The Taxation of Corporations in the United States

Questions of taxation in the United States are becom- ing every year more important, more complex and more difficult of solution.State tax commissions have reccntly gone over the whole field in New York, Massachusetts and Michigan; in Ohio and Illinois taxation is a political issue.The most difficult part of the problem relates to the taxation of corporations, and a correct solution of this question would help very much in supplying the answers to several others.There are a great many ways of taxing corporations, none of which satisfy entirely the demands of both theory and practice, even where the property and business taxed are confined to a single state.For the present discussion we may distinguish three methods: ( i ) The taxation of net receipts, (2) the taxation of tangible wealth plus franchise, (3) the taxation of the concern on a valuation equal to the sum of the values of the stock and bonds.Theoretical justice requires, first, that the tax shall reach the actual income earning power of the business, and, secondly, that the bur- den shall be equitably apportioned among the parties that receive the income.Now it is evident that the first method of taxing a corporation reaches the income of the stockholders, but does not touch that of the bondholders.The stock- holders pay no more than they ought to.The bondholders, however, if they are not taxed through the corporation, are not likely to be found, and so are not taxed at all/ 1 The second method of taxation reaches, on the other hand, the whole effective income capacity of the business, but it does not provide for a proper adjustment of the burden between the stockholder and the bondholder.The stockholder only is taxed.But first we should see what is meant by the tax- ation of tangible wealth plus franchise.It is, of course, well recognized that a tax on tangible property only is generally insufficient.Many corporations have a large earning power with a small amount of tangible wealth.This is the case, for example, with an express company,' the tangible wealth of which consists, perhaps, of a few horses and wagons and warehouses, but whose earning power depends chiefly on its organization, contracts and good-will. 3So, too, of telephone and telegraph companies or even of great producing and manufacturing corporations, such as the oil or steel combinations,' the tangible wealth is not an adequate measure of earning power.In the case of a street railway, the main source of wealth is usually found in the privileges or franchises which it enjoys in the use of the public highways.5 5 If these concerns are to be taxed according to their ability it is obvious, and the fact has long been recognized, that they should contribute on the basis of a valuation which takes account of these things, just as they are bought and 1 This form of property has increased enormously in recent years, notably with the great development of "industrial" securities.The loaning of money on bonds is substituted for the loaning of money on ordinary commercial paper and the change makes it possible to reach a creditor interest which was formerly even more difficult to discover and assess at the proper place

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