, falls upon this form of savings,
and is consequently undesirable.

Such a conclusion would condemn a large part of the
general scheme of taxation. All taxes are burdens upon
savings and restrictions upon thrift. The problem in tax-
ing insurance companies is to levy a tax upon them which
will be equitable with that placed upon other forms of
investment. Peculiar difficulties arise in that the length
of time a company has been in existence is an important
factor, the premiums are not income, the companies take
on so many different forms, and do business in so many
tax jurisdictions.

The tax which is most generally used by the states is
a percentage levy upon the gross premiums. While this,
no doubt, introduces some injustices, and while the rate
varies considerably from state to state, yet no other pro-
posed plan has appeared so satisfactory. An added justi-
fication for some payment is to maintain the insurance
department in the state which renders the companies
safer and more serviceable to the public. This is a special
service, and should at least command enough from those
benefited to pay the cost of the service.

Taxation of Manufacturing Corporations. In the earlier
history of corporation taxation, manufacturing concerns
were usually treated more leniently than other corpora-
tions, or were entirely exempt from taxes. A number of
states even yet exempt this form of industry, to a great
extent, from tax burdens. There is no good reason, how-
ever, why manufacturing concerns should not bear their
share of the public burden. They can no longer be con-
sidered as infant industries which need the fostering hand
of the state. The men who put capital into such enter-
uprises have no more claim to exemption than those who
invest hi other industries. The problem of taxing this
form of business is the problem of taxing capital in general
in a just and equitable manner. The taxation should be



TAXATION OF CORPORATIONS 359

such, however, that there will be no discrimination in
favor of particular fields of business endeavor, and uni-
formity should be extended, if possible, throughout the
whole competitive district.

185. Taxation of Foreign Corporations Has Proved
Troublesome. A foreign corporation is one whose charter
is granted in some other state than the one in which the
business of the corporation is located. Corporations,
moreover, do not come under the " privileges and immuni-
ties granted to the citizens of the states" clause of the
Federal Constitution, but may be singled out for special
legislation. Two opposite policies have been followed in
treating this foreign capital either treat foreign corpora-
tions leniently to attract foreign capital, or treat them
severely to protect domestic capital.

With forty-eight states, each legislating on the matter,
no semblance of uniformity in the taxation of foreign
corporations can be expected. States sometimes adopt
retaliatory features in their tax legislation. These laws
provide that, if any other state impose heavier burdens
upon its foreign corporations than had been provided for
by domestic legislation, then foreign corporations of that
state shall be taxed to the same extent as it would inflict
burdens upon its foreign corporations. The result has
been the multiplication of taxes upon foreign corpora-
tions, and especially upon those engaged in life insurance.

Some uniform system of taxing such corporations would,
of course, be the most desirable, if states provided a uni-
form plan for taxing domestic corporations. This is not
to be expected, and foreign corporations should be taxed
in such a way that the burden upon them does not vary
greatly from the burden placed upon domestic concerns
in the same line of business. No good reason appears for
placing especially heavy burdens upon a business just
because it is incorporated in another state, nor is there
any reason for especial leniency. The most logical ideal
is to place the same burdens upon similar enterprises



360 OUTLINES OF PUBLIC FINANCE

wherever they are organized, and to do this the same
methods of taxation must be used for domestic and for-
eign corporations.

It would be difficult to get equality of burdens in a
state that taxed the capital of domestic corporations if a
tax were placed upon earnings of foreign companies of
the same nature. Even if the same method be used, the
difficulty still remains of determining what part of a
corporation should be taxed to each of the various states
in which it may be doing business. One commonly used
plan is to compare the amount of assets within a state
to the total assets, and levy the tax accordingly. This
comparison is not always good. For example, an adver-
tising corporation might be doing a large business in
several states and have no assets except, perhaps, in one
state. A more just basis of comparison would be to levy
the taxes in proportion to the amount of business arising
in the different states.

1 86. The Federal Government Taxes Corporations.
For a number of years corporations were regarded as a
source of revenue solely for state purposes. More re-
cently, however, the Federal government has begun to
use the corporate form of organization as a source of
revenue. The introduction of the excess profits tax is a
familiar example of this situation which arose because of
the Great War. This aspect of the tax will be noted in a
later chapter. Even before the war, however, Congress
decided to tap this source of revenue, and in 1909 placed
a tax on the net earnings of corporations.

Law of 1909. The law of 1909 grew out of a discussion
of the Payne- Aldrich Tariff Act, as a part of which many
Senators favored enacting an income tax. The fear of un-
constitutionality of the income measure led to the sub-
stitution of the so-called excise tax on corporations in
proportion to their income, which is a part of the Tariff
Act of 1909. The law provides that every corporation,
joint stock company, or association, organized for profit



TAXATION OF CORPORATIONS 361

and having a capital stock represented by shares, and
every insurance company now in existence or afterward
organized in the United States, or in any foreign country,
and doing business in the United States, shall be subject
to pay annually a special excise tax with respect to the
carrying on or doing business by such corporation, joint
stock company, or association, or insurance company,
equivalent to 1 per cent upon the entire net income over
and above five thousand dollars received by it from all
sources during the year.

The law goes into detail in specifying the deductions
which are allowed in calculating the net income. The
statement of the nature of the tax a special excise tax
equivalent to 1 per cent upon the entire net income was
evidently an attempt to get around the constitutional
limitations as to the levy of direct taxes by the Federal
government. The Supreme Court later acquiesced in
this interpretation, by holding that such a tax is not a
direct tax within the meaning of the Constitution, and
that it is within the power of Congress to indicate the
method by which an excise tax shall be measured. 1

187. Taxes Have Been Placed upon the Transfer of
Corporate Securities. In recent years some states have
placed a tax upon the transfer of corporate shares of
stock. In reality this is not a tax upon corporations, but
upon the exchange or sale of shares of stock which has
but an indirect effect upon the corporations themselves.
Several proposals for such a law were made in New York
before it was enacted in 1905. By this Act a tax of two
cents on every one hundred dollars face value was placed
upon the sale or exchange of shares and certificates of
stock of all foreign and domestic corporations.

Much opposition to the law developed and its consti-
tutionality was attacked from every possible angle. Both
the Court of Appeals of New York and the Supreme
Court of the United States refused to admit the conten-

1 For modifications brought about by the war, see Chapter XIX, p. 468.



362 OUTLINES OF PUBLIC FINANCE

tions that such an Act was class legislation and inter-
fered with interstate commerce. The decision was that
the tax was not upon property, but upon the transfer of
property. Since it was uniform in operation on all trans-
fers, and upon all persons making them, it contravened
neither the state nor Federal constitutions.

Some administrative difficulties developed, such as
locating the transfers and preventing evasion through
the use of washed stamps. These difficulties have been
practically eliminated, and the tax is a resourceful, yet
little felt, source of revenue. It would be more just, per-
haps, if the tax were based upon the market value rather
than the par value of the stock. There is no very good
reason for taxing a one hundred dollar share selling for
twenty-five dollars, as much as one selling for three hun-
dred dollars. Such a basis, however, would greatly in-
crease the administrative difficulties.

During the Great War the Federal government imposed
a similar tax upon all sales or transfers of stocks. This
tax was also a tax of two cents on each one hundred dol-
lars or fraction thereof. If the shares have no face value,
the tax is two cents on each share, unless the market
value is more than one hundred dollars, in which case the
tax is two cents on each one hundred dollars or fraction
thereof.