SHGETl QlornfU ImwrBttg Sltbrarg BOUGHT WITH THE INCOME OF THE SAGE ENDOWMENT FUND THE GIFT OF Henrg W, Sage 1891 lp_6^f^6, ,. LJM^^.^. 9306 ..u/,m»^Siiw^ fc«aijta'*»i'* Cornell University Library HJ2321.S46 E7 1913 Essays in taxation. olln 3 1924 030 264 315 The original of tiiis book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/cletails/cu31924030264315 ESSAYS IN TAXATION THE MACMILLAN COMPANY NEW YORK • BOSTON - CHICAGO DALLAS ■ SAN FRANCISCO MACMILLAN & CO., Limited LONDON - BOMBAY • CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA, Ltd. TORONTO ESSAYS IN TAXATION BY EDWIN R. A. SELIGMAN. MCVICKAK PROFESSOR OP POLITICAL ECONOMY COLUMBIA UNIVBRSITT EIGHTH EDITION COMPLETELY REVISED AND ENLARGED THE MACMILLAN COMPANY LONDON: MACMILLAN & CO., Ltd. 1915 All rights reserved COPTHIGHT 1895 By MACMILLAN AND CO. New Revised and Enlarged Edition CoPTHlGHT, 1913, Bt the MACMILLAN COMPANY Set up and electrotyped. Published March, 1913. Reprinted October. 1915. _ PREFACE TO THE EIGHTH EDITION This book was originally published in 1895, and the favor with which it was received has rendered necessary a new edition every two or three years. Owing partly to the pressure of other occupations and partly to a shrinking from the arduous labor which would have been required to keep the presentation up to date, these successive editions contained but slight changes. Now however, after the lapse of almost eighteen years, the. progress of the world, both in fiscal facts and in economic theory, has been so marked as to render any further delay impossible if the book is to remain a half-way satisfactory interpretation of actual conditions. I therefore determined to subject the volume to a careful revision and, where necessary, to rewrite entire sections or even chapters. Moreover, in the interval, not a few of my addresses and articles on germane topics have appeared; and it seemed opportune to incorporate a selection from these into the book, even at the risk of some inevitable repetition in a few pages here and there. As a consequence, the thirteen chapters of the earlier editions have grown to twenty-one; and this together with the additions to the remainder of the work has resulted in a volume of almost double the size of the original. To a large extent, therefore, the present edition may be regarded as a sub- stantially new work. To recount here the names of the many friends who have assisted me in various ways in the preparation of this volume would be impossible. But I desire to make especial mention of Mr. A. C. Pleydell, the secretary of the New York Tax Reform Association, who has been good enough to read the entire proof of this edition, and to favor me with many suggestions out of the abundance of his rich experience in practical tax reform. Edwin R. A. Seligman. Columbia Univebsity, New York, March, 1913. CONTENTS CHAPTER I The Development of Taxation I. Voluntary and Compulsory Payments II. Direct versus Indirect Taxation III. The Forms of Direct Taxation . IV. Changes in the Basis of Taxation PAGE 1 6 10 14 CHAPTER II The General Propehtt Tax I. Practical Defects 19 II. History of the Property Tax in Antiquity ... 32 III. Early Mediaeval History of the Property Tax ... 38 IV. Later Mediaeval and Modern History of the Property Tax 45 V. Theory of the Property Tax 56 VI. Conclusion 61 CHAPTER III The Single Tax I. What is the Single Tax? 66 II. The General Theory 68 III. Practical Defects 75 1. Fiscal Defects 75 2. Political Defects 77 3. Ethical Defects 79 4. Economic Defects, (a) Effect on poor communi- ties; (6) On farmers; (c) On rich communities . . 83 IV. Conclusions 96 CHAPTER IV Double Taxation I. By the Same Authority 1. Property and Income 2. Property and Debts. . 3. Corporations and Investors 4. Corporate Property and Stock II. By Competing Authorities 100 100 102 107 109 110 The Inheritance Tax CONTENTS CHAPTER V PAGE , 120 CHAPTER VI The Taxation op Corporations. I. History I. Early Taxation of Corporations II. Development of the Corporation Tax 1. Banks 2. Insurance Companies 3. Railroads 4. Other Public-Service Corporations 5. The General Corporation Tax . 6. The Tax on Corporate Charters III. Bases of the Tax .... 145 148 157 161 170 182 195 215 218 The Taxation of Corporations, I. The Franchise Tax II. Economic Theory III. Practical Reforms IV. The Legal Situation CHAPTER VII II. Principles II. III. IV. CHAPTER VIII The Taxation of Corporations. III. Complications and Conclusions I. Property and Debts . ... Income and Property Property and Stock . . . . Double Taxation due to Conflicts of Jurisdiction . 1. Interstate Taxation of Corporate Property 2. Of Corporate Securities 3. Of Non-resident Security-holders 4. Of Receipts. . The Corporation and the Security-holder Incidence . . . . Local Taxation . ... Conclusion . . . . V. VI. VII. VIII, CHAPTER IX Modern Problems in Taxation I. Justice and the New Economic Basis of Society II. Economic Analysis and Fiscal Facts III. Practical Problems .... 221 238 250 264 271 273 276 280 280 282 285 292 297 308 310 314 316 320 325 CONTENTS ix CHAPTER X A Quarter Century's Progress in Taxation page I. General Progress .... . . 330 II.- Social Considerations and the Benefit Theory . . . 333 III. Social Considerations and the Faculty Theory . . . 338 IV. Conflicts between Tax Jurisdictions .... 342 CHAPTER XI Separation of State and Local Revenues I. Present Difficulties II. Meaning and Advantages of Separation III. Objections to Separation IV. History of Separation V. The Outcome CHAPTER XII 347 350 357 368 372 The Relations op State and Federal Finance I. The Principles of Efficiency and Suitability . . . 378 II. The Principle of Adequacy ...... 383 III. The Apportionment of Federal Revenues . . . 386 CHAPTER XIII The Importance of Precision in Assessments I. Democracy and Administration ..... 390 II. American Conditions 393 CHAPTER XlV The Classification of Public Revenues I. The Primary Classification .... . 400 II. Police Power versiis Taxing Power . 402 III. Fees . 406 IV. Special Assessments . 413 V. Prices . . ... . 421 VI. Conclusions . . . ■ 430 CHAPTER XV The Betterment Tax I. The Origin . . . . . 433 II. Betterment and Taxation .... 436 III. The Principle . 444 X CONTENTS CHAPTER XVI Recent Reforms in Taxation. I. The Reforms of 1893-1895 page I. England 452 II. New Zealand • . 459 III. Holland 466 IV. Prussia 473 CHAPTER XVII Recent Reforms in Taxation. II. The Reforms of 1909-1910 I. Great Britain 482 II. The Land Taxes 488 III. Germany . 496 IV. The Tax on Unearned Increment . ... 505 V. Australasia 516 VI. The Exemption of Improvements ... . 522 VII. The Income Tax and the Relation of State to Federal Finance 531 VIII. Conclusion 538 CHAPTER XVIII Recent Literature in Taxation I. Germany 543 II. France 553 III. Italy, Holland and Spain 561 IV. Switzerland 568 V. England 572 VI. United States 580 CHAPTER XIX American Reports on Taxation. I. 1870-1900 I. New York and Massachusetts . II. Illinois and Maryland III. Maine and Pennsylvania . IV. New York and Ohio V. Massachusetts and Pennsylvania VI. Wisconsin and New York CHAPTER XX 596 598 600 604 609 615 American Reports on Taxation. II. 1901-1907 I. Municipal Commissions . ... 622 II. Special State Commissions . . . 627 III Permanent Tax Commissions ... . . 042 CONTENTS xi CHAPTER XXI American Reports on Taxation. III. 1908-1911 page I. Municipal Commissions 648 II. Special State Commissions 651 III. Permanent Tax Commissions 665 IV. Conclusion . ....... 674 Bibliography of Reports of Special Commissions .... 676 ESSAYS IN TAXATION CHAPTER I THE DEVELOPMENT OF TAXATION To the citizen of the modem state, taxation, however dis- agreeable it may be, seems natural. It is difficult to realize that it is essentially a recent growth and that it marks a com- paratively late stage in the development of public revenue; it is more difficult to realize that each age has its own sys- tem of public revenue, and that the taxes of to-day are different from those of former times; it is still more difficult to perceive that our ideals of justice in taxation change with the alteration in social conditions. Not only the actual forms of taxation, but the theories of taxation as well, vary with the economic basis of society. Fiscal conditions are always an outcome of economic relations. This is true even where the direct influence of political causes is traceable, for political changes are in the last resort dependent on economic changes. Finance and economics are inextricably intertwined. Like all the facts of social life, taxation itself is only an historical category. I. Voluntary and Compulsory Payments At the begiiming of history there is no such thing as a state. Whether we accept Hobbes' theory of the helium omnium con- tra omnes, or the more modem clan theory of the origin of society, there is no public household, because there are no recognized public needs. But even in the original man there are pos- sibilities of social development. Man, as Aristotle tells us, is a social and political animal. Centuries of hard experience strengthen the social instinct and contribute to form primitive society, until finally a real political life emerges. Gradually from either physical, ethical or religious causes a leader evolves. The oldest or the wisest or the bravest — at all events, the one possessed of some peculiar character- 1 2 ESSAYS IN TAXATION istic — ^becomes the leader of the horde, the clan or the tribe. He acts as the great priest, great judge or great warrior, often combining all three quahties. There are no financial needs, because the only consideration is that of defence; and every man contributes to the defence in his own person. The leader himself subsists on the booty of war. But with the growth of society and the expansion of the clan into the larger commimity, the public needs develop. Administration begins. Roads, bridges and fortifications are constructed, and the prince or king must now not only maintain order, but must be assured of a revenue to support his house- hold and to distribute favors to his retinue. All his followers, being roughly equal, now support him by gifts, whether of labor or of property. In all primitive societies voluntary offerings constitute the first form of common contributions, and every man feels the necessity of upholding the political and military organization by his own personal efforts. The king's needs now increase. They are chiefly personal needs, except in so far as expenditures are made for the pur- poses of internal peace and external defence. But in order to ensure his position, the king endeavors to secure his revenues elsewhere. He develops the subsidies and tributes of the allied and conquered nations, and amasses treasure filched from abroad. Part of this he distributes among his followers; part he retains to increase his own possessions. The private property of the king differentiates itself from the public property, which was originally common to all. The monarch now increases his revenues and domains through the acquisition of lucrative prerogatives of all kinds. Certain activities come to be looked upon as within his peculiar province. The king's peace must be kept — any infraction must be paid for in fines and penalties; not only crimes, but torts, have their pubhc side. Nobody can harm an individual without breaking the king's peace, and having to pay for it. Commerce begins, and weights and measures and money are needed. The royal rights of coinage arise; and as the kingship becomes stronger, the rights of escheat, of wreck, of confiscation develop, until finally the various royal prerogatives bring in a substantial revenue. Voluntary payments have in the meantime ceased. As society advances, what was at the outset freely given comes to be paid by the individual from a sense of moral obligation. But with the weakness of human nature, in the face of a diver- THE DEVELOPMENT OF TAXATION 3 sity of interests, even the feeling of duty soon fails to produce an adequate revenue. The moral obligation slowly becomes a legal obligation, keeping pace with the crystallization of social usage and custom into primitive law; the voluntary offerings become compulsory contributions. But the compulsory con- tributions are still largely personal services, connected with the common security. Such was the early mediaeval trinoda necessitas, the liability to military service, to watch and ward, and to the repair of the bridges and fortifications. The first forced contribution of the individual to the maintenance of the common welfare is always seen in this rude attempt to assess every one according to his ability to bear the common burden — his faculty. This faculty consists in the enforced participation in the administration. But there is not yet any idea of taxation of property. The contribution is personal, and is limited to a few well-defined objects. The individual's faculty is found in his person, not in his property, because there is practically no private property. And the contributions are, for the most part, not regular, but spasmodic. As civilization gradually advances, private property develops, and the primitive equaUty slowly disappears. The interchange of commodities takes place on a larger scale. The old revenues are no longer adequate, and it becomes necessary for the mon- arch tp supplement them by broadening the field of these compulsory contributions of service. In other words, the need of taxation arises. But a direct tax is still out of the question. Public opinion will not yet admit its necessity. The taxation of property is scarcely less impossible than the taxation of the person. It is regarded as a badge of disgrace for the freeman — a nota captivitatis, as the Romans at first called it — ^because only conqilered enemies have to pay this arbitrary impost. The king, therefore, must endeavor to effect his object cov- ertly. He must go to work in a roundabout way, and hide the tax in a variety of disguises. He either gradually extends his lucrative prerogatives, or alleges that the charges are sim- ple returns for governmental services. He grants protection or privileges to individuals, and requires some payment in return. Thus begins the period of fees and charges, which the individuals are willing to pay and which gradually reconcile the public to the idea of governmental charges. Before long, however, the monarch feels able to throw off all disguises, and limits the amount of his exactions only by the de- 4 ESSAYS IN TAXATION gree of his rapacity. Thus the fees and tolls change into taxes on exchange and transportation; thus the. people become ac- customed to the "customs"; thus the "evil duties "and the ex- cises grow apace; thus the payments become veritable "imposi- tions." In other words, the community enters upon the stage of indirect taxation. This explains why it is so difficult for the idea of direct tax- ation to force its way into popular favor. The earliest mani- festations of the taxing power are generally merciless and bru- tal. They are apt to react on the public consciousness and to stunt the growth of any feeling of obligation. It is not un- til public morality has so far developed as to introduce more lenient and more refined processes of indirect taxation that we discover a growing willingness on the part of the individual to pay direct taxes. Another reason for the later appearance of direct taxation is that the indirect taxes are often paid with- out the contributors being really conscious of it. They are jealous of their own and not public-spirited. They are willing to give only that the loss of which they do not feel. But what- ever be the reason, it is clear that when this final stage — ^pos- sible only after centuries of laborious and continued exertion — has been reached, we enter upon a new phase in the history of finance. The readiness to share in the public burdens out of one's property presupposes a far higher social ethics and a far more complex society than was possible in the simple condi- tions when every one was willing to take part in the defence of the village or the repair of the roads. Interests have now be- come specialized. It needs a far greater sense of civic obliga- tion to submit cheerfully to direct property taxation than was necessary in primitive times for the putting forth of mere per- sonal exertions. Even to-day the full import of this obligation is only inadequately grasped. Until within a few years it was deemed necessary to base the theoretical justification of tax- ation on fanciful doctrines of contract, of protection and the Hke. And even at the present time, those who cheerfully seek to contribute their share to the common burden form the ex- ception, not the rule. But even the imperfect recognition of this duty implies a highly developed pohtical consciousness. The method of taxing every one according to his property is the first rough attempt of a property-owning community (as over against a primitive community) to assess each member according to his relative ability. The introduction of the direct THE DEVELOPMENT OF TAXATION 5 property tax is a vast step forward in the development of social ethics. This historical process is well illustrated by etymology. If we look at the various terms applied to what we to-day call a tax, we shall find every shade of the development reflected not only in the words used in former centuries, but in those still employed to-day. There are no less than seven different stages in this etymological growth. The original idea was that of gift. The individual made a present to the government. We see this in the mediaeval Latin term donum and in the English benevolence, which was used far into the middle ages. The second stage was reached when the government himably implored or prayed the people for support. This is the meaning of the Latin precarium, used for many cen- turies on the continent, as well as of the German Bede (from beten, to pray). The Landbede was the term applied to the land tax in the German states until quite recently. With the third stage we come to the idea of assistance to the state. The in- dividual felt that, if not making a gift, he was at least doing the government a favor. This idea is expressed in the Latin ad- jutorium, the English aid and the French aide, which was at one time used for all kinds of taxes. The same idea is discernible in the English subsidy and contribution. It has survived in the German term for a tax, Steuer {steuern, to help), and in the Scandinavian hjelp. In France contribution is even to-day com- monly used as synonymous with tax. The fourth stage of development brings out the idea of sacri- fice by the individual in the interest of the state. He now sur- renders something for the public good. This is seen in the old French gabelle, in the modern German Abgabe, and in the familiar Italian dazio. In each case the citizen gives or sacrifices something. With the fifth stage the feeling of obligation devel- ops in the taxpayer. The EngUsh duty was not originally restricted to its present narrow meaning in the United States. Here it is usually applied to import taxes and sometimes to the internal revenue taxes. But even to-day in England the term includes some of the most important so-called direct taxes, like the inheritance tax and the income tax. It is not until the sixth stage is reached that we meet the idea of compulsion on the part of the state. We see this in our impost or imposition, as well as in the French impot and the Italian imposta. Although we limit the term to a certain kind of tax, the French use it 6 ESSAYS IN TAXATION as the generic epithet par excellence. The same idea is seen in the German Auflage (something "laid on") and Aufschlag (something "clapped on"), frequently used at present for cer- tain indirect charges on commodities. With the seventh and final stage we reach the idea of a rate or assessment, fixed or estimated by the goveriunent without any reference to the volition of the taxpayer. We see this in the mediaeval EngUsh scot (to be "at scot and lot"), which is nothing but the German Schoss or the Scandinavian skatt. It is seen in the German Schdtzung (or estimate), which was used until about a century ago. Above all, it is recognized in our tax {taxare, to fix, to estimate), the French taxe, the Italian tassa and the English rate. It is worthy of note that in the mid- dle ages "tax" always meant a direct tax, for which a regular assessment list or schedule was made. II. Direct versus Indirect Taxation With the introduction of direct taxation, the progressive in- crease of public revenues becomes far easier. This is fortunate, for with the advance of civilization the public expenditures grow apace. For a long time, as we have seen, almost the only aims of government are security and defence. But as economic conditions develop and various classes of society differentiate, more attention must be paid to matters of general welfare. Expenditures for commerce, industry and transportation arise. The need is felt for better roads, for more canals, for improved methods of communication through the postal service. Then the less material ends of government are recognized. Education must be provided, hospitals and asylums must be erected, and the sanitary conditions must be looked after. Finally comes the immense growth of the modern state, with its new fimc- tions due partly to the industrial revolution, partly to the growth of democracy, partly to the recognition in legislation of the preventive as against the repressive principle. These new functions mean fresh expenditures; and these expenditures mean increased taxes. Thus the characteristic mark of the modem age is taxation as against the more or less self-sufficing public economy of former times. Direct taxation, as we have seen, generally forms the last step in the historical development of public revenues. At first regarded entirely as an extraordinary means of support, it gradually assumes the character of an ordinary form of THE DEVELOPMENT OF TAXATION 7 revenue. In the early days of classic antiquity the direct tax was used only in very exceptional exigencies and was, in fact, regarded as a compulsory loan, to be repaid in the future. It was not until after the establishment of the Roman Empire, for instance, that the regular direct taxation of Roman citizens began. And the same process may be observed throughout the history of many mediaeval states down to the most recent period of European and American history. In some cases, however, this historical process assimies a slightly different form. It depends entirely on the economic conditions and on the relative importance of the various social classes. For instance, it is incontrovertible that certain kinds of indirect payments always come first, as has been explained above. But when the people understand that indirect charges on commodities increase their price and thus form veritable taxes, it sometimes happens that more opposition is shown to indirect than to direct taxation. In such cases direct taxes furnish the ordinary revenue, and it is only after a severe struggle that indirect taxes are introduced. This process can be clearly traced in the history of mediaeval and modem revenue. In democratic communities, where the legislation is influenced by the mass of the people, we commonly discern a tendency to oppose indirect taxes on consimiption. In the early mediaeval towns the democratic instincts were strong, because of the more equal distribution of property. We accordingly find that the revenue system was based largely on direct payments, and that the populace rebelled against indirect imposts. But on the continent, where aristocratic influences gradually became powerful enough to break down the communal liberty and democracy, the mass of the people were ground down by taxes on the necessaries of life, while the wealthier or governing classes practically escaped. When the democratic upheaval took place, as in the Italian towns, we find an attempt to reintroduce the old order of things and to reach the wealthy by a system of direct taxes. But with the downfall of the mediaeval democracy, the property and income taxes disappeared, while the octroi and municipal indirect taxes again came to the front. Only in England, where the democratic instincts maintained themselves somewhat more strongly, and where the power of the aristocracy was held in check by a strong monarchy, do we find continued opposition to the general excises and to local taxes on the necessaries of life. It was with 8 ESSAYS IN TAXATION the greatest difficulty that the excise system was introduced. And the same feehng was awakened under similar conditions on the other side of the Atlantic, when Hamilton initiated his system of indirect taxation or internal revenue in the federal fiscal system of the United States. "The time will come," said one of the members of Congress in 1790, "when the poor man will not be able to wash his shirt without paying a tax." With the advent of the modern democratic state, we notice the same tendency. Indirect taxes, says Lassalle, are taxes on labor. Hence the efforts of modem democracy in England, in Switzerland and in America to confine indirect taxes on consumption and exchange within the narrowest limits. On the other hand, there is a counter-tendency which has frequently been overlooked. Curious as it may seem, indirect taxes were advocated in the later middle ages as the means of introducing not inequality, but equality, of taxation. This was owing to the fact that the privileged classes on the con- tinent had succeeded in securing virtual immunity from taxa- tion. The nobles were largely exempted from the land tax, while the clergy and the wealthier citizens in general were able to a large degree to purchase freedom from the tax burdens. What was more natural than that the statesmen and tax re- formers should attempt to make them pay something through taxes on their expenditure, which they could not well escape? Their plan, it is true, no longer took the shape simply of taxes on the necessaries of life; it was now expanded into the single tax on all expense which would reach the rich as well as the poor. This was the idea of Colbert; and it has been the idea from the time of Hobbes and Petty of all enthusiasts for indirect taxa- tion in England, and of many writers in Germany, in France and in Italy. To-day we are clamoring for the abolition of in- direct taxation; formerly the reformers clamored for a single universal indirect tax. The explanation, as we see, is simple. But this does not yet answer the question why excise taxes were actually introduced into England, as elsewhere, in the seventeenth century. The fact is that tax reformers cannot do much good if economic conditions are not ripe for their pro- posals. It must be confessed that according to the experience of history most reforms, in finance at least, are due to selfish reasons; they are the necessary outcome of changes in economic relations and of the efforts of each class, whether it be the small or the large class, to gain some advantage for itself. The classic THE DEVELOPMENT OF TAXATION 9 home of the excise tax or indirect tax on business and trade is Holland. It is well known that Holland, during the sixteenth and seventeenth centuries, had become the leading financial and trading nation of Europe. In the other countries wealth was still centered in the landed interests, and the whole system of taxation was largely dominated by feudal aristocratic ideas. The direct taxes were land taxes, because wealth consisted chiefly of land; but the landed proprietors sought to escape the burden by assessing real property as low as possible and by put- ting taxes on the necessaries of hfe of the poorer classes. In Holland, on the other hand, wealth was now largely centered in the moneyed interest. The great traders and merchants did not relish any direct taxation of trading capital, and therefore devised a system of indirect taxation of business which would, as they thought and hoped, be shifted to the community in general, and to the poorer classes in particular. Thus developed the stamp taxes, the excise taxes, and the whole host of indirect taxes for which Holland was noted. The seventeenth century marks the rise of the trading class in England; "the glorious revolution" was a revolution not so much of the people as of what the Socialists love to call the "bourgeois." Puritanism and commercialism went hand in hand,i and the downfall of the Stuarts not only put an end to feudalism, but weakened the fiscal ascendency of the land- owner — an ascendency to which another serious blow was given by the abolition of the Corn Laws, and whose final overthrow in England, as elsewhere, is fast approaching. The indirect taxes of the seventeenth century were thus the outgrowth of the effort on the part of the commercial classes to escape the burdens which the landowners were desirous of placing on them. The selfish designs of the capitalists and the unselfish ideas of the tax reformers went hand in hand to widen the scope of indirect taxes. And as the trading class developed in the other coun- tries, the system of excise spread with it.^ It was not until the 1 This aspect of Puritanism has more recently been studied in detail by Professor Max Weber in a series of suggestive articles " Die protestantische Ethik und der ' Geist ' des Kapitalismus " in the Archiv fur Sodalmssen- schaft und Sozial-politik, vols, xx and xxi (1905). 2 A word may be said, in passing, about our present attitude toward indi- rect taxes. There is a prodigious amount of cant on this topic. Many thinkers are apt to make common cause with the socialists and the single- taxers in demanding the complete abolition of the so-called indirect taxes. This is a mistake. There is nothing inherently bad about an indirect tax, 10 ESSAYS IN TAXATION democratic movement of the nineteenth century, when the sys- tem of excises was recognized as a burden on the poorer classes, that the number of commodities subject to excise was gradually reduced. III. The Forms of Direct Taxation "We have seen the economic relations which condition the interworking of direct and indirect taxation. Let us now en- deavor to learn how these economic conditions affect the growth of direct taxation itself. In primitive society, there is a certain rough equality in the personal status and the personal abilities of the individual. Hence the idea of the poll or capitation tax, which is the j&rst rude manifestation of the equities of taxation. The members of a club to-day pay equal dues, because their interests are supposed to be equal. Club life does not cover the whole of human activity, but only a very small portion of it. So, in the same way, as long as economic conditions are primitive, the social obligations of the members of the clan or the state are conceived to be equal. But as the social conscience develops, more stress is laid on other elements of ability to pay than on mere number. Not only do men differ in strength, in mental vigor and in opportimities, but inequality of possessions grows greater. And with differences in property, the old feeling of equal obligation weakens. The poll tax becomes unjust and is gradually abolished. A certain phase of this primitive feeling sometimes persists for a long time, especially in democracies where political equality is still based on the fictioru of economic equality. We find poll taxes as adjuncts to other taxes long after the justification of a single poll tax has disappeared. But it has now assumed a political significance, as in Switzerland, and in some of the American commonwealths, where its pay- ment is made a condition of the suffrage. Even this tends to become a farce to the extent that the payment of the tax is nor is there anything inherently good about a direct tax. It depends en- tirely upon what kind of direct or indirect tax it is. A direct tax on the laborer is not necessarily good because it is direct; an indirect tax on the luxury of the rich is not necessarily bad because it is indirect. It happens, indeed, that most of the indirect taxes of the past have been devised by the powerful in order that their burden might fall on the weak; but it is by no means impossible to frame a system of taxes on consumption which will supplement other taxes and do substantial justice to all. The elaboration of this point must be reserved for another place. THE DEVELOPMENT OF TAXATION 11 assumed by the political parties. The economic basis of the poll tax has entirely vanished and it tends to be replaced by the property tax. The first property taxes are entirely in harmony with the facts of early industrial life. It is a matter of common knowl- edge that the early period of almost every civilization is marked by two chief facts, the preponderance of agriculture and the existence of slavery. As Rodbertus has pointed out/ this leads to a fundamental distinction between ancient and modem economic theories. In modern civilization we have not only a quantitative division in wealth, but also a qualitative difference. That is, not only are there rich and poor, but there are landowners, capitalists, employers and laborers. In early civ- ilization there was a quantitative but no qualitative distinction in wealth. Property consisted chiefly of land and the land- owner's household, including slaves and beasts of burden. There was no important capital — or at all events, no industrial capi- tal — ^apart from this landed property, and hence there were no distinct shares in distribution. But Rodbertus errs in predicating of Greece in general and designating by the Greek name an economic system which is characteristic of all early civihzations. It was as true of the slave-holding states in the American Union, and of the mediseval manorial system, as it was of the early Hellenic civilization. Wherever we find only agriculture and slavery, there we have this inseparable mass of collective property, not yet split up into its constituent parts. The importance of this for finance lies here: since we have only this general collective property, and since this property consists practically of land and the means to till the land, the direct property tax must take the shape either of the land tax or of the tax on the cattle or slaves or implements used in agriculture. These are practically tantamoimt to each other. For the produce of two given portions of land will vary about in proportion to the value of the land, together with the amount of slaves and cattle necessary to till it. Everjrwhere at first, therefore, the direct property tax is found to be either the land tax or the tax on agricultural capital.^ It is the only practi- ' "Untersucliungen auf dem Gebiete der Nationalokonomie des klas- sischen Alterthums," in Hildebrand's Jahrhucher fiir Nationalokonomie und Statisiik, iv., p. 343 et seq. 2 In some of the early mediaeval tax systems, these were specifically termed cattle and land taxes. So the Vieh-und Klauensteuer in Germany. 12 ESSAYS IN TAXATION cable and the only just form of taxation at this early period. It is, however, important to notice that the property which is now taxed is not so much property in land as property in the produce of land. Whether we have the primitive village com- munity or only the system of common cultivation, the earliest private property consists of the produce of the soil. The first attempt, therefore, to take account of the gradations in the tax-paying ability of the individual is seen in the tax on gross produce — ^the tithe or any other portion of the produce, or on mere quantity of the land irrespective of value. Since land itself is not private property, since land is not bought or sold, the faculty of the taxpayer can be measured not by the value of the land, but by the value of its produce, which is in some proportion to the quantity of the land. Moreover, in early agriculture, where tilling is extensive and where expenses of cultivation vary but little, the tax on gross produce is a fairly accurate test of ability to pay. With the advance in population and the necessity of more intensive agricultural methods, owing to the decay of the primi- tive communal system and the growth of private property in land, it becomes possible to measure the productivity of land in terms of property. Thus the land taxes of this newer stage of culture are property taxes, even though the value of the property is fixed sometimes according to selling value, some- times according to arbitrary estimates of quality. But where the survivals of primitive conditions are strong, the value is still measured in terms of yield or produce, either actual or computed. In the early middle ages, for instance, land taxes were not based directly on the selling value, because, although land was private property, it was not bought or sold. The lands had rental value, but no selling value, and the tax was assessed not so much on the market value as on the produce of land. When the American colonies were founded, private property in land was well established and the land taxes there very soon became property taxes, although we not infrequently find examples of the taxation of gross produce rather than of property.^ With the progress of cultivation and the advance in population, the tax on gross produce is supplanted by the property tax on market value. ' For details see the article on " Income Taxes in the American Colonies," Political Science Quarterly, vol. x. (1895), pp. 233, 234. This is reprinted in Seligman, The Income Tax, 1911, part ii, chap. i. THE DEVELOPMENT OF TAXATION 13 But now comes a change in the forms of economic life — a change that inevitably produces an effect on the public con- science and on the accepted ideas of justice. In the first place, with increasuig prosperity we find a gradual increase in the simpler kinds of personal property. The landowner's family gradually accumulates money, clothing, and luxuries. If the general property, tax is still to continue a fair evidence of in- dividual ability to pay, personal property must be taken up into the assessment lists. And this, in fact, everywhere occurs. Not only the real estate, but also the growing personal estate, is now regarded. At first this personalty will consist of tangible, visible objects not easily concealed, and constituting a fair index of the citizen's prosperity. The existence of this scanty stock of personalty will, however, still be in harmony with the early economic system. It is still the landowner who owns the personal property, and it is fitting that there should still be only the general property tax. The economic system has not yet materially altered. The next change, however, inaugurates a widely different stage. The primitive family group or manorial system decays. Slavery is gradually broken down by manumission or abolition. The commercial instinct grows stronger, and trade is no longer limited to the interchange of superfluities between adjacent households. What Aristotle decries as the gainful pursuits become common occupations. Capital develops and free laborers appear. The original undifferentiated mass of property splits up into separate parts. The landlord is no longer the property lord. Personal property, in the shape both of pro- ductive capital and of unproductive wealth, increases at a con- tinually accelerating ratio. Finally, as in our modern indus- trial system, the movables outrank the immovables. Realty is completely overshadowed by personalty, in both extent and influence. Now begins the contest between the landed and the moneyed interest, between rent and profit. The landowners in medi- aeval times, like the farmers in our own time, vainly attempt to expand the original property tax so as to include all these new forms of property. The capitaUst and moneyed class either seek to shift the burden by devising the indirect tax of which we have spoken above, or they attempt to escape the burden entirely through evasion or through lax administration of the property tax. Where the differences in wealth become striking 14 ESSAYS IN TAXATION and the lower classes are politically powerless, the landed propri- etors and the traders combine to throw the burden on the agricultural laborers and the urban artisans, although they may still struggle between themselves as to the division of the remainder of the burden. Where aristocratic conditions prevail less strongly, as in America up to the present time, the laborer fares better, but the contest between the farmer and the city resident assumes a more acute form. The history of modem taxation is largely the history of these class antagonisms. IV. Changes in the Basis of Taxation In the meantime the test or standard of individual ability has itself undergone a change. With the growing differentiation of society, the productive powers of the various classes them- selves differ. Moreover, there are now many forms of earnings which are derived not from property, but from industry. And since it is difficult to capitalize industry, it is the product of the industry which now becomes of importance. But there is a decided difference between this new system of taxes on product, and the original system which preceded the first property tax. In the original system the tax was on gross produce or on mere quantity of land. The land tax was either the tithe or some definite part of the estimated produce. Now the tax is on net produce. Allowance is made for expenses of cultivation. Two pieces of land may yield the same amount, and yet the outlay in the one case may have been considerably more than the other. To take net, instead of gross, product marks another step for- ward in the evolution of the idea of ability to pay. In a state of complete mobility of capital and labor, it perhaps makes no difference whether we take the market value or the net product of a piece of property; for the selling price of property tends to equal the capitalized value of the revenue derived therefrom. But in actual life, where we often find limitations to this absolute mobility, there may be a divergence between the capitalized value of the produce and the actual value of the property. Thus we find almost everyTvhere a movement to replace the property tax by a system of taxes on net product — on the product of land, of capital, of business, of labor, etc. This was the stage reached in Europe toward the end of the eighteenth and the beginning of the nineteenth century. Relatively good as this system was, it was soon seen not to be entirely satisfactory. It failed to respond to modern eco- THE DEVELOPMENT OF TAXATION 15 nomic conditions. It looked art the produce of the source of industry, rather than at the recipient of the earnings; it was a tax on things, rather than on persons; it abstracted from the personal situation of the taxpayer; it made no allowance for indebtedness. Just as the tax on gross produce was defective because it paid no attention to expenses of cultivation, so the tax on net produce, while in itself an improvement, was never- theless faulty because it paid no attention to what may be called the personal expenses of cultivation, i.e. the interest on indebtedness. Thus it is that in recent decades the tendency has arisen to substitute personal taxes for the older real taxes, and to assess the individual rather than the thing; or, stating it in simpler language, to put revenue or income in the place of proceeds or earnings as the test of taxation. Just as a man's ability to support himself or his family is seen in his income or revenue, so, in the same way, it is recognized that the test of a man's ability to support the state is to be found in this same income or revenue. From the modem point of view, it is the duty of the citizen to support the government according to his capacity to support himself. Income or revenue may not, indeed, be an ideal test; ^ for there is no absolute test which can exactly gauge all the varjdng personal circumstances of each individual. But it is the best workable test that governments can secure, and it is in harmony with the test imposed on the individual by the force of social opinion in regard to his duty to his own family. For this reason modern states are everywhere changing their revenue systems, so that the taxes shall correspond, as nearly as possible, to the revenues of the citizens. But pre- cisely because the income tax is a personal rather than an im- personal tax or a tax on things; it involves administrative difficul- ties and presupposes an advanced stage of social morality and political probity. Where this stage has not yet been reached, it may be better to continue the system of taxes on product which form a very rough approximation to the revenue of the tax- payer, than to attempt a system of income taxes which strive to reach'the revenue more closely. Furthermore, as we shall see in a subsequent chapter, there are certain considerations which militate against the exclusive adoption of individual faculty as the all-controlling norm of taxation. But whatever may be the ' For some of the difficulties connected with the theory of the income tax see Seligman, The Income Tax, 1911, Introduction, § 4, et seq. 16 ESSAYS IN TAXATION momentary demand of expediency, or the influence of counter- vailing considerations, the line of development is evident, and the ultimate result must necessarily harmonize with the facts of economic and social relations. Let us test the theory of development as laid down in the above pages by a reference to the history of taxation in America. It is well known that the primitive revenues of the colonies were composed largely of voluntary payments, of subsidies or allow- ances from abroad, of quit-rents, and of occasional fees and fines of early justice. But it has usually been overlooked that when the voluntary offerings turned into compulsory contribu- tions, the tax systems in the various colonies were quite different. The New England colonies were democratic communities where almost every one owned some land, and where the dis- tribution of property was fairly equal. We therefore find as a characteristic mark of New England, in addition to the primi- tive poll tax, the tax on the gross produce of land either actual or computed according to the quantity or quality of the land. This slowly grew into a real property tax, which soon expanded into what was nominally a general property tax. And this itself was supplemented by a tax on town artisans and others who subsisted on the produce not of their property, but of their exertions. To the property tax was now added the "faculty " tax.^ In the Southern colonies, which were aristocratic in their economic substratum, the land tax played an insignificant r61e, because the large landowners naturally objected to bearing the burdens. After the introduction of slavery it became difficult to retain even the poll tax, which when laid on slaves is practically a property tax on the slave owner. Hence we see a system of indirect taxes, mainly on exports and imports, falling with special weight on the poorer consumers. Finally, in the middle colonies, above all in New Netherlands, the conditions were neither democratic nor aristocratic. There was no such approach to equal distribution of wealth as in New England, and no such preponderance of the landed interest as in Virginia. We find the dominance of the moneyed interest or of the trading classes, who brought with them Dutch instincts and Dutch methods. Accordingly, there was no system of poll and property taxes as in New England, and no system of in- 1 For details as to the American " faculty " taxes, see Seligman, The In- come Tax, 1911, pp. 367 et seq. THE DEVELOPMENT OF TAXATION 17 direct taxes on exports and imports as in Virginia. The funda- mental characteristic of this system was the introduction of the excise system or indirect taxation of trade, which was borrowed from Holland, just as we find the excise system introduced from Holland into England and the other European countries during the seventeenth century. Each section, therefore, had a fiscal system more or less in harmony with its economic conditions. It was not imtil these conditions changed during the eighteenth century that the fiscal systems began somewhat to approach each other; and it was not umtil much later that we find through- out the country a general property tax based not on the produce, but on the market value, of the property. The same divergence of economic conditions explains what is to-day the most marked distinction in the United States between the fiscal systems of the North, the South and the West. In the Southern states up to the civil war, the interests of the large landed proprietors were still dominant. Under the federal constitution, it was impossible for them to levy import or ex- port duties. For a time, therefore, land, as the only source of wealth, had to defray the public charges. In the absence of in- dustrial centres, there was little opportunity for taxation of personal property. As the need of increased revenues was felt, the landed interests attempted to secure this revenue from the few ordinary occupations carried on outside of the farms and estates. In other words, the license or privilege system was established, which levied a fixed charge on well-nigh every occupation. It was not until after the middle of the century that the general property tax was introduced; but even to-day the license or privilege taxes yield a large share of the pubhc revenue. In the Northern states, on the other hand, where the business interests were more powerful, the license or privilege system never attained such a firm foothold. But with the breakdown of the general property tax, the attempt of the general public to secure a taxation of the moneyed interests has taken the form of taxa- tion of corporations and of capital. There are plainly visible the beginnings of a system of taxation of net product. Finally, in the Western states, where the economic conditions are as yet more primitive, there have been only sporadic attempts to alter the general property tax, which there is still to a great ex- tent a tax on real estate. But with the gradual unification of economic conditions, which is slowly taking place throughout 18 ESSAYS IN TAXATION the entire country, we may expect that the systems of taxation will become more nearly uniform, until the results of modern industrial and democratic development will finally appear here, as they are appearing in other parts of the world. The recent attempt to introduce a federal income tax, however defective the measure may have been, is a significant evidence of the trend. That this attempt will ultimately be followed by others, not necessarily precisely similar, but yet indicative of the same general movement, is by no means improbable. From the above survey one fact stands out prominently. Amid the clashing of divergent interests, and the endeavor of each social class to roll off the burden of taxation on some other class, we discern the slow and laborious growth of standards of justice in taxation, and the attempt on the part of the commu- nity as a whole to realize this justice. The history of finance, in other words, shows from one point of view, at least, the evolu- tion of the principle of faculty or ability in taxation — the prin- ciple that each individual should be held to help the state in proportion to his ability to help himself. In the earliest indirect payments there was no idea of equity, but only of force. But with the advance of civilization and social ethics, we reach the first stage of rude equality in the poll tax. Step by step the revenue system advanced to successively higher planes. Ex- penditure, property, product — each of these in turn was con- sidered the test of individual capacity and obligation toward the state; until finally in modern times revenue or income has come to be regarded as the most equitable and the most practica- ble measure of individual and social faculty. To arrange a system of taxation a large part of which at least shall, on the whole, correspond as closely as possible to the net revenues of individuals, and which shall take into account the variations in tax-paying ability, has thus become a demand of modern civilization. But unless this system is in harmony with the external structure and the internal- conditions of modem eco- nomic life, it is foredoomed to failure. If the history of taxation teaches any one lesson, it is that all social and moral advance is the result of a slow process and that while fiscal systems are continually modified by the working out of ethical ideals, these ideals themselves depend for their realization upon the economic forces which are continually transforming the face of human society. CHAPTER II THE GENERAL PROPERTY TAX There is perhaps no single feature of our modem tax system that is commonly thought to be more thoroughly American than the general property tax. The proportional taxation of all property is held to be the result of an instinctive feeling original to and thoroughly ingrained in the minds of the Ameri- can people. And yet it may be said that few institutions have evoked of late more angry protests and more earnest dissatis- faction than this very tax. The reason is plain. As long as prosperity was general and the public expenses were small, taxation was light and its burden was scarcely felt. But during the last few decades, with the complicated demands of modem civilization, public expenditures, both local and national, have increased to such an extent as to exert a sensible pressure on the population. The problems of public revenue have been pushed to the front. The expressions of discontent with various phases of the financial system have become numerous and loud. But for the most part the discussion has been superficial and the conclusions reached have been inadequate. The opponents of the general property tax have confined themselves to a portrayal of its practical shortcomings. No one has hitherto attempted to give the deeper reasons why the property tax is unsuited to the present generation, or to discuss the subject in its wider relations to the science of finance. It is proposed in this chapter to show that the property tax is by no means original to America, but that it has gone through precisely the same evolution in many other places. It is further proposed to prove that the property tax is as destitute of theoret- ical justification as it is defective in its practical application. And it is proposed, finally, in subsequent chapters, to discuss the reforms of our direct taxation — some of them partly com- pleted, some projected, and some hitherto neglected. I. Practical Defects The defects of the general property tax may be treated under five heads. ^ ' In a monograph by the present writer entitled Finance Statistics of the 19 20 ESSAYS IN TAXATION 1. Lack of uniformity, or inequality of assessment. The property tax with us is an apportioned, not a percentage tax. According to the latter method, the tax would be levied on the individual by means of a fixed percentage of all property. According to the actual method, the total amount to be raised by the state is first ascertained and is then apportioned to the various subdivisions according to the appraised valuation in each. The final rate of taxation throughout a state is ob- tained by adding the local tax to the state tax. The rate of taxation ought therefore to vary only with the local needs, and would indeed so vary if property were everywhere assessed xmiformly. As an actual fact, however, this is far from being the case. In most of the commonwealths the tax laws provide for the assessment of property at its "fair cash value." And in all the states it is expected that the valuation shall everywhere be made at a uniform rate. Yet it is a notorious fact that in scarcely any two contiguous counties is the property — even the real estate — appraised in the same manner or at the same rate. In regard to the maimer, it frequently happens that corporation property, e.g. the roadbed of a railway, is assessed in one county at an immense sum per mile and is treated in the adjacent county like a piece of grazing land.^ In regard to the rate, the assessors follow the practice sanctioned by local usage, or decide by mere caprice. The official reports abound with com- American Commonwealths (Publications of the American Statistical Asso- ciation, Dec. 1889) may be found a large number of citations from the com- monwealth financial reports for the preceding year. The reader is referred to that publication for the verification of statements for which no special authority is adduced in these pages. See especially pp. 401— il7. Many facts and figures may also be found in Ely, Taxation in American States and Cities, 1887. See also, for some striking statistics, T. G. Shearman, Taxation of Personal Property, impracticable, unequal and unjust, 1895. For the two decades that have elapsed since this chapter was originally written, facts in abundance testifying to the defects of the general property tax will be found in most of the official state reports on taxation. See chap. XX, below. Cf also the valuable articles and addresses in the (five) Reports of the Conferences of The National Tax Association, 1907-1911 (Columbus, 1908-1912). See especially the "Report of the Committee on Causes of Failure of General Property Tax " in the Fourth Conference, Columbus, 1911, pp. 299-310. At the second conference the name of the organiza- tion was changed to International Tax Association, but at the fifth con- ference the original name was resumed. ' In New York, for example, two adjoining counties made a difference of S24,000 per mile in assessing the same railroad. Other counties varied $20,000 per mile. Report of the State Assessors, 1879, p. 19. THE GENERAL PROPERTY TAX 21 plaints or open confessions that property is assessed all the way from par to one twenty-fifth of the actual value. In one county the property is listed at its full worth; in the next county the assessment does not exceed a tithe of its value. ^ That this is a glaring infraction of the fundamental rule of equality in taxation is apparent. As between counties it leads to under- valuations which give an entirely fallacious view of the public resources; as between individuals it results in gross injustice. A tax rate of a given amount on one may be double, quintuple, or decuple the nominally equivalent tax on another. The first constitutional injunction — that of uniformity of taxation — is flagrantly violated. Assessors are compelled openly to dis- regard their oaths, or to incur certain defeat at the next elec- tion.^ There is no pretence of complying with the law. An escape from these evils has been sought in the creation of boards of equalization. A number of commonwealths ^ have attempted to correct the undervaluation of the county officials by giving a state board power to alter the valuations (or in some cases, as Nebraska, the rates) in the hope of securing uniformity. In a few states, like New York, Ohio, Tennessee, Utah and Wyoming, the power extends only to the equaliza- tion of real estate assessments. In some cases, the board may charge the valuation of classes of property separately, and in still fewer instances, like Connecticut, Indiana, Maine, New Hamp- shire and South Carolina, the assessment of minor districts. But in most cases its function is confined to the equalization of * Biennial Report of the Auditor of Public Accounts of Nebraska, 1886, p. 4. In New York the range is from 100 to 18 per cent. Report of the State Assessors, 1883, p. 3. In Illinois the range is from 100 to 5 per cent. Report of the Revenue Commission of Illinois, 1886, p. ii. 2 Report of the Assessors of New York, 1886, p. 20. The report for 1884, p. 4, speaks of the assessors' open "intent to ignore the law." In one case an assessor objected to a certain declaration, and asserted that it would be necessary to swear the merchant. The latter answered: "If you swear me, I'll vote against you next time." West Virginia Tax Commission, Preliminary Report, 1884, p. 13. ^ State boards of equaHzation are found in Arizona, Cahfornia, Connect- icut, Idaho, Uhnois, Indiana, Iowa, Kansas, Kentucky, Colorado, Maine, Michigan, Minnesota, Missouri, Montana, Nebraska, North Dakota, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Utah, Washing- ton, West Virginia, Wisconsin and Wyoming. Alabama, Arkansas and Oregon have tax commissions with equalizing powers. In some states the boards of equalization have to deal only with the assessment of corporate property. 22 ESSAYS IN TAXATION county assessments, while county boards deal with the assess- ments of local districts, and ordinarily also have power of re- view over the assessments of individuals.^ In several cases, while these may raise, they may not reduce, the aggregate as returned by the local assessors; in other cases their power ex- tends only to real estate; in still other cases they may raise or lower the assessment of separate classes of property as well. The efforts of both state and county boards, however, have been very imperfectly successful. The composition of the boards is such as to render any comprehensive scrutiny of the county returns almost impossible. Even were the boards to be ideally constituted, the local jealousies and bickerings would still con- tinue to prevent any just distribution of the burdens.^ The officials themselves confess that such distribution cannot be secured tmder the present system.' Boards of equalization are thus at best mere makeshifts, — clumsy attempts to accom- plish the impossible. As it has been drastically put: "A people cannot prosper whose officers either work or tell lies. There is not an assessment roll now made out in this state that does not both tell and work lies."* As long as this is true, boards of equalization are of little avail. 2. Lack of universality, or failure to reach personal property. This defect although the most flagrant, perhaps requires the ' County boards of equalization exist in most of the states, even when state boards are unknown. Thus in Delaware, Florida, Maryland, Missis- sippi, Nevada and Texas there are county boards, but no state boards. On the other hand, in Connecticut, Maine, New Hampshire and West Virginia there are state boards but no county boards. Finally in Georgia, Louisiana, Massachusetts, Vermont and Virginia, there are neither state nor county boards. For details see Carl C. Plehn, Revenue Systems of State and Local Government, in the Twelfth Census Report on Wealth, Debt and Taxation, Washington, 1907, p. 629 et seq. In the above statement the facts have been brought down to date [1912]. 2 "The strife between counties to reduce assessments has not ceased and in all probability will not, as long as assessors are elected, or selfishness bo a passion in the human breast." Report of the California State Board of Equalization, 1885 and 1886, p. 4. ' "No board of officials, however diligent or however conversant they may be with the subject, can make an equahzation which to themselves will be absolutely satisfactory." Annual Report of State Assessors of New York, 1887, p. ii. From ocean toocean the same complaint is found. ^ M. I. Townsend, in Proceedings and Debates of the Constitutional Con- vention of New York, 1867-68, iii., p. 1945. Cf. the first Report of the {New York) Commissioners to revise the Laws for the Assessment and Collection of Taxes, 1871, p. 33. THE GENERAL PROPERTY TAX 23 least comment; for it is so patent that it has become a mere byword throughout the land. The escape of personal property is noted almost from the beginning of the existence of the prop- erty tax in the American colonies. Thus in Massachusetts Bay as early as 1651 we find an interesting account of the difficulty experienced in ascertaining certain personalty, followed by a resolution to the effect that "To the end that all publicke charges may beaequally borne, and that some may not be eased and others burdened and it being found by experience that visible estates in land, com, cattle are, according to order, whoUy and f uUy taxed, but the estates of marchants, in the hands of neibours, straungers, or their factors, are not so obvious to view, but, uppon search, little of theire estates doe appeare, beinge of great valew, so that the law doth not reach them by that rule of taxing visible estates, — it is therefore ordered. . . . that all marchants, shop- keep.s and factors shall be assessed by the rule of common estemation. according to the wiU and doome of the assessors. . . . having regard to theire stocke and estate, be it psented to view or not.'- " jl This was evidently not of much use, for we soon after find an admonition to the officials to see " that so many estates, though more obscure and difficult to find out, may bear their due and just pportion with such estates as are more obvious and can- not be hid." ^ What was true in a certain measure at this early date has become still more true of recent years. Personal property no- where bears its just proportion of the burdens; and it is pre- cisely in those localities where its extent and importance are the greatest that its assessment is the least. The taxation of personal property is in inverse ratio to its quantity; the more it increases, the less it pays. The reason is plain. So far as it is intangible, personal property escapes the scrutiny of the most vigilant assessor; so far as it is tangible, it is purposely exempted in its chief form, as stock in trade, in our com- mercial centres. In the mad race for wealth it is considered dangerous for the local assessors in large cities to Ust the mer- chant's capital, with the possible result of drivmg it away to localities more favored by their financial officers. It is scarcely necessary to give figures to substantiate these statements; but ^ Records 0/ the Governor and Company of Massachusetts in New England, edited by N. B. Shurtleff, Boston, 1853, vol. iii., p. 221. 2 Ibid., vol. iii., p. 426. 24 ESSAYS IN TAXATION a few facts, taken from the official documents, national, state and municipal, may be of interest. The tenth census of the United States asserts that from 1860 to 1880 the assessed valuation of real estate increased from 6,973 millions of dollars to 13,036 millions, while that of per- sonal property decreased from 5,111 to 3,866 millions. In 1890 the assessed valuation of real estate had grown to 18,956, while that of personal property was 6,516 millions. Scarcely more than three decades earlier in California personal property was assessed in 1872 at 220 milUons of dollars, in 1880 at 174 millions, and in 1887 at 164 millions, — a net decrease in fifteen years of 56 millions. Real estate increased during the same period from 417 to 791 millions. Personal property paid 17.31 per cent, real estate 82.69 per cent of the taxes. By 1893, although the assessed value of real estate was 1,000 millions, that of personalty was only 173 millions. In Illinois in 1882 personal property paid 22.01 per cent of the taxes, in 1894 only 17.26 per cent. In Cook County (including Chicago), personal property paid only 14 per cent; in Kankakee County, only 11 per cent. In Iowa, while the real estate valuation in 1893 increased over that of the preceding year by 32 million dollars, the assessed valuation of personal property actually decreased. In New York the figures are as follows: Real Estate Pebbonal Propeety 1843 $ 476,999,000 $118,602,000 1859 1,097,564,000 307,349,000 1871 1,599,930,000 452,607,000 1888 3,122,588,000 346,611,000 1893 3,626,645,000 411,413,000 1911 9,639,001,868 482,499,193 1 The proportion paid by personal property has decreased steadily almost every year, until according to the last figures it pays but five per cent of the state taxation, as against ninety- five falling on real estate. In forty years the valuation of real estate has increased 8 billions; that of personalty has in- creased only 30 millions. In the District of Columbia the valuation was in 1878: realty 83 millions, personalty 17 mil- lions; in 1894 realty had increased to 160 millions, personalty had decreased to 11 millions. In New Jersey, in 1887, in one 1 A part of this prodigious difference between real and personal property is due to the placing of considerable personalty like bank stock and mort- gages in special classes. THE GENERAL PROPERTY TAX 25 township the real estate was assessed at $272,232, the personal property at $591; in another the figures were $2,274,900 and $47,150 respectively. Perhaps the most remarkable figures are found in the large cities. In Cincinnati the valuation in 1866 was: realty, $66,454,602; personalty, $67,218,101. In 1892 the realty had increased to $144,208,810; the personalty had de- creased to $44,735,670. In Monroe County, New York, in which the city of Rochester is situated, the realty was assessed in 1892 at $132,202,478; the personalty at $8,408,803. Finally, in the city of Brooklyn in 1893 real estate was assessed at $486,497,186, while personalty was valued at $19,123,170. Personal property, in other words, paid a little more than three per cent of the whole tax on property. In 1895 the proportion fell still lower, — to one and twenty-three hundredths .per cent. These striking figures become ridiculous when it is remem- bered that in our modern civilization the value of personal property far exceeds that of real estate, as understood by the taxing power. It is true that the legal distinction between real and personal property fluctuates iu the various common- wealths; but in the eyes of the assessors real estate generally includes only land and the fixtures thereto, all the other forms of wealth being regarded as personal property. In Massa- chusetts and a few other states it is indeed provided that mortgages of real estate shall be regarded and taxed as interests in real estate. But even if mortgages were counted as real estate, and even if (as is nowhere done) other certificates of ownership in realty were also counted as real estate, it would still remain true that personal property constitutes the greater part of the national wealth. For personal property does not denote merely movable objects. It includes money, public ob- ligations and the vast mass of iatangible property represented by securities of corporations, of which only a small portion are certificates of ownership in realty. Above all, personal property includes the entire and ever-increasing annual prod- ucts of agriculture and iadustry — the gigantic mass of modern wealth devoted mainly to consumption, but existing as the stock in trade of individuals. Even in our western common- wealths, where the communities are still mainly agricultural, it is an acknowledged fact that the personalty exceeds the realty. The auditor of Washington tells us that, if a true valua- tion could be reached, it is "clear and incontestable that the wealth of the territory in personal property, for the purposes 26 ESSAYS IN TAXATION of taxation, would largely predominate over that of real es- tate." ^ And if this is true of the far West, how much greater must be the relative proportion of personalty in the busy marts of the East.^ Yet the more differentiated the industry and the more predominant the personalty, the less does the latter con- tribute; until in the foremost state of the Union realty pays more than nine-tenths and personalty less than one-tenth; while in its second largest city realty in 1893 paid ninety-nine hundredths and personalty only one hundredth of the tax. The later figures are even more striking. The taxation of personal property, therefore, is in inverse ratio to its quantity. The more it increases, the less it pays. The general property tax thus sins against the principle of universality of taxation even more than against the principle of uniformity. In the middle ages whole classes were exempt by express provision of the law; in our time and country whole classes are exempt by the inevitable working of the law. It is the law which is equally at fault in both cases. 3. Incentive to dishonesty. One of the worst features of the general property tax is that any attempt to enforce the taxation of personalty by more rigid methods results in evasion and deception. The property tax necessarily leads to dishonesty, and this for two reasons. In the first place, under our system, whole classes of personalty are exempt from state taxation. The most familiar examples are imported merchandise in the original package; United States bonds, notes, checks and cer- tificates; property in transitu; goods produced in another state sent on commission; deposits in savings banks, etc. The tempta- tion for the taxpayer to convert his property temporarily into these classes is generally irresistible. Not only does the law hold out to individuals inducements to practise fraud, but it sustains them in its commission.^ Secondly, wherever any pre- ' Report of the Territorial Auditor to the Legislative Assembly, 1887, p. 94. Cf. Biennial Report of the Auditor of Iowa, 1881, p. 8, and that of the Comptroller of Idaho, 1887-88, p. 74, to the same effect. 2 Cf. New York State Assessors' Report, 1880, and Comptroller's Report, 1889, p. 33: "I am sure that the actual value of the personal property legally liable to taxation exceeds that of the real estate." ' In People ex rel. Ryan, 88 N. Y. 142, the Court of Appeals held that the assessors were bound by a transaction which the court itself declared to be "a device to escape taxation." In 1892, however, a law was passed in New York requiring applicants for reduction of assessment to make oath that they had not incurred debts for the purpose of avoiding taxation. THE GENERAL PROPERTY TAX 27 tence is made of enforcing the tax on personalty, and especially where the taxpayers are required to fill out under oath detailed blanks covering every item of their property, the inducements to perjury are increased so greatly as to make its practice universal. The honest taxpayer would willingly bear his fair share of the burden; but even he cannot concede his obligation to pay other men's taxes. When an effort is made to introduce still more dras- tic methods by the employment of so-called "tax-inquisitors" or "tax-ferrets," as until recently in Ohio and Iowa, and still in Indiana, Kentucky and Oklahoma, the situation be- comes still worse. The only result of more rigid execution of the law is a more systematic and widespread system of decep- tion. Official documents tells us that "instead of being a tax upon personal property, it has in effect become a tax upon ignorance and honesty. That is to say, its imposition is re- stricted to those who are not informed of the means of evasion, or, knowing the means, are restricted by a nice sense of honor from resorting to them." ^ The tax commission of New Hamp- shire declares that "the mere failure to enforce the tax is of no importance, in itself considered, in comparison with the mischief wrought in the corrupting and demoralizing influences of such legislation." ^ The Illinois commission asserts that the system is "debauching to the conscience and subversive of the pub- lic morals — a school for perjury, promoted by law." ^ The Connecticut commission maintains that the resulting "de- moralization of the public conscience is an evil of the greatest magnitude." * A later New York report states that "it puts a premium on perjury and a penalty on integrity." ^ The Ohio commission tells us that "it results in debauching the moral sense and is a school of perjury, imposing unjust burdens on the man who is scrupulously honest." ® The Cleveland commission of 1895 says that "the existing system is productive of the gravest injustice; under its sanction, grievous wrongs are inflicted upon those least able to bear them; these laws are made the cover and excuse for the grossest oppression and ' Report of the Commissioners of Taxes and Assessments in the City of New York, 1872, p. 9. ^ Report to the Legislature. By Hon. George Y. Sawyer, 1876, p. 16. ' Report of the Revenue Commission, 1886, p. 8. * Report of the Special Commission on Taxation, 1887, p. 27. Cf. the New Jersey Tax Commission Report, 1880, p. 11. ° Report of Counsel to Revise the Tax Laws of New York, 1893, p. 12. ° Report of the Tax Commission of Ohio, 1893, p. 22. 28 ESSAYS IN TAXATION injustice; above all and beyond all, they produce in the com- munity a widespread demorahzation; they induce perjury; they invite concealment. The present system is a school of evasion and dishonesty. The attempt to enforce these laws is utterly idle." ^ The West Virginia commission tells us that "the payment of the tax on personalty is almost as voluntary and is considered pretty much in the same light as donations to the neighborhood church or Sunday-school." ^ The New Jersey commission tells us that "it is now literally true that the only ones who pay honest taxes on personal property are the estates of decedents, widows and orphans, idiots and luna- tics." ^ Every annual report of the state comptrollers and as- sessors complains bitterly that the assessment of personalty is nothing but an incentive to perjury.^ 4. Regressivity. Taxes are progressive when their increase is more than proportional to the increase of the property or in- come taxed, i.e. when the rate itself increases with the increase of the property. Taxes are regressive when the rate increases as the property or income decreases. The general property tax in its practical effects is often regressive, since the tax on per- sonalty is levied virtually only on those who already stand on the assessor's book as liable to the tax on realty. Those who own no real estate are in most cases not taxed at all; those who possess realty bear the taxes for both. The weight of taxation really rests on the farmer, because in the rural districts the as- sessors add the personalty, which is generally visible and tan- gible, to the realty, and impose the tax on both. We hear a great deal about the decline of farming land. But one of its chief causes has been singularly overlooked. It is the over- burdening of the agriculturist by the general property tax. What is practically a real property tax in the remainder of the state becomes a general property tax in the rural regions. The farmer bears not only his share, but also that of the other classes of society. Thus official documents tell us that "the class of property that escapes taxation most is the class of property that 1 Report of the Special Committee on Taxation of the Cleveland Chamber of Commerce, 1895, p. 10. 2 Preliminary Report of the Tax Commission, 1884, p. 10. ^Report of the Commission to investigate the Subject of Taxation in the State of New Jersey. Trenton, 1897, p. 75. ' Cf. Report of California Board of Equalization, 1885-86, p. 6. For simi- lar quotations from the reports of the new state commissioners from 1895 to the present, see infra, chaps, xix, xx. THE GENERAL PROPERTY TAX 29 pays the largest dividends." ^ And in general it may be said, with our state auditors, that "the property of the small owner, as a rule, is valued by a far higher standard than that of his wealthy neighbor." ^ Or, as it is put by others: "In every por- tion of the state we find the most unproductive property, and that of the lowest real value, assessed at the highest ratio. The rule holds good that those who have to battle hardest with life for subsistence, are compelled to pay the most onerous taxes on the real value of their property." ^ It is no wonder that in their desperation the small farmers should cry out for the equal enforcement of the laws taxing personalty; it is no wonder that they should attempt to stem the current in ignorance of the impossibility of the task. They have forgotten Walpole's saying, that it is safer to tax real than personal estate, because "landed gentlemen are like the flocks upon their plains, who suffer themselves to be shorn with- out resistance; whereas the trading part of the nation resemble the boar, who will not suffer a bristle to be pluckt from his back without making the whole parish to echo with his com- plaints." ^ 6. Double taxation. Double taxation, as we shall see later on, is of various kinds. But there is one form which is par- ticularly applicable to the property tax, namely that of debt exemption. This is perhaps the greatest weakness of the gen- eral property tax, and the one which has given rise to the most interminable discussion. On the one hand it is maintained that an offset should be made for all indebtedness, whether mortgage debts on real property or general liabilities on personalty. Individuals should be taxed on what they own, not on what they owe. To tax both bor- rower and lender is double taxation. This is the view of the Connecticut commission,'' and the practice of most of the states accords with it. On the other hand, the majority of American investigators assert that deduction for indebtedness results prac- tically in such injustice and deception as to be utterly unendur- able. They therefore demand that there shall be no offset of 1 Biennial Report of the Auditor of Iowa, 1880-81, p. 6. 2 Biennial Report of the Auditor of Kentucky, 1887, p. iv. ' Report of the State Assessors of New York, 1873, p. 9. Cf. West Vir- ginia Tax Commission, Preliminary Report, 1884, p. 8; Report of the Comp- troller of Tennessee, 1888, p. 16. * Cf. Sinclair, History of the Public Revenue, vol. iii., appendix, p. 79. ° Report of the Commission of 1887, p. 26. 30 ESSAYS IN TAXATION debts against property. This is the view of the Massachusetts and New Jersey commissions, ^ and the practice in some states like Pennsylvania, Georgia, Kentucky, Louisiana, Maryland and Missouri. Both these views are correct. To tax both lender and bor- rower for the same property is plainly double taxation, and therefore unjust. The fallacy of the contrary opinion consists in looking at the property rather than at the owner. What the state desires to reach is primarily the individual. It taxes his property simply because it considers this a test of his ability to pay. But his ability is manifestly reduced pro tanto by his debts. His true taxable property therefore consists in his surplus above indebtedness. Otherwise one would be taxed for what he has, and another for what he has not. As it has been well put, what we want to tax is ability, not liability. This is the view accepted by all European authorities. ^ The only American scientist who holds to the contrary opinion, Amasa Walker, does so in a half-hearted way; for he bases his view on arbitrary data, confesses that much hardship will ensue, and finally concludes that the income-tax principle is the only just one. ^ To tax both property and credits, both lender and borrower, is plainly incorrect in principle and inequitable in practice. On the other hand, it is equally true that deduction for debts is thoroughly pernicious in its operation. It is the universal testimony that no portion of the tax laws offers more tempta- tions to fraud and perjury than this system of offsets. The creation of fictitious debts is a paying investment. In the states where such deductions are permitted, attempts to obtain immunity from taxation in this way are widespread and gen- erally successful. And they are most successful in the case of property which already bears less than its share of the burdens. The great majority of officials cry out against debt-exemption as an utter abomination. * Both methods are thus unendurable. Debt-exemption and no debt-exemption are equally bad. The states shift from one ' MassacJmsetts Commission, 1875, pp. 95-98; New Jersey Commission, 1880, p. 20; Commission of 1891, Preliminary Report, p. 10. 2 Roscher, Finanzwissenschaft, p. 336; Wagner, Finanzwissenschaft, ii., p. 432. ^ A. Walker, Science of Wealth (7th edition), 339. ■• Report of the Commissioners of Assessment and Taxation in Oregon, 1886, p. 9. THE GENERAL PROPERTY TAX 31 policy to the other in equal despair. We are therefore forced to the conclusion that the whole system is unsound. The fault lies not in the exemption, but in the taxation, of property. The general property tax imder either of these two methods produces crying injustice. As there is no third method possible, the in- ference is that the injustice is of the essence of the general property tax. The New York commission, indeed, came to the conclusion that mortgage debts should be deducted from realty, but that there should be no offset for debt in the assess- ment of personalty.^ This would be a legal discrimination wholly subversive of the first principles of justice. As a matter of fact, just the contrary principle prevails at present in New York and Cormecticut; debts are there deductible only from personalty. There is no logical escape from one of the two methods, debt-taxation or debt-exemption; and under either plan the general property tax stands convicted by the test of experience. Under a system, indeed, where there is no general property tax, but simply a tax on real estate, the question of taxing mortgages assumes a different aspect and must be decided in- dependently. As that problem is discussed elsewhere in this volume,^ it may be omitted here. But as soon as we have the general property tax and exempt mortgage debts on real estate, the exemption must consistently be accorded to all debts. And we are then immediately confronted by the di- lemma just discussed. If we sum up all these inherent defects, it will be no ex- aggeration to say that the general property tax in the United States is a dismal failure. No language can be stronger than that found in the reports of the officials charged with the duty of assessing and collecting the tax. Whole pages might be filled with such testimony from the various states. Only the following extracts from the New York reports are given, as samples: " A more unequal, unjust and partial system for taxation could not well be devised.' 1 First Report, 1871, pp. 60-69, 71-79. Cf. the sharp criticism in the Massachusetts Tax Commissioners' Report, 1875, p. 96. ^ Infra, chap. iv. ' First Annual Report of the State Assessors, 1860, p. 12. 32 ESSAYS IN TAXATION The defects of our system are too glaring and operate too oppressively to be longer tolerated.' The burdens are so heavy and the inequalities so gross, as ahnost to paralyze and dishearten the people.'' The absolute inefficiency of the old rickety statutes passed in a bygone generation [is patent to all].' The hope of obtaining satisfactory results from the present broken, shattered, leaky laws is vain.^ The system is a farce, sham, humbug.^ The present result is a travesty upon our taxing system, which aims to be equal and just.^ [The general property tax is] a reproach to the state, an outrage upon the people, a disgrace to the civilization of the nineteenth century, and worthy only of an age of mental and moral darkness and degrada- tion, when the 'only equal rights were those of the equal robber.' "' After such self-criticism nothing more need be said. In comparison with this, the view of the European scientists is moderate, that "a cruder instrumentality of taxation has rarely been devised." * And yet, notwithstanding all this criticism, our methods limp along almost imchanged. II. History of the General Property Tax in Antiquity In the previous chapter we have learned how direct taxation begins, and have seen that the primitive form is the land tax or tax on real estate. We also noticed the process by which the original mass of property is gradually broken up, and per- sonal property slowly assumes a greater importance in the wealth of the commimity. Let us study a little more in detail the subsequent history. The monarch, or public opinion as reflected in the govern- ment, seeks to conform the practice of taxation to this change in economic facts. The property tax continues, but the as- sessor tries to make the tax equable by including not only the realty, but also all these new forms of personalty, whether corporeal or incorporeal. The original land tax is supplemented ' Comptroller's Report, 1859. 'Assessors' Report, 1873, p. 3. ' Assessors' Report, 1877, p. 5. * Report of Commissioners of Taxes and Assessments, 1876, p. 52. ' Assessors' Report, 1879, p. 23. « Comptroller's Report, 1889, p. 34. ' Assessors' Report, 1879, p. 7. ' Leroy-Beaulieu, Science des Finances (5™6d.), iii., p. 498: "Rarement, daas la fiscalit6 moderne, on a invents d'instrument plus grossier." THE GENERAL PROPERTY TAX 33 by other taxes, or expanded into a general property tax. The attempt is intelUgible and even laudable; for it is simply the manifestation of the ideas of equality and universality of tax- ation. Personal property must not escape; ergo, it must be included in the designation of general property and taxed equally with the real property. The attempt is laudable, but it is futile. Personalty will evade the most inquisitorial assessor. Wherever tried, the general property tax again resolves itself into the real prop- erty tax. History shows us that this has always been the case. The more complex the industrial development, the more in- evitably does this process take place and the more surely does the general property tax virtually revert to its primitive form of real property tax. Not alone history, but theory, shows us that this must be so. For the general property tax, as we have seen, originated with and is calculated for an economic system where the only property is the collective, indivisible property, where the landowner and capitalist are one. There is one kind of property, and therefore one kind of property tax. But as soon as property is split up into different parts, as soon as there are various kinds of property, just so soon does the single prop- erty tax become antiquated and useless. It is not only useless, but it is now absolutely iniquitous. For the attempt to include under one head the gains flowing from widely different pur- suits — pursuits whose number and divergence are limited only by the well-nigh boundless variety of individual capacity — , this attempt to reduce the multiform to the uniform can end only in the virtual exemption of the new forms and a con- sequent overburdening of the old. What has been conceived in the spirit of justice develops into an embodiment of injus- tice. What has been in its origin an attempt to attain equality results in gross inequality. Because of the evident impracticability of the general prop- erty tax, governments now begin to iit their theories of tax- ation to the economic facts. They abandon the attempt to make the new facts eonform to the old theories. As various forms of personalty gradually set themselves free from taxation, the state reasserts the principle of equality. But it now recog- nizes the existing facts and abandons the fiction of the general collective property. As property splits up into its various elements, new taxes are laid, one by one, not on the property but on the separate sources of this new wealth. The old land 34 ESSAYS IN TAXATION tax may be retained, but other taxes are imposed in various forms. Taxes on vocations, on professions, on trade, on com- merce, on profits, on interest, on wages and salaries, follow in quick succession, until finally the theories and practice of taxa- tion are in harmony with actual conditions. One by one these various sources of wealth drop off from the antiquated general property tax only to receive a new life in these fresh forms. The feeling of equity in the public consciousness cannot be put down. What escapes under one form it attempts to reach under another. Fiscal theory cannot long lag behind the facts of industrial life. Let us test the truth of these statements by an appeal to history. Let us trace, in other words, the actual development of I5he general property tax.^ In antiquity direct taxation was treated as an extraordinary source of revenue. The Athenian direct tax (etV^o/ja), as levied in the time of Solon (b. c. 596), was nominally a classified property tax, but in reality a land tax.^ With the increase of wealth an attempt was soon made to reach personalty; but its success is entirely conjectural. We simply know that under Nausinicus (b.c. 378) the bases of taxation were not only land and houses, but also slaves, cattle, furniture and money. It has been claimed, however, that the tax had by that time be- come a progressive income tax.' At all events there is no proof that the tax on intangible personal property as such was at all successful. ' The only general attempt thus far made to discuss this subject is that of Parieu, Histoire des impdts g&neraux sur la propriM^ et le revenu (1856). While interesting, it is inexact, inadequate, unclear and antiquated. 2 Boeckh, Public Economy of the Athenians, book iv., chap. 5. J. Beloch, "Des Volksvermogen in Attika," in Hermes, vol. 20 (1885), pp. 245-6 main- tains that it was a tax on produce, and most probably on gross produce. It was paid in kind until 428-7. For details see SeUgman, Progressive Taxa- tion, 2d ed. (1908), pp. 11-12. ' This is claimed by Rodbertus, in Hildebrand's Jahrbiicher, viii., p. 4S3 et seq. For the other view see the complicated interpretation of Boeckh (p. 669 of the American edition). Beloch contends that it was still a prop- erty tax at this time, and that the taxpayers were put into associations or groups (o-u/i/nopiai) for the purpose of a more adequate assessment of personal property. See the article quoted in the last note but one, and also " Das attische Timema," in Hermes, vol. 22 (1887), p. 371. Beloch's views are accepted by Ed. Meyer, Geschichte des Altertums, vol. ii. (1893), p. 408, note, and Kleine Schriften zur Geschichtstheorie und zur wirthschaftlichen und politischen Geschichte des Altertums (1910), p. 180. Cf. also P. Guiraud, Etudes economiques sur I'anliquite, 2d ed. (1905), pp. 77-79; and Francotte, Les finances des cites grecques (1909), p. 26. THE GENERAL PROPERTY TAX 35 _ In Rome the direct tax (tributum civium), which was some- times even treated as a forced loan to be repaid out of the proceeds of conquest, was levied only to meet extraordinary expenses for which the proceeds of domains (the vedigalia) did not suffice. As Rome was at first an agricultural community, the real " quiritarian" property alone recognized by law con- sisted solely of land and the capital afiixed to land, like houses, slaves and cattle. These were the res manci'pi} But the prop- erty tax was assessed only' on the land, on the assumption that every acre of land would require a definite quantity of this productive capital.^ The early Roman property tax was there- fore in effect a tax on realty, analogous to the early ela^opd} With the development ,of trade and industry in the later days of the republic, the character of property underwent a change. The amount of personalty increased. If the tributum was to remain a general property tax, it would be necessary to assess also these new forms of property. And, in truth, the attempt was made. Not only farming implements, but ships, carriages, money, garments, ornaments, etc., were listed.^ But it must be remembered that the only personalty assessed still consisted of visible, tangible objects, although the censors had practically unlimited power to take up any property into the tax-Ust {census). There is no evidence to prove that trading capital proper was at all taxed.^ And it is useless to speculate what might have been the result during the last period of the re- public; for further progress in this direction was checked by the fact that, with one isolated exception, the republic levied no direct property tax at all on the Roman citizens after 167 B.C. Whether the tributum civium was again employed during ' "Mancipi res sunt praedia in Italioo solo, tarn rustica, qualis est fundus, quam urbana, qualis domus; item jura praediorum rusticorum, velut via, iter, actus, aquaeduotus; item servi et quadrupedes, quae dorse coUove do- mantur, velut boves, muli, equi, asini. Ceterae res nee mancipi sunt." Ulpian, 19, 1. Cf. Gaius, i., p. 120; ii., pp. 15-17. 2 Marquardt, Romische Staatsverwaltung (2d edition), ii., p. 166. ' Except that it was not a graduated tax, and was levied on the market value, not the produce. * Matthias, Romische Grundsteuer und Vectigalrecht, 1882, p. 6. The lead- ing ideas of Matthias are translated in Humbert, Essai sur les finances chez les Romains, ii., p. 328 et seg. * The only one who maintains the contrary is Walter, Oeschichte des romischen Rechts (3d edition), i., p. 271. But the passage of Livy to which he refers (vi., 27) does not bear out his assertion. Walter stands quite alone. 36 ESSAYS IN TAXATION the empire is a moot question. The weightier arguments seem to be on the side of those who maintain that it was never again made use of in its old form.^ In the provinces the property tax was nothing but a land tax — either a tax on the value (tributum soli), or a tithe {decuma), or a ground rent {vectigal certum or stipendium). In addition to the land tax proper we find the poll tax (tributum capitis) which, in some of the older provinces where the remains of an enterprising commercial life still existed, probably included a tax on classes or professions or a nominal general property tax.^ The Roman property tax was therefore virtually a tax on land and the little productive capital affixed to land. Person- alty, so far as it was assessed at all, consisted of the meagre tangible objects owned by an agricultural people. The Romans had a general property tax because, as in early Greece, there was only one kind of property — ^the collective property owned by slave-holding landed proprietors. Under the empire industrial society began to differentiate. Caligula (a.d. 37— il) took advantage of this to levy taxes on special classes, above all on carriers, prostitutes and pimps.^ Trading capital, everywhere the first element to separate itself from the collective mass of property, was reached for the first time by Vespasian (69-79) in the curious tax on the private owners of city urinals and closets.* Finally, shortly before Caracalla (211-217) we find a general tax on commercial capital, known henceforth as aurum negotiatorium. But what a singular 1 Rodbertus, Hildebrand's Jahrbucher, iv., pp. 408-427, and Hewegisch, Romische Finanzen, p. 1346, maintain its existence. But Savigny, Ver- mischte Schriften, ii., pp. 151, 185; Husohke, Ueber den Census zur Zeit Christi, pp. 70, 190; Mommsen, Romische Geschichte, ii., p. 387; and Mar- quardt, Romische Slaatsverwaltung, ii., p. 171, take the opposite view. Bureau de la Malle, in his Sconomie politique des Romains, does not touch this point. The decisive quotation is that from Tacitus, Annates, 13, 51, of which Rodbertus' interpretation is strained. The best argument — which has not hitherto been advanced — seems to be this: that if the tributum civile had continued, it would not have been necessary for Diocletian to introduce into Italy the tributum promndale. ' Rodbertus, iv., p. 364, puts it too strongly when he says that it was only a poll tax. See Marquardt, op. cit., ii., p. 195. ' Suetonius, Caligula, 40 : "Ex gerulorum diumis quaestibus pars octava, ex capturis prostituarum quantum quaeque uno concubitu mereret." Cf. Dio Cassius, lix., 28. ■■ Known a.s foricarii. Suetonius, Vespasian, 16, 23. Cf. for other author- ities Walter, Rechtsgeschichte, i., p. 498. THE GENERAL PROPERTY TAX 37 commentary it is on the progress of civilization that the first tax on circulating capital should be on a rather degrading occupa- tion, and the first tax on industry one on prostitutes. ^ Cara- calla, we are told, conferred the privilege of Roman citizenship upon all the inhabitants of the empire in order to extend to them the now numerous direct taxes, especially the succession and manumission taxes.^ The provincial land tax continued; but it went through the same evolution as the civic direct tax and became a general property tax. The industrial development, however, had outrun fiscal theory. It became more and more difficult to reach personalty. More and more barbarous methods were introduced;^ until, as Lactantius tells us in stirring language, torture was applied to the recalcitrant owner.* Under Diocletian the provincial land tax (known henceforth as jugatio or capitatio terrena) was introduced into Italy. But at the time of the Theodosian code and the completion of the late fiscal system, we find, not the general property tax,^ but a vast variety of taxes, uidirect and direct. Chief among the latter were those on the profits of trades, professions and artisans,^ now consolidated into corpora- tions through the petrifaction of industrial relations.^ But the attempt to tax personalty by means of a general property tax was abandoned because the original mass of property had dis- integrated. The primitive system was abolished, and was replaced by methods more or less analogous to those employed in modern Europe. ' Hildebrand's Jahrbiicher, v., p. 315. ^ At least this is the uncharitable construction of the act by Dio Cassius. ' The municipal decurions, for example, were made personally hable for the taxes levied on their municipalities. Service as decurion became com- pulsory and hereditary. Fugitive decurions were brought back, like fugi- tive serfs or military deserters. * De mwte pers. 23: Fora omnia gregibus familiarium referta; unusquis- que cum liberis, cum servis aderat; tormenta ac verbera personabant; filii adversus parentes suspendebantur; fidelissimi quique servi contra dominos vexabantur, uxores adversus maritos. Si omnia defecerunt, ipse contra se torquebantur, et quum dolor vicerat, adscribebantur quae non habebantur. * The poll tax (capitatio plebeia or humana) levied on the serfs {coloni) was practically a property tax because it was paid by the landowner. * Known as chrysargyrum, vectigal artium, pensio auraria, and aurum lustrale. Cf. Levasseur, Histoire des classes ouvriires en France, i., pp. 72-78. ' Cf. Wm. Adams Brown, "State Control of Industry in the Fourth Cen- tury," Political Science Quarterly, ii. (1887), pp. 494-513. 38 ESSAYS IN TAXATION III. Early Mediaeval History of the Property Tax During the middle ages the same development can be no- ticed. In the early period, after the disruption of the Roman empire, there were no taxes at all. The primitive Teutonic idea forced its way into the feudal system, and the contri- butions originally devoted to public purposes became the private possessions of feudal nobles and over-lords. The public tax became private property.^ In the early feudal system land was practically the only form of wealth, as it was the basis of the political fabric. In England the feudal payments {hidage, scutage, carucage and tallage) were assessed on the land, just as the Saxon shipgeld and danegeld were land taxes. These were at first levied on the gross produce of the land, either actual or as computed by the mere quantity of the land. With the progress of cultivation net produce rather than gross produce was made the test. Rents became the only practicable test of the value of land. But from the twelfth century onward, the growth of industry and commerce in the towns led to such an increase of personalty or movables that it became necessary to devise some new method of reaching the ability of the citizens. The only way out of the difficulty in England, as on the whole continent, was a combination of the taxes on lands and on movables through the general property tax. The mediaeval town was the birthplace of modem taxa- tion. Every inhabitant was compelled to bear his share of the local burdens, his proportion of the scot and the lot. The scot, or tax, was almost from the very outset the general property tax combined with the subordinate poll tax, exactly as in the earliest days of the New England colonies. The town, as such, generally paid its share of the national burdens in a lump sum, the firma hurgi. But this lump sum was always distributed among the townsmen in proportion to the property of each.^ 1 Cf. for details Clamageran, Histmre de I'impdt en France, i., p. 115; and Vuitry, Etudes sur le regime financier de la France avant la r&volution, l, p. 420. 2 Numerous examples may be found in Madox, Firma Burgi, p. 281 et seq. In one town, under Edward III., each man is "taxandus et assidendus juxta quantitatem bonorum et catallorum suorum ibidem." In another town the tax "debet assideri proportionaliter juxta quantitatem bonorum suorum." For London, where each freeman paid the general property tax as ■partem de bonis suis or partem catallorum, see the examples in Munimenta THE GENERAL PROPERTY TAX 39 On the continent it was the same. In the German towns the taxes were at first levied only on lands and houses.-^ Begin- ning in the twelfth century, however, other constituent ele- ments of property, both movable and immovable, were grad- ually added, until before long we find the general property tax. The tempo of the development naturally varied in the different towns, but the broad lines were almost everywhere the same. Thus by the end of the thirteenth century it had become cus- tomary to add rent-charges to houses and land. As long as the rent-charges were irredeemable, they were taxed as real estate; but after they had become redeemable, they were gradually treated as personalty.^ For in Germany as in Eng- land we find the feudal distinction between real estate and per- sonal property {Liegende and Fahrende Habe or Liegenschaften and Fahrniss), which was almost tantamount to that between movables and immovables {Mobilien and Immohilien). The other elements of personalty were slowly added to the assess- ment lists. We find mentioned in the tax ordinances of the period the following classes of personal property: (1) household furniture, (2) clothing, ornaments and weapons, (3) food supplies for home consumption, (4) supplies of wine, straw and coal for the same purpose, (5) horses and cattle, (6) tools of various kinds, (7) wares and commodities, (8) money, (9) credits. At first a man's personalty was taxed only if the owner paid no tax on his real estate, but this alternative method of taxation soon disappeared. In almost all cases the various classes of personalty were assessed at fixed rates which varied for each class, but before long they were all merged into the general property tax — or, as it was called, the tax on property in possessionibus, agris, domibus, censibus et rebus quibuscunque} Gildhallae Londoniensis, Liber Albus, i., p. 592 et seq. For full details as to the method of assessment tempore Edward II., see Liber Custumarum, pp. 193 et seq., 568 et seq. 1 There is a rich literature of local taxation in Germany. Well-nigh every important town has had a monograph devoted to it. The general surveys are the older work of Zeumer, Die deutschen Siadtesteuem insbesondere die stadtischen Reichssteuern im XII. und XIII. Jahrhundert, Leipzig, 1878; and the more recent studies of M. E. Heidenhain, Stadtische Vermogen- steuem im Mittdalter, Leipzig, 1906; and Bruno Moll, Zur Geschichte der Vermogensteuern, Leipzig, 1911. Each of the last two works contains com- plete bibliographies of the local histories. 2 See the full discussion in Heidenhain, op. cit., pp. 62-92, esp. 68. ' Zeumer, op. cit., pp. 86-89. 40 ESSAYS IN TAXATION In some towns it was called simply a tax of so much per posse or pro bonorum facultate} The documents often speak of a man being taxable "na sine vermugen," or in the Latin equivalent "secundum propriamfacultatem et bonorum suorum estimationem"^ or "juxta suam possibilitatem et pro rata bonorum suorum.^ Many of the German towns by this time combined the general property tax with the poll tax,^ and in the Swiss cantons the tax was even called the Hab-, Gut-, und Kopfsteuer.^ In France and in the Low Coimtries the conditions were the same. The tax started out as one on real estate, but soon became one on property in general, the taxpayer: being assessed accord- ing to his vaillant (fortune), or according to his hiretage and catel (realty and personalty), the rentes-d-vie always being taxable as realty.^ At St. Quention provision was made as early as 1195 for a collectam super omnes pecunias et hereditates burgensium; and at Bapaume only a few years later the tax was levied ad valentiam tenementorum et mobilium.'' The only distinction between England and the continent was that in England the property tax remained for centuries the sole local tax, while in France and Germany local excises or octrois were soon added. But for some time at least the general property tax was the measure of the individual's capacity. The general state taxes followed in the wake of the munic- ipal taxes. Already in 1166 a property tax was levied through- out almost all Europe in order to aid the crusaders.* The English statute mentions in detail the various classes of tax- able property, namely, lands and all movables including gold, silver, animals, coin, credits, the produce of vineyards, etc., and provides further that those who do not own as much as a 'Christian Meyer, Das Stadtbvch von Augsburg, 1872, pp. 75, 313. 2 Von Below, " Geschichte der direkten Staatssteuern in Julich und Berg," in Zeitschrift des Bergischen Geschichtsvereins, vol. 26 (1890), p. 32. ' Moll, op. cit., p. 37. * G. von Schonberg, Finanzverhaltnisse der Stadt Basel im xiv. und xv., Jahrhundert, Tubingen, 1879, p. 134. ' Blumer, Staats- und Rechtsgeschichte der schweizerischen Democratien, ii., p. 2Q5 etseq. ° Espinas, Les finances de la commune de Douai des origines au XV Steele (1902), p. 119 et seq. This work is especially valuable for its wealth of detail as to the French and Flemish towns. ' In 1200. Espinas, op. cit.,- p. 119, note. ' Sinclair, History of the Public Revenue, i., p. 88. For a general treatment see Gottlob, Die papstlichen Kreuzztigssteuern des IS'"" Jahrhunderts. Heiligenstadt, 1892. THE GENERAL PROPERTY TAX 41 pound should nevertheless pay a penny if they are either householders or in possession of some office.^ A few decades later, in 1188, came the Saladin tithe, on the occasion of the third crusade, when all rents and movables {redditus et mobilia) were expressly made taxable.^ In England from this time on, the grants of rents and movables ide redditibus et mobilibus or, as they were sometimes called, de redditibus et catallis) became more and more common until they finally superseded the older methods of securing revenue. The fractional parts of the prop- erty granted varied from a fortieth to a fourth; but from 1290 it became customary to tax the nobility and the clergy only two- thirds as much as the commons. In 1334 the proportion was fixed as the fifteenth and the tenth. The tax accordingly came to be known as the fifteenth and tenth (quinzime and disme). Strictly speaking, the tenth was levied in the cities, boroughs, and lands of ancient demesne, the fifteenth in the rest of the country. Practically, however, the fifteenth was a tax on rents or realty, the tenth a tax on movables or personalty. The name applied to the English tax — fifteenths and tenths or tax on rents and movables — ^brings up two interesting problems. The one is, why rents or produce should have been put on a plane with movables or property; the other is, why they should have been taxed at different rates. As to the first point, it is clear that under feudal conditions, where land was not regularly bought and sold, the simplest method of ascertaining the taxable ability of the landowner was through the rental that he received for the land, a rental that was always in a certain proportion to the produce of the land. In the case of houses in the towns, especially where the land did not belong to the large landowners, we find of course more numerous examples of transfers of real estate; and ac- cordingly the tax on town houses was sometimes assessed ac- cording to property, instead of rental, value. This is especially true in many of the German towns.^ In the case of rent- charges again, which in the earlier centuries were far more 1 The ordinance is reprinted in full in Manes "Die Einkommensteuer in der englischen Finanzpolitik," in Festgaben filr Wilhelm Lexis, 1907. It is also found in B. Moll, Zur GeschicMe der englischen und amerikanischen Vermogensteuern, 1912, p. 7. 2 This ordinance is printed in full in Dowell, History of Taxation, etc., vol. ii (1888), appendix. ' As in Basel, Speyer, Mainz, Regensburg, Zurich, Bern, etc. Cf. Heiden- hain, op. cit., p. 54. 42 ESSAYS IN TAXATION common on the continent than in England, it is obvious that under the prevailing conditions their value could be found onlj' as an annuity. Accordingly the annuity or yearly rent- charge was always included in the redditus or returns of real estate. Personal property on the other hand had a capital value. In fact, most of the elements of personalty yielded no money produce at all, but only what economists call a benefit or psy- chic income. Personalty, therefore, was taxed according to property value; realty, except in the towns, according to rental value. Thus the mediaeval general property tax was really a combination of property and product tax, product being utilized when the capital value was difficult or impossible to ascertain. In England this system of distinguishing between rents and movables continued through the middle ages; on the continent and especially where feudal conditions gave way before the democratic movement, the more unified property conception gained the upper hand. The other problem is that of the difference in rates. In England the proportion came to be, as stated, a tenth for per- sonalty and a fifteenth for realty. On the continent the dis- parity was often considerably greater, the rate on personalty being frequently two or even three times as high as that on realty. Moreover, when we remember that in the case of per- sonalty the tax was assessed on capital value, whereas in the case of realty it was assessed only on the produce of the prop- erty, the contrast becomes astonishing. In England there is not much doubt that the difference in the rate was, in part at all events, due to^the fact that the peers were politically more powerful than the commons. But in many parts of the continent we find the same practice even where the aristocrats were not in the saddle. The explanation must therefore be of a more general nature. Some authors seek the explanation in the alleged fact that personalty, especially that part of it invested in trade and com- merce, was more lucrative than real estate, and could therefore more easily endure a higher rate.^ Apart from the fact, how- ever, that trade capital constituted only a small part of the ' This is the view of Hartung, "Die Augsburger Vermogensteuer im XV. Jahrhundert" and "Die Belastung des Augsburgischen Grosskapitals," in Schmoller's Jahrbuch, etc., vol. 19 (1895); and of KoUe, Die Vermogen- steuer der Reichstadt Ulm vom Jahre 1709. Stuttgart, 1898. THE GENERAL PROPERTY TAX 43 taxable personalty, the alleged fact is really without founda- tion. Other writers advance a variation of this theory by con- tending that real estate, especially in the towns, was of very slight productivity. The towns, they tell us, were full of empty dwellings, the population was small, and land was not the subject of speculation as in modern times. The towns, we are told, even helped to rebuild houses that had been destroyed by fire.^ This view, however, represents an unwarrantable general- ization from a single town or a single period. A more defen- sible theory is that land was the basis of the entire economic life in the middle ages, and since most people even in the towns made their chief living out of the land, it was only natural that the principal means of subsistence should be treated somewhat more tenderly and that the surplus over what the individual needed for his living should be taxed at a higher rate.^ The best explanation, however, is to be found in the fact that it was administratively more difficult to reach personal property, both because some of it was more or less hidden from the scru- tiny of the assessor, and because intentional concealment and fraud were far easier.^ As a matter of fact the assessment of chattels was not strictly enforced. This is apparent in England, at all events, from the dissatisfaction shown with the tax of 1275, when the people were assessed ad unguem, i.e. up to the full value of their movables.* In the succeeding grants the old easy practice was resumed. As the tax on lands, however, could be levied on actual rents, it was not apt to be so leniently assessed. Thus a substantial equality was probably reached. Just as in England the tallages merged into the fifteenths and tenths, so in France the feudal charges on the land de- veloped into the general property tax, which however still retained the old name tailU. The ordinances of 1254-56 at- tempted to regulate the assessment, and provided that im- 1 F. R. Bothe, Die-'Entinckelung der direkten Besteuerung in der Reich- stadt Frankfurt Ms zur Revolution, 1612-1614- Leipzig, 1906, p. 67. 2 This theory is vigorously espoused by Heidenhaiu, op. cit., esp. p. 53. ' This explanation was first advanced by the present writer in 1892, in an article in the Political Science Quarterly, and is found in the first edition of this work. It was independently advanced by Hartung in 1895 in the essays mentioned above, and is accepted in substance by Hartwig, Der Liibecker Schoss bis zur Reformationszeit, 1903, p. 47, and by Moll, Zur Geschichte der Vermogensteuern, 1911, p. 108. * Dowell, History of Taxation and Taxes in England (2d edition), i., p. 68. 44 ESSAYS IN TAXATION movables should be charged only half as much as movables.-' France thus endeavored to attain by law what England effected by custom. During the fourteenth century the taille came to be the chief direct tax, and in 1439 it was made a permanent annual tax. In Germany, also, the imperial and state direct taxes, in so far as there were any, took the form of general property taxes. The Bede ^ or Landbede, the gemeiner Pfennig,^ the Landschoss,^ the Landsteuer,^ etc., all followed the example of the local property tax. In Scotland the "costage" paid to England in 1424 was a general property tax. An act of that year directed that a book be prepared, containing the names of the inhabitants with a list of all their goods, including com and cattle, as evidences of their ability to pay.^ By 1585 it had become customary to apportion the occasional burdens known as stents to the burghs according to their "substance and common good." '' In the Italian republics the commonwealth was at first sup- ported by the general property tax. In Milan, imder the name stima e catastro de heni it is found as early as 1208, and after- wards was levied with such severity that the assessment book was known as the lihro del dolore.^ In Genoa it was called colletta} In Florence it was known as estimo and played an important role in politics.^" And finally we find in the Netherlands from the earliest times the general property tax ' Clamageran, Hisloire de I'impdt en Prance, i., p. 264. ' At first a feudal land pajanent; cf. Hullmann, Deutsche Finanzgeschichte des Mittelalters, p. 133. ' Lang, Historische Entwickelung der t&utschen Steuerverfassungen seit der Karolinger. Berlin, 1793, p. 182. *Schmoller, "Die Epochen der preussisohen Finanzpolitik,'' in Jahr- buch fur Oesetzgebung, Verwaltung und Volkswirtschaft, i. (1877), pp. 35, 42. " Hoffmann, Geschichte der direkten Sieuem in Baiem vom Ende des xiii. Jahrhunderts, pp. 11, 17, 39. « S. H. Turner, The History of Local Taxation in Scotland. Edinburgh, 1908, p. 161. Ubid., p. 152. ' Carli, Relazione del Censimento dello Stato di Milano, in Custodi's Scrit- tori Classici Italiani, -parte moderna, xiv., pp. 184, 185. ' "Le imposts straordinarie si possono di questa epoca [1252] compren- dere in una sola, la coUetta." Canale, Storia dei Genovesi, i., p. 318 (edition of 1844). " Villani tells us that it was levied on "cio che chiascuno havea di stabile e di mobile e di guadagno." Istorie Florentine fino al anno 1348, book x., chap. 17 (vol. vi., p. 26, of Milan edition of 1803). THE GENERAL PROPERTY TAX 45 known as the schot or the tenth, etc., on hezittungen (pos- sessions). ^ The general property tax thus existed throughout all Europe. It was moderately successful because well suited to the period. Although mvolving an inquisitorial search into every article of the scanty mediaeval stock, as can readily be seen from the detailed schedules of assessments still in existence, the tax was levied chiefly on tangible, physical objects not capable of easy concealment. With the exception of coimtries like France, where the tax was emasculated by the system of exemptions, it resulted on the whole, during this early period of society, in a tax fairly proportional to the individual faculty. There was a general property tax because there was a very slight differentiation of property. IV. Later Mediceval and Modern History of the Property Tax Before long a change set in. In England the fifteenths and tenths were changed in 1334 from percentage to apportioned taxes. Every locality had now to raise a definite lump sum, which, it was intended, should remain the same from year to year, and which was to be apportioned in precisely the same ratio among the various counties, towns and parishes. One fifteenth and tenth therefore meant a fixed sum, and when more was needed, two or three fifteenths and tenths were im- posed. The old methods of assessment, however, soon fell into disuse. Each town and county made its own arrangement and treated personal property with such leniency that the total product of the tenth and the fifteenth continually decreased. This resulted in attempts on the part of the crown to supple- ment the old tax by a new general property tax, called the sub- sidy. The early effcirts met with failure, but finally, in 1514, the first general subsidy was granted, as a tax of sixpence in every pound of property. The poimd rate was afterwards fixed at four shillings on lands, and two shillings eight pence on goods. But the subsidy went through precisely the same development as the fifteenth and the tenth. At first really a percentage tax, it was soon practically converted into an apportioned tax of a stated lump sum. No re-assessment of the districts took place; each locality was supposed to pay the same sum year after year. All increase in wealth was thus entirely omitted from ' Engels, De Geschiedenis der Belastingen in Nederland, pp. 60-65. 46 ESSAYS IN TAXATION the lists. Exemption after exemption was made, and personal property was so loosely assessed that the total yield continually declined. The most arbitrary methods were employed. Only the old "subsidy-men" were taxed; allowances were made in a multitude of cases; and the assessments of personalty were so low and partial that the subsidy became a perfect farce. As Bacon said, "the Englishman is master of his own valua- tion." ^ Sir Robert Cecil stated in 1592 that there were not over five men in London assessed on their goods at £200; and Sir Walter Raleigh wrote in 1601 that "the poor man pays as much as the rich." ^ Although nominally a general property tax, the subsidy thus came to be levied chiefly on the land, and became an unequal land tax— so unequal that it finally dis- appeared in 1663. Under the commonwealth an attempt was made to revive the general property tax, imder the name of commonwealth monthly assessments, real estate being always assessed, as before, according to its "yearly value," personalty according to its value. These monthly assessments were already author- ized during the Revolution. Thus in 1644 a "monethly assess- ment" was imposed upon the counties, cities and towns men- tioned and levied upon "the true yearly values of lands, rents, annuities, offices and hereditaments and according to the true value of goods, chattels, debts and other estate reall or per- sonall." ' The improvement was so marked that the old sub- sidies were completely abandoned and replaced by the assess- ments. But the reform was short-lived and the assessments of personal property continually diminished. Sir William Petty, the author of the first theoretic work on taxation printed in England, discussed the defects of these monthly assessments in a picturesque passage as follows: "There have been, in our times, ways of levying an aliquot part of mens estate, as a fifth, and twentieth of their estates, real and personal, yea of their offices, faculties and imaginery estates also, in and about which way may be so much fraud, collusion, oppression and trouble, some purposely getting themselves taxed to gain more trust: others bribing to be taxed low, and it being impossible to check or examine or ' And, he adds, "the least bitten in purse of any nation in Europe." 2 Report on Public Income and Expenditure, 1869, ii., p. 415. 'An Ordinance of the Lords and Commons assembled in Parliament for the raising and levying of the Monethly Sum of £120,000 towards the maintenance of the Scottish army, by a Monethly Assessment, etc. Feb. 24, 1644. See esp p. 8. THE GENERAL PROPERTY TAX 47 trace these collections by the print of any footsteps they leave (such as the hearths of chimneys are) that I have not patience to speak more against it: daring rather conclude without more ado, in the words of our comick to be naught, yea, exceeding naught, very abominable, and not good." ' A little later, however, Petty was slightly more hopeful and expressed the opinion as do some of our rural legislators to-day, that "assessments upon personal estates, if given in as else- where upon oath, would bring that branch which of itself is most dark to a sufficient clearness." ^ After the Revolution the tax was levied as the so-called prop- erty tax. By its terms ' it was assessed on the persons possessed of personal property, real estate, or public offices or positions of profit. And it was at first a percentage tax. But the yield de- creased so enormously that Parliament in 1697 fixed the sum a rate should produce, i.e. it became an apportioned tax of stated amount. A rate of a shilling in the pound meant a tax of half a million pounds for the country as a whole, this sum being sub- divided in fixed amounts to the various localities. The tax varied from three to four shillings in the pound. In the case of land the tax was assessed on the rent or yearly value. In the case of personal property the tax was assessed on the value of the prop- erty, rental value of all kinds of property being deemed to be six per cent of their capital value. In the case of "any person exercising any public office or employment of profit" where there was no capital value the tax was imposed directly on the salary."* Moreover, the difficulty of assessing personalty and the impos- sibility of reaching intangible property were now so apparent that whereas according to the intent of the law the chief revenue was to come from personal property, and only the residue from realty, in practice the tax became almost exclusively a land tax, and was first so called in 1697. The "annual land tax" of England was thus intended to be a general property tax and for a long time continued to be so legally.^ 1 A Treatise on Taxes and Contributions, by W. Petty, London, 1667, pp. 61-62. 2 Petty, Verbum Sapienti; or . . . the Method of raising Taxes in the most equal manner, p. 17. (Appended to his Political Anatomy of Ireland, edition of 1691.) ' 4 William III., chap. 1. " For a full explanation of the law the provisions of which are frequently misunderstood, see Seligman, The Income Tax, 1911, pp. 48-49. 6 Adam Smith, Wealth of Nations, book v., chap. ii. : "By what is called 48 ESSAYS IN TAXATION The complaints as to the escape of personal property were heard almost from the begimiing. Thus in 1694 Briscoe tells us: "And here I might take notice how the monied men are enrich'd by the mine of the poor and industrious traders, how gentlemen (whose estates are in land) are pressed with taxes, while the monied men are in a manner tax-free; the landed man pajdng more tax to their Majes- ties out of an estate of £100 per annum or higher, than the monied men do for £10,000 in money." ' In the eighteenth century this had become a commonplace. A popular pamphleteer expresses himself as follows : "This is a grievous and unequal tax. In all the remote parts of this country, the tax never was levied according to the value of their estates nor ever can be. . . Monied men are another vast body who . . . contribute Uttle or nothing to this tax. Their stock in trade can never be known and is always assessed but a trifle. Money lent on mortgages never is taxed and stock in the funds hath the publick faith to exempt it so that it never can be taxed. With all these advantages the monied men, though they hold the greatest properties in the state, pay no proportion to the support of that government from whence they have equal protection with those who are charged at the utmost." ^ Walpole at about the same time stated that "no man con- tributes the least share to this tax, but he that is possessed of a landed estate." ' Perhaps the most severe arraignment of the justice of the tax is made, toward the middle of the century, by a well-known publicist. Decker, from whose catalogue of indictments we select the following: "Thirdly, It tends to corrupt the manners of the people, consequently to make them tumultuous and less governable. "For being to pay in proportion to what they earn, spend, or possess, the just value whereof is impossible to be known but by themselves, and to force them to a declaration, an oath is always imposed, which makes a struggle between interest and conscience; an extreme wise law, whereby an honest man is put on a worse footing than a perjured knave : he that forswears himself pays less than his due and saves his money; but he that is conscientious pays to the full; which latter sus- the land tax, it was intended that stock should be taxed in the same propor- tion as land." (Thorold Rogers' edition, ii., p. 553.) 1 A Discourse on the -Late Funds of the Million-Act, etc., by J. B(riscoe), 1694, p. 13. ^ A Letter to a Freeholder on the Late Reduction of the Land Tax to one Shilling on the Pound, By a Member of the House of Commons, London, 1732, pp. 44, 48, 26. ' Dowell, op. cit., vol. ii., p. 99. THE GENERAL PROPERTY TAX 49 pecting others to evade, is piqued at paying more than his neiglibors, and wonders why a false oath should not fit as easy on him as on so many others; whereby the most solemn pledge of truth among men becomes frequently violated, is despised, disregarded, and interest rides triumphant over conscience; which latter being to men as a dike to keep out the torrent of vice, if once a thorough breach is made, a deluge of iniquity ensues, whereby all good principles are drowned; and the more vicious men grow, the readier they are to oppose authority." ' So unequal and so insignificant did the old general property tax (nov7 universally known as the land tax) become that in 1798 permission was given to the landowners to buy themselves free of the tax by the payment of a capital sum. In other words, the land tax became a redeemable rent-charge. The provision taxing personal property continued to exist on the statute book imtil 1833, and the clause taxing public offices and positions of profit was not finally repealed until 1867. The year before its repeal it yielded the sum of £823 ! ^ Such was the ludicrous result of the attempt to maintain mediaeval customs. The general property tax, which had started out as a land tax, re- verted in name as well as in fact to its earliest form. In Scotland the history was the same, although because of the later industrial development of the country the old system survived almost to our day.' The chief direct tax, known as the cess, was originally a general property tax. In the middle ages one of the functions of the Great Chamberlain was to inquire whether the public burdens were fairly "distributed to rich and poor according to their faculties." ^ A fixed proportion of the cess was allotted to each burgh and it was then paid partly out of "the common good," ^ partly out of real estate, while the remainder, if any, was assessed on the personal property and income of the taxpayers. In 1597 an order declared more pre- cisely that the officers are to "stent" each person "according 1 Matthew Decker, An Essay on the Causes and Decline of the Foreign Trade, Edinburgh, 1756, pp. 19-20. 2 Be-prnt of the Commissioners of Inland Revenue, 1867. 3 Cf. for a sketch of the Scotch system the Report of the Poor Law Com- missimiers on Local Taxation, 1843, and the more recent work of Stanley H. Turner, History of Local Taxation in Scotland. Edinburgh, 1908. ■■ "Si equaliter ponantur super divitibus et padperibus juxta eorum facultates." Turner, op. cit., p. 158. *The "common good" included the public lands for grazing as well aa feu duties on those parts loaned in perpetuity and river and loch fishings and also grain mills and occasionally a walk-mill and the like. Turner, op. cit., p. 128. 50 ESSAYS IN TAXATION to the avail and quantity of his rent, living, goods and gear that he has within burgh." ^ In the course of time, however, person- alty slipped out of the assessment list. In Dumfries by the end of the seventeenth century the records tell us that "now by the decay of trade the cess is like to fall on the lands and houses." In Kintore the cess was "paid of the land rent." In the counties the cess or land tax, as it was now sometimes called, was converted into a redeemable rent-charge in 1798 and 1802, as in England. In the boroughs, however, the old system continued, each borough levying the general property tax in its own way, with suitable variations. In Banff, for instance, in the nineteenth century, the tax was levied, one-half on real estate; one-quarter on trade and merchandise, according to the amount of purchases by each trader; one-eighth on the incorporated trades; and one-eighth on the other inhabitants, according to the discretion of the stent-master. In Cullen the rate was im- posed on land and on trade each being rated "according to his understood ability to pay." ^ So burdensome and vexatious were the remains of the property tax felt to be that the Com- mission of 1835 recommended the entire abolition of the trade- stent, as it was called. It was, however, not until 1896 that the whole system of borough contribution to the cess was abolished and with it all attempts to raise any part of the tax from per- sonal property.^ That was the end of the state general prop- erty tax in Scotland. In other countries the history of the property tax is identical. In France the taille was of two kinds; the taille reelle, which was levied only on lands in the pays d'etat; and the taille person- nelle, nominally a general property tax levied in the pays d' election which constituted the greater portion of France. In reality the taille personnelle was assessed only on the families or households of the non-nobles {roturiers), and it became practically a land tax like the taille reelle; for the wealthy owners of personalty soon acquired the same privileges as the nobility. Vauban tells us that the taille as a tax on movables was assessed only on the poorest classes.* Sully, indeed, endeavored in 1660 to ' Turner, op. eit., p. 159. 2 Ihid., pp. 164, 165,"l83. ' Ihid., p. 167. * "En rdsum^ la taille 6tait un imp6t territorial qui n'atteignait que les propri^taires les plus pauvres du royaume, et une taxe mobili^re qui portrait exclusivement sur les classes les moins riches de la soci6t6." Dime royale, p. 32 of Daire's edition. THE GENERAL PROPERTY TAX 51 restore the principles of the general property tax and to assess personalty as well as realty.^ But he failed ignobly; for, at the close of the seventeenth century, the great work of Boisguillebert is full of bitter complauit and lamentation.^ And when the attempt was made in the eighteenth century to supplement the taille by the dixiemes and vingtiemes, like the tenths or fifteenths of old in England, the new tax again soon became virtually a land tax.^ The development was inevitable, and it resulted during the Revolution in the total abolition of the general property taxes. In Germany, the mediaeval assessment lists to be filled out by the taxpayer bear a striking resemblance to those still used in some of the American commonwealths.* But there, as here, it became contiuually more difficult to reach personal property. In Prussia (Brandenburg) this was true already at an early period.^ In Bavaria as well as in Austria the nobility and the richer commercial class succeeded at the end of the sixteenth century in shoving the main burdens on the shoulders of the rural population.^ And in the other German states the equal property tax remained so only in name.' In the Netherlands, the general property tax or two hun- dreth seemed in the seventeenth century to possess some ad- vantages in English eyes. We are told by a pamphleteer that ' Sully ordered the officials to assess contributors "d raison de leurs fac- ulty, quelque part qu'elles soient, meubles ou immeubles, heritages nobles ou roturiers, trafic et Industrie." Cf. Clamageran, Histoire de I'impdt, ii., p. 359. " " II n'y a pas le tiers de la France qui y contribue, n'y ayant que les plus faibles, et les plus mislrables; en sorte qu'eUes les ruinent absolument." Le detail de la France, chap. iii. ' "Dans la pratique, I'^ltoent foncier pr^dominait presque exclusive- ment." Stourm, Les finances de I'ancien regime et de la revolution, i., p. 240. See also Necker, De V administration des finances de la France, i., p. 159. It must be noted, however, that these taxes were calculated on the basis of income, rather than of selling value. For details, see Seligman, The Income Tax, 1911, pp. 51-53. * For a typical list of 1531, see Bielfeld, Geschichte des magdeburgischen Steuerwesens von der Reformationszeit, pp. 19-23. ' SchmoUer, "Die Epochen der preussisohen FinanzpoUtik," in his Jahr- buch, i., pp. 42, 49. Cf. his "Studien iiber die wirthschafthohe Politik Fried- riohs des Grossen," in the Jahrbuch, viii., p. 38, for Brandenbiirg; viii., p. 1011, X., p. 330, and x., p. 350, for Magdeburg. Cf. also F. J. Neumann, Die personlichen Steuern vom Einkommen, 1896, p. 232. * Hoffmann, Geschichte der direkten Steuern in Baiem, p. 70. ' Wagner, Finamwissenschaft, iii. (1st edition), pp. 62, 77, 80. 52 ESSAYS IN TAXATION "The two hundredth part is assessed upon the whole bulke of a mans substance so that whoever is worth two hundred shillings or in pounds payes in one to the treasury, for foure hundred and so proportionably: but some may say, how can the magistrate make a true estimate of every mans private fortunes? Since none easily betray their opulence or indigence; whence may be infer'd, that the magistrate often declines the way of equity, seeing it cannot be but that some will passe for poorer, others for richer than indeed they are. This difficulty is pre- vented by a prudent temper and moderation. . . . Most men being ambitious and having the repute of opulent, many from whom the magistrate exacts too much, chuse rather to pay then proclaime the slendernesse of their fortunes. So that vice itseHe supports vertue and reall profit is reaped from wealth imaginery." '■ Half a century later, however, the testimony of writers on the spot shows that the general property tax in Holland worked just as badly as elsewhere. We hear that: "Finally, in an extreme necessity of money, there may be impos'd a general tax on all the moveable and immoveable estates of the inhab- itants. I say in an unusual great necessity, because by these taxes there would fall a greater hardship upon the common inhabitants than could fall by any other expedient of this nature. And seeing the as- sessors are whoUy ignorant of mens personal estates or what the in- habitants do owe, or is owing to them; and if they did know the value of them yet could they not tax them so equally as may be done in the case of immoveable goods: We may therefore easily see, what by favour and hatred, and by ignorance of the assessors, that there must be an intolerable inequality in bearing this tax. Those that would honestly declare their estates might lighten the tax; but the fraudulent will unavoidably make it heavier." ' In Italy the development of the property tax can be clearly studied in Florentine history. The estimo, at first assessed with comparative equality, soon became honeycombed with abuses. Personalty slipped out of the lists, the rich bankers entirely escaped, and the whole load of taxation fell with crush- ing force on the small owners, populo minuto. Hundreds were completely ruined and compelled to seek refuge in exile.' The ' The City Alarum or the Weeke of our Miscarriages, etc., whereunto is annexed a treatise of the Excize, London, 1645, pp. 29. 2 The True Interest and Political Maxims of the Republick of Holland and West Friesland. By John DeWitt, and other Great Men in Holland, London, 1702, pp. 109-110. ' Cf. L6on Say, Les solutions d&mocraliqu£s de la question des impdts, i., p. 209 et seq., especially pp. 222, 229. He gives no references. For a full history, see Baer, "II Catasto Fiorentino nel secolo xv.," Nuova Antologia, THE GENERAL PROPERTY TAX 53 discontent became so loud that after threats of revolution and disorder the estimo was finally supplanted in 1427 by the new tax, catasto, to be levied on the personalty of traders and bankers as well as on realty. Machiavelli gives us an interesting accoimt of the opposition of the nobles, who were at the same time great financiers.^ But the new general property tax went the way of its predecessors. When we read of the subterfuges and evasions, of the strenuous efforts on the part of the state to compel the listing of personalty and of the dismal failure of the attempts, we seem to be reading the present-day reports of American commonwealth assessors or comptrollers. Their ex- perience was precisely the same as ours. In 1431 only fifty- two persons paid the tax on trade capital, although the amount of such capital must have been immense. And in 1495 the tax was made in name, what it had long been in fact,^ — a tax on immovables only. Personalty, as such, was henceforth legally exempt. The general property tax had again become a land tax. Throughout Europe the local property tax also has become a tax on real estate. In England the whole system of local taxation is based on the poor rate, according to the statute of 1601 which mentioned as liable to the tax not only occupiers of lands, houses, etc., but every inhabitant, parson and vicar. The tax was a general property tax levied according to the ability of the individual, ad statum et fadultates, as the courts put it. At first land was assessed, as everywhere else at the beginning, simply according to the number of acres; but by the time of William III., rental value was substituted for mere quantity as the test of ability. Since personal property also was taxable, this was, however, simply a general property tax. Yet from an early period the rule was adopted that all personal property liable must be local, visible and productive of a profit.^ Thus intangible personalty, tangible personalty kept in the owner's hands, earnings from personal abilities, and profits from moneys invested or lent at interest in another parish were exempt as being either unproductive, invisible, or not possessing vol. 17 (1871) and the book of Canestrini quoted in the next note but one. 1 History of Florence, iv., p. 14 (vol. i., p. 181 of Detmold's translation). ' Canestrini, La Sdenza e I'Arte di Stato. L'Imposta sulla Richezza Mobile ed Immobile (1867), i., pp. 108, 115, 321, etc. ^ In 1633 it was decided that "the assessments are to be according to the visible estates, real and personal, of the inhabitants." Sir Anthony Earby's Case, 2 Bulstrode, 354. 54 ESSAYS IN TAXATION a local situs} The only property not excluded by these condi- tions was stock in trade, but it was not until the industrial revolu- tion toward the close of the eighteenth century that the matter became of importance. Lord Mansfield in 1775 showed the impolicy of such action; ^ but although the liability of stock in trade was hotly disputed, it was affirmed by Lord Kenyon in 1795.^ The results were doubly disastrous in the places where it was tried: the early success of the experiment led the justices of the peace to begin that improvident method of poor relief known as the allowance system ; * and the practice of rating stock in trade, which was confined to the old clothing district in the south and west of England, resulted in the rapid decline of the ancient staple industry and a transfer of the business to Yorkshire, where personalty was not assessed.^ When the principle was tested in another district in 1839, the courts again upheld the practice.'' As a consequence, a law was passed which exempted personalty from taxation,^ but it was powerless to bring the trade back to its old channels. The exempting law was enacted for only a year, but it has been annually renewed ever since.* Thus for the last half century the local property tax in England has been legally as well as actually a tax on pro- ductive real estate alone. ^ ' Report of the Poor Law Commissioners on Local Taxation, 1843, 8vo edition (1844), p. 43 et seq., and especially pp. 34-38. This contains an excellent history of local taxation in Great Britain. A more recent work is Edwin Cannan, The History of Local Bates in England, 1896 (2d ed., 1912). 2 Rex vs. Ringwood, 1 Cowp. 326. ' Rex vs. Mast, 1 Bott. 204. For a detailed statement of the case see Appendix A to the Report of the Poor Law Commissioners on Local Taxa- tion, 1843, nos. 35-94. The existence of the general property tax can still be seen in 1791. . Cf. Rex vs. White, 4 T. R. 771. * By the Speenhamland Act of 1795. See First Annual Report of the Poor Law Commissioners, 1835, p. 207. ^ Report of the Poor Law Commissioners on Local Taxation, 1843, 8vo edi- tion, p. 38. ^ Queen vs. Lumsdaine, 10 Adol. and Ellis, 157. ' 3 and 4 Vict., chap. 89, provided that it should not be lawful "to tax any inhabitant in respect of his ability derived from profits of stock in trade or any other property," except "lands, houses, tithes impropriate, propria- tions of tithes, coal mines, or saleable underwoods." ' By the Expiring Laws Continuance Act ° Thorold Rogers, Local Taxation, especially in English Cities and Towns, p. 16. Cf. also Cannan, op. cit., passim; Noble, Local Taxation, p. 58; Pal- grave, Local Taxation in Great Britain, p. 78; Goschen, Reports and Speeches on Local Taxation, p. 50; Phillips, "Local Taxation in England and Wales," in Probyn's Local Government and Taxation in the United Kingdom, p. 502; THE GENERAL PROPERTY TAX 55 Scotland has had an especially interesting history because of its later industrial development and of the consequent survival of the old system almost to our own day.^ The local tax in Scotland, as iu England, originated with the Poor Act. The earliest law providing for compulsory in lieu of voluntary con- tributions was the,Vagabound Act of 1574, which authorized the elders and deacons in towns and the headsmen of rural parishes "by their good discretion to tax and stent the whole inhabitants of the parish . . . according to the estimation of their substance." ^ The "stent-roll" was to be revised yearly according to the "increase or dimiaution of men's goods and substance." In 1649 a more general act was passed empowering the commissioners, when they found the voluntary contribu- tions inadequate, to stent the parishes according to their ability and wealth. In all these matters the criterion of ability was declared to be the "estates and conditions" or the "goods and substance " of the inhabitants.^ In 1663 the important change was introduced that one half of the charge was to be assessed on lands and only the other half on the inhabitants according to their means and substance. In 1692 this was made a general rule.'* For a long time the tax included personal estates and even the income of professional classes and artisans.^ In the various boroughs and parishes the practice was exceedingly diversified, although personal property in most cases slipped out of the assessment. The Act of 1845 granted wide option to the parochial boards. Several alterations were permitted, one of which included an assessment "upon the whole inhabit- ants according to their means and substance." ^ By 1847 out of 558 parishes that used their rating powers only 71 employed the method of means and substance, the great mass imposing Bilinski, Die Gemeindebesteuerung und derm Reform, p. 35 et seq. See also Hedley, Observations on the Incidence of Local Taxation (1884), who opposes the exemption of stock in trade and the attempts to get machinery exempted from ratabihty. Cf. G. H. Blunden, Local Taxation and Finance, 1895. Some interesting material may also be found in J. J. O'Meara, Municipal Taxation at Home and Abroad, 1894. The best works on the legal aspect of the question are Boyle and Davies, The Principles of Rating practically considered, 1890; Castle, Law and Practice of Rating (1895 and later edi- tions); E. M. Konstam, Rates and Taxes, a practical guide, 1906; W. C. Ryde, The Law and Practice of Rating, 2d ed., 1904; C. A. Webb, Law and Practice of Rating and Assessment, 1910. 1 Cf. especially the work of Turner, cited supra, p. 49, note 3. 2 Ibid., p. 14. ' Ibid. * Ibid., pp. 21, 34. '' Ibid., p. 38. ' Ibid., pp. 44-45. 56 ESSAYS IN TAXATION the tax on real estate, one-half on owners and one-half or occupiers. By 1860 out of 752 parishes only 25 used the "means and substance" method. In 1861 the Baxter Act abolishec rating on means and substance in all parishes where it had been introduced since 1845. A very few parishes retained the sys- tem by right of usage previous to 1845, the last to maintain the custom being Greenock, where it continued to exist accord- ing to a curiously progressive scale, until 1880.^ The system was abolished because it was finally realized by the owners of real estate that the exemption of personalty really increased, rather than diminished, the value of their own real property.' Thus came to an end the local general property tax in Scotland, As we have seen above,' it was only a few years more before the state general property tax followed suit. History thus everywhere teaches the same lesson. As soon as the idea of direct taxation has forced itself into recognition, it assumes the practical shape of the land tax. This soon de- velops into the general property tax which long remains the index of ability to pay. But as soon as the mass of property splits up, the property tax becomes an anachronism. The various kinds of personalty escape, until finally the general property tax completes the cycle of its development and re- verts to its original form of the real property tax. The property tax in the United States is simply one instance of this universal tendency; it is not an American invention, but a relic of medise- valism. In substance, although not in name, it has gone througl every phase of the development, and any attempt to escape the shocking evils of the present by making it a general prop- erty tax in fact as well as in name is foredoomed to failure The general property tax as the chief source of revenue is im- possible in any complicated social organism. Mediaeval methods cannot succeed amid modern facts V. Theory of the General Property Tax While it is generally confessed that the property tax, as {idministered in the United States, is a failure, it is sometimes contended that if thoroughly executed it would be a just tax. ' 1 Ibid., pp. 48-49. 2 IMd., p. 52. 3 Syp^o, p. 50. * "While there is no fairer or better mode of taxation than the ad valoren system properly and justly administered, there is none more oppressive oj unjust and unequal when loosely or imperfectly executed." Report of tht Compiroller-General of Georgia, 1894, p. 5. THE GENERAL PROPERTY TAX 57 The theory of the general property tax designed as the sole or principal source of state and local revenue, as set forth in almost all our state constitutions, is held to be correct in principle. Is this true? In the first place we must disabuse ourselves of the idea that property, as such, owes any duty to pay taxes. The state has direct relations not with property, but with persons. It is the individual who, from the very fact of his existence within the state, is under definite obligations toward the state, of which the very first is to protect and support it. The state, indeed, can exist without the particular individual, but the individual caimot exist without the state. Every civihzed community professes to tax the individual according to his ability to pay, which may, indeed, be measured by his prop- erty or by any other standard. In the last instance, however, it is the individual who really owes this duty. But is property the true test of ability? In primitive com- munities it is to a certain extent. Every freeman is a proprietor, and all are supported by the produce of the land. Comparative equality of wealth gives comparative equality of opportunity, and the finer differences in ability to pay are not yet recognized. In the early stages of society property is indeed a rough test of ability. But a change soon sets in. As society differentiates, classes arise who support themselves not from their property, but from their earnings. Manifestly he who earns a salary cannot be declared entirely devoid of ability to pay, as compared with one who receives the same amount as interest on a principal, or as profits on property. Moreover, the productiveness of property becomes a controlling element in calculating the owner's ability. Of two factory owners, one may be running full time and making large profits; the other may be compelled to keep his factory closed, earning nothing. Of two landowners, one may employ im- proved processes and enjoy a large product; the other, although on equally valuable land, may suffer climatic reverses and produce far less. Of two capitalists, one may invest his property so as to obtain large proceeds; the other may put an equal amount into an enterprise which yields very little. It is plainly incorrect to say that the ability in these cases varies with the property. The test of ability is shifted from property to product, proceeds or earnings. The truth of this principle is faintly recognized in the legis- 58 ESSAYS IN TAXATION lation of all countries one step removed from the primitive tax system. Its application can be seen in some of the medisevai town taxes, where the earnings of the artisans and tradesmen were taxable, as evidences of ability or faculty, side by side with the property of others. It can be seen also in various attempts of mediaeval states to tax the proceeds or rents of land, the salaries of officials and the products of individual exertion. In like manner, it can be seen in the early legislation of the Ameri- can colonies. Thus the law tax of 1634 in Massachusetts Bay provided for the assessment of each man "according to his estate and with consideration of all other his abilityes what- soever." The measure of ability, however, was still property, as appears from the provision of 1635 that "all men shall be rated for their whole abilitie, wheresoever it lies." By 1646, the glimmering of the new idea is seen; for the law now provides not only for rating of all "estates, both real and personal," but also for the taxation of "manual persons and artists," who "are to be rated for returns and gains proportionable unto other men for the produce of their estates." In other words, not only property but product was taken into account. In many of the other American colonies, also, the proHts of certain classes were taxable like the produce of estates, by what was known as the faculty tax or the assessment on the faculty.^ We see, there- fore, how wide of the mark is the statement that the system which the Americans instinctively adopted was "the equal taxation of property, the non-taxation of labor." In the colonies, indeed, these laws mark only the first faint attempts to substitute product for property as the basis of taxation. Later on, the distinction was lost sight of and the attempt abandoned. But in Europe the development con- tinued and the basis of the tax system was changed from prop- erty to product. Thus taxes on land, houses, wages, salaries, interest, profits, etc., gradually supplanted the property tax, and formed a more or less complete system based on product. In modern societies, as we have seen, the basis of taxation has very recently again shifted from product to income. The point here to be noticed is that throughout all Europe the mediaeval basis of taxation — the mass of property — was aban- doned because it no longer corresponded to the demands of jus- tice. The property tax is theoretically unjust because property ' For the details of this development seeSeligman, The Income Tax, 1911, 367 et seq. THE GENERAL PROPERTY TAX 59 no longer measures the ability to pay — because property has been replaced by product as an index to faculty. This is the reason for the failure of the property tax. It has, indeed, been contended by some, as, for instance, by Presi- dent Walker, that the fatal defect of the property tax consists in its constituting a penalty on savings.^ This criticism seems to be questionable, for the same objection would attach to any tax based on income just so far as income, exceeds expendi- tures. An income tax on the surplus is equally a tax on sav- ings. There is no difference in this respect between a property tax and this portion of an income tax. The only logical con- clusion from this objection to the property tax is a tax on ex- pense. If we wish to avoid taxing savings, we must tax only expenditure. And yet President Walker correctly opposes the expense tax as the most unjust of all. The property tax is un- just, not because it is a penalty on savings, but because prop- erty is no longer a measure of ability. There is not a single scientist of note who upholds the prop- erty tax as the sole or chief direct contribution. Some of the German writers on finance do, indeed, advocate a general prop- erty tax, but simply as a subordinate supplement to all existing direct taxes,^ and mainly as an adjunct to the income tax, in order to tax income from property more than professional or individual earnings. These writers, however, overlook the fact that the same result may be attained by making a differ- ence in the rate of the income tax, as lq Italy. Above all, the continental countries have been so long exempt from the gen- eral property tax that the European writers have given it very little attention, have forgotten its shortcomings and have failed to analyze its inherent defects. One other argument of somewhat more weight is sometimes advanced in favor of the property tax, viz., that under any other system vmproductive property, hke jewellery, art collec- tions, unimproved lands, etc., would be exempt. This con- sideration at its best does not justify a general property tax, but a tax on special kinds of property. Entirely apart from the impolicy of taxing art collections, or the impossibility of ' Political Science Quarterly, vol. iii. (1888), p. 3. ^Cf. Gustav CohQ, Finanzwissenschaft, § 475: "Neben der Erwerbsbe- steuerung bleibt fur die Besitzbesteuerung heute nur ein beschrankter Raum ubrig." See the English translation, p, 566: "The taxation ol earnings as it exists to-day leaves but scant room for taxes on possessions." 60 ESSAYS IN TAXATION discovering jewellery, or the utter insignificance of this kind of property when compared with the total national wealth, the argument is defective. The conversion of capital into unpro- ductive wealth of itself destroys the revenue, which is the only true fund for the payment of taxes. It is undeniable that if the property were productive, and if the tax were levied on the product, the owner would pay a larger sum. But on the other hand, his revenue would be still greater and his annual sur- plus above the tax would constitute an ever-increasing pro- ductive fund. To leave unproductive property free may thus indeed lessen the share of the government, but seems to be nothing more than justice to the individual. His renunciation of revenue diminishes pro tanto his tax-paying ability. It is really only because of the belief that the possession of these articles of consumption involves an expenditure for their main- tenance, or forms an indirect proof that their owner is able not only to retain these articles of luxury, but also to live in com- fort on his income, that we attempt to tax this kind of property. In other words, just as relative expenditures of certain kinds afford a rough criterion of a man's income, because his stand- ard of living usually bears a fairly definite relation to his income, so the taxation of special articles of property may really be con- sidered an indirect way of getting at relative revenue. But precisely because it is very rough and indirect, it is in the main unsatisfactory. The great element of reason in the demand for the taxation of unproductive property is to be found in the assessment of real estate. It is an undoubted fact that real estate is often held for speculative purposes, and that it is the duty of the community not to encourage such speculation by exempting vacant lands from taxation. The owner expects to reap from the future value of the land, whether he sells or keeps it, a sum more than sufficient to recompense him for his outlay and inter- vening loss of interest and profit. He is prospectively earning an annual revenue from the land, whose present unproductive- ness is technical rather than real. It is thus perfectly logical to tax unproductive real estate even though the basis of taxa- tion be product rather than property. It is the estimated, rather than the actual, product that is taxed. But even granting that there is this justification for a tax on certain forms of unproductive property, it would not strengthen the case for a general property tax. At best it would simply THE GENERAL PROPERTY TAX 61 mean that the tax on product should be supplemented by a tax on certain kinds of unproductive property, which are really prospectively productive. No one has ever objected to a real estate tax, whether it be levied on the basis of value or of assumed product. But a real estate tax is not a general property tax; the principle of the real estate tax does not signify that property in general should be made the test of ability to pay. We may, therefore, still assert that if there are any evils arising from the absence of a general property tax, they are slight when compared to the evils inseparable from its existence. VI. Conclusion From the preceding survey it is difficult to escape the con- clusion that the general property tax as the main source of public revenue is a failure from the triple standpoint of history, theory and practice. Historically, the property tax was once well-nigh universal. Far from being an original idea which the Americans instinc- tively adopted, it is found in all early societies whose economic conditions were similar to those of the American colonies. It was the first crude attempt to attain a semblance of equity, and it at first responded roughly to the demands of democratic justice. In a community mainly agricultural, the property tax was not unsuited to the social conditions. But as soon as com- mercial and industrial considerations came to the foreground in national or municipal life, the property tax decayed, became a shadow of its former self and, while professing to be a tax on all property, ultimately turned into a tax on real property. The disparity between facts and appearances, between prac- tice and theory, almost everywhere became so evident and engendered such misery, that the property tax was gradually relegated to a subordinate position in the fiscal system, and was at last completely abolished. All attempts to stem the current and to prolong the tax by a more stringent administration had no effect but that of injurious reaction on the morale of the com- munity. America is to-day the only great nation deaf to the warnings of history. But it is fast nearing the stage where it, too, will have to submit to the inevitable. Theoretically, we have foimd that the general property tax is deficient in two respects. First, the theory presupposes that there is an ascertainable general property — a definite surplus of assets over liabilities. In primitive social conditions this is 62 ESSAYS IN TAXATION true; there is a composite mass of property, because there is no iadustrial differentiation. But in the modern age property is split up into a hundred elements, so that if we attempt to tax each element separately, it is often impossible to decide from which category deductions are to be made for indebtedness. An individual, for instance, owes more on his book accounts than is due to him. Granting that he therefore pays no tax on his book accounts, shall he be permitted to deduct this sur- plus of debt from the value of his real estate? This is mani- festly inadmissible. And yet unless this is done he is taxed not on his property, but on his surplus of debt — ^not on his real assets, but on what he owes; not on his ability, but on his liability. The theory of the property tax is not carried out; and it cannot be carried out because the conditions of the theory fail. The general mass of property has disappeared, and with it vanishes the foundation of the general property tax. Secondly, the property tax is faulty, because property is no longer a criterion of faculty or tax-pa3dng capacity. Two equal masses of property may be unequally productive, and hence imequally affect the margin of income from which the public contributions are paid. The standard of ability has been shifted from property to product; the test now is not the extent, but the productivity, of wealth. And since revenue is a better index than wealth, the vast class of earnings derived not from property but from exertion is completely and unjusti- fiably exempted by the taxation of property alone. The theory of the property tax again fails because the conditions of the theory have disappeared. Practically, the general property tax as actually admin- istered is beyond all doubt one of the worst taxes known in the civilized world. Because of its attempt to tax intangible as well as tangible things, it sins against the cardinal rules of uni- formity, of equality and of universality of taxation. It puts a premium on dishonesty and debauches the public conscience; it reduces deception to a system, and makes a science of knavery; it presses hardest on those least able to pay; it imposes double taxation on one man and grants entire immunity to the next. In short, the general property tax is so flagrantly inequitable, that its retention can be explained only through ignorance or inertia. It is the cause of such crying injustice that its altera- tion or its abolition must become the battle cry of every states- man and reformer. AMERICAN BIBLIOGRAPHY OF THE GENERAL PROPERTY TAX.^ 1. Ames, John H. The Taxation of Personal Property. Des Moines, 1877. 2. Ames, John H. The Taxation of Real Property and Corporations. Des Moines, 1878. 3. Andrews, Geoege H. Taxation. Address . . . before the Assem- bly Committee of Ways and Means of the State of New York. New York, 1874. 4. Andrews, George H. Unequal State Taxation. New York, 1875. 5. Andrews, George H. Taxes and Assessments in New York City. New York, 1876. 6. Andrews, George H. Twelve Letters on the Future of New York. New York, 1877. 7. Bemis, E. W. The Taxation Problem in Chicago. Chicago, 1897. 8. Benton, J. H., Jr. Inequahty of Tax Valuation in Massachusetts. Boston, 1890. 9. Brown, Frederick J. Short Talks on Taxes with special reference to the Hayes BUI of 1892. Baltimore, 1894. 10. Cochran, Thomas. Local Taxation. Philadelphia, 1871. 11. Cochran, Thomas. Methods of Valuation of Real Estate for Taxa- ation. 1874. 12. Ely, Richard T., and Finley, J. H. Taxation in American States and Cities. New York, 1888. 13. Endicott, William, Jr. The Taxation of Tangible Things. Bos- ton, 1875 14. Ensley, Enoch. The Tax Question: What should be taxed and how it should be taxed. Suggestions for the People of Tennessee to consider. NashviUe, 1873. 2d edition, edited by Lawson Purdy, New York, 1906. 15. Green, J. P. The Niles Tax Bill, No. 344, H. R., before the Com- mittee on Ways and Means. Argument. Philadelphia, 1893. 1 Exclusive of articles in periodicals, of addresses and papers in the Na- tional Tax Conferences and in the Publications of the American Economic Association, of reports of official commissions, and of the histories of taxa- tion in the separate states and cities. For the bibUography of special phases of the property tax see the bibliographical notes in the other chapters of this book. In the Bibliogra-phy of Works on Taxation, by Ellen M. Sawyer, published in 1898 as a special Bulletin of the State Library of Massachusetts will be found a fairly good selection of articles on the subject up to that date. 63 64 • ESSAYS IN TAXATION 16. Hamilton, John. The Tax Problem. An Address delivered at the Annual Meeting of the Pennsylvania State Board of Agriculture. Harrisburg, 1891. 17. Haugen, N. p. The Exemption of Credits. Madison, 1903. 18. Hinckley, Isaac. Unequal Taxation in Delaware. Philadelphia, 1875. 19. Hills, Thomas. Address on Taxation. Boston, 1890. 20. JuDSON, F. M. Justice in Taxation as a Remedy for Social Dis- content. St. Louis, 1898. 21. Knott, R. W., and Humpheey, A. P. Municipal Taxation: an Argument submitted to the Revisory Commission. Louisville, 1892. 22. Lane, Jonathan A. Address on Taxation at a Meeting of the Boston Executive Business Association. Boston, 1891. 23. Le Rossignol, Jas. E. Taxation in Colorado. Denver, 1902. 24. Matschek, C. W. The General Property Tax in North Dakota. n. p., 1911. 25. Minot, William, Jr. Local Taxation and Public Extravagance. Boston, 1877. 26. Minot, William, Jr. Taxation in Massachusetts. 2d edition. Boston, 1877. 27. Olmstead, M. E. Niles Tax Bill, House Bill No. 344. Argument before the Ways and Means Committee of the House of Repre- sentatives of Pa. Harrisburgh, 1893. 28. Peabody, A. P. Address on Taxation. Boston, 1893. 29. Plehn, C. C. The General Property Tax in CaUfomia. 1897. 30. PuHDY, Lawson. The Burdens of Local Taxation and who bear them. Chicago, 1901. 31. QuiNCY, JosiAH P. Tax Exemption no Excuse for Spoliation. Boston, 1874. 32. Ropes, John C. Taxation of Mortgaged Real Estate. Boston, 1881. 33. Shearman, Thqmas G. Taxation of Personal Property, imprac- ticable, unequal and unjust. New York, 1895. 34. Sherman, Isaac. Exclusive Taxation of Real Estate and the Fran- chises of a few specified moneyed Corporations and Gas Compa- nies. New York, 1875. 35. Stdrgis, Roger F. Taxation: a Problem. Boston, 1911. 36. Swan, Charles Herbert. Impersonal Taxation. A Discussion of some Rights and Wrongs of Governmental Revenue. Phil- adelphia, 1907. 37. Wells, David A. Theory and Practice of Local Taxation in the United States. Boston, 1874. 38. Wells, David A. The Reform of Local Taxation. Boston, 1876. 39. Wells, Jas. L. The Assessment of Real and Personal Property for Taxation. New York, 1902. THE GENERAL PROPERTY TAX 65 40. Wetl, W. E., and others. Equitable Taxation: Six Essays in answer to the question: What Changes in existing Plans are necessary to secure an equitable Distribution of Taxation for the Support of Governments. New York (1892). 41. Whitmore, William H. Unjust Taxes. A Criticism of the Massachusetts System of Local Taxation. Boston, 1877. 42. Winn, Henby. An Address on Unequal Taxation, n. p., 1890. 43. Winn, Henry. Massachusetts Tax Problems. Boston, 1896. CHAPTER III THE SINGLE TAX Among the projects for social and tax reform, few have been more earnestly and enthusiastically supported than the single tax. Many persons, however, have only a faint idea of what the project really is; while others have been so influenced by the alluring arguments of its advocates, that they have not troubled themselves to investigate the problem from the standpoint of modern economic science. Let us attempt, in the following pages, to explain the nature of the single tax and to consider critically the arguments that are commonly urged in its fa-\or. I. What is the Single Tax? In the first place, the single tax denotes, as its name implies, the only tax, the exclusive tax, the tax on some one class of things. The idea that the wants of the state may be supplied by such a tax is not a new one. During the seventeenth and eighteenth centuries, a band of reformers in England as well as on the continent put forward the idea of a single tax on ex- pense.'- So many of the privileged classes had succeeded in securing exemption from the various direct taxes, that it was hoped to realize a substantial universality of taxation by taxing everybody on his expenditure; and since it was supposed that this tax could be evaded by no one, it was for a time very popular. Later on in the eighteenth century there was a party in Eng- land whose motto was a single tax on houses.^ Again, at the beginning of the nineteenth century the experience of England with the income tax led a number of writers on the continent to advance the plan of a single tax on incomes.^ Toward the middle of the century, again, a single stamp tax was advocated ' Supra, p. 8. 2 Cf. Seligman, The Shifting and Incidence of Taxation, 3d ed., 1910, pp. 89-95. ' For the German advocates of this single tax see Seligman, The Income Tax, 1911, pp. 234-2.36. 66 THE SINGLE TAX 67 in France,^ and a generation later, the project of a single tax on capital was enthusiastically advocated not by socialists, but by conservative reformers.^ The single tax proclaimed by Henry George is thus simply the last of many similar schemes that have been propounded; and it is not improbable that after it has dis- appeared economists of the future will be occupied in dealing with yet another form of single tax. The present scheme is a single tax on land values — that is, a tax on the value of the bare land irrespective of the buildings or other improvements in or on the land. Curiously enough the taxation of land has been supported by two lines of argument which are fundamentally opposed. Thus about a generation ago Mr. Isaac Sherman, an eminent citizen of the city of New York, proposed a plan by which all state and local taxes at least were to be levied on real estate. Mr. Sherman and his followers con- fessed that taxes oughtvto be borne by the whole community. They favored the taxation of land on the theory that the tax would be shifted from the landowner to the consumer, and would thus be diffused throughout the community. As every one is a consumer, each would in the end bear his share of the burden. The tax would, moreover, have the additional merits of sim- plicity and convenience. Many people to-day declare their adhesion to a tax on land for this reason. But it is remarkable that what constitutes the chief advantage of the tax in the eyes of this party is re- garded in precisely the opposite way by the real advocates of the single tax on land values. Mr. Sherman said that the tax on real estate -is to be recommended because it falls only nominally on the owner, and is in fact shifted to the consumer. Mr. George said that the tax on land values will stay where it is put, namely, on the landowner, and that it is to be recom- mended precisely because it will not be shifted to the consumer. The difference between the two theories could not be more fundamental. As between these two theories, there is a substantial con- sensus of opinion among economists that Mr. George is correct. From the time of Ricardo, it has been well-nigh universally con- fessed that a tax on land values, i.e. a tax on economic rent, ' Alexis Wilhelm, Projet d'impdt uniqvs universal sur la fortune publique. Paris, 1850. ' Especially Menier and his followers. For these see Sehgman, The Ih~ come Tax, 1911, p. 290. 68 ESSAYS IN TAXATION will fall wholly on the owner. ^ This is precisely the reason why the scheme is advocated by the single-taxers, who desire to tax the landowner out of existence — to take away from the owner of the land all his revenue rights in the land. The essential antagonism between the two schemes, therefore, cannot be emphasized too strongly. The one desires a land tax because it will be borne by the whole commimity; the other desires a tax on land values because it will be borne not by the whole community, but by a particular class. Yet many persons who really favor the former theory mistakenly give their adhesion to the latter. There are many self-styled single-taxers who simply believe that a land tax is the most convenient of all methods for securing the desired equality of burden. In reality, there is no kinship between them and the single-taxers proper. Mr. George warns us not to confuse a tax on land with a tax on land value. Another point which needs especial emphasis is the distinc- tion to be observed between the single tax and a tax on land values. The single tax with which we have to deal is indeed a tax on land values, but a tax on land values is not necessarily a single tax. The essential feature of the single tax is the singleness of the tax — the demand for the abolition of all other taxes and the substitution of a tax on land values. This is something quite different from the demand for a tax on land values as a supplement to other taxes. The addition in recent years of a tax on land values to the tax systems of various countries must not be interpreted to be an acceptance of the single-tax philosophy. The more modern advocates of the "single tax limited," i. e. a local tax on land' values plus a state tax on corporations, plus perhaps a national income tax are really not single-taxers at all. The distinction between the single tax and a tax on land values is of fundamental importance. II. The General Theory The general economic theory on which the demand for the single tax is based may be summed up in a few words. Land is the creation of God; it is not the result of any man's labor; no one, therefore, has a right to own land. Increase in the value of land is due mainly to the growth of the community; like the land itself, it is not the result of any individual effort; it is an unearned increment which properly belongs to society. More- 'See Seligman, The Shifting and Incidence of Taxation, 3d ed., 1910 pp. 281-287. THE SINGLE TAX 69 over, private property in land is undoubtedly the cause of all social evils. It therefore becomes the duty of the government to take what rightfully belongs to the whole community. Every one may still retain the result of his own labor; but the value of the bare land, the economic rent, must be taken for the state. In this way, and in this way alone, can the social problem be solved. The consequences are epitomized as follows in the platform of the Single Tax League: "It would solve the labor problem, do away with involuntary poverty, raise wages in all occupations to the full earnings of labor, make over-production impossible until all human wants are satisfied, render labor- saving inventions a blessing to all, and cause such an enormous production and such an equitable distribution of wealth as would give to all comfort, leisure, and participation in the ad- vantages of an advancing civilization." This is an inviting prospect. It is not so much a method of tax reform, as a panacea for human ills, that is here set forth. It would be interesting to discuss this fine fabric of the ideal. But we must be more modest and confine our attention to the scheme primarily as a practical method of tax reform. In order to attain a basis for this discussion, it is necessary to allude to the two fundamental doctrines on which the plan is founded. The first is the underlying theory of private property; the second is the theory of the relation of the individ- ual to the public purse. In the first place, the single-tax theory of property is the labor theory — the theory that individual human labor con- stitutes the only clear title to property. It would be interesting, were there space, to trace the genesis of this doctrine. The Romans, as is well known, had an entirely different theory — the occupation theory, based on the right of the first occupant. Against this rather brutal doctrine, which in the early middle ages paved the way for intolerable abuses, the philosophers advanced the labor theory, hoping thereby to bring about a reform in actual institutions. The labor theory went hand in hand with the doctrine of natural rights, which was the result of an earnest attempt to aboHsh the abuses of the ancien regime, and which came to a climax in the eighteenth century. Modern jurisprudence and modern political philosophy, however, have incontestably proved the mistake underlying this assumption of natural-law or natural rights. They have shown that natural law is simply the idea of particular thinkers of a particular age of 70 ESSAYS IN TAXATION what ought to be law. These particular thinkers, indeed, often influence the social consciousness, as they in turn are influenced by it, so that natural law may be called law in the making. But at any given time it represents simply an ideal. Whether that ideal will approve itself to society depends on a variety of cir- cumstances, but chiefly on the question whether society is prepared for the change. Just as the modern theory of juris- prudence is sociological in character, so also the modern theory of property may be called the social utility theory.^ The social utility theory says that just as all law, all order and all justice are the direct outgrowths of social causes, and just as private ethics is nothing but the consequence of social ethics, so private property is to be justified simply by the fact that it is the last stage of a slow and painful social evolution. At the outset, property, and especially property in land, was largely owned in common. It was only through the gradual progress of economic and social forces that private property came to be recognized as tending on the whole to further the welfare of the entire community. The social utihty theory does not, of course, mean that what has once been must always be. It is not a reactionary doctrine which looks upon all that is as good. It simply maintains that the burden of proof is always upon the party urging the change; and that when the change ad- vocated is a direct reversal of the progress of centuries, and a reversion to primitive conditions away from which all history has travelled, the necessity for its absolute proof becomes far stronger. The nationahzation of land is a demand which, in order to win general acceptance, must be based on theories independent of the doctrine of natural rights. Even though we accept the theory of natural rights, we need not therefore accept the single tax. If it is said that the value of land is the work of the community, and that in consequence every one has a natural right to it, how can we logically deny that the value of any so-called product is, at least partly, the work of the community? Mr. George bases his defence of private property in commodities other than land on the labor theory. Yet individual labor, it may be said, has never by itself produced anything in civilized society. Take, for example, the workman ' For a good exposition of the insufficiency of the doctrine of natural rights, a discussion of which would be out of place here, the reader is referred to Ritchie, Natural Rights, 1895; and, with special reference to the land question, to Huxley's essay on "Natural Rights," in his Collected Essays. THE SINGLE TAX 71 fashioning a chair. The wood has not been produced by him; it is the gift of nature. The tools that he uses are the result of the contributions of others; the house in which he works, the clothes he wears, the food he eats (all of which are necessary in civilized society to the making of a chair), are the result of the contribu- tions of the community. His safety from robbery and pillage — nay, his very existence — is dependent on the ceaseless co- operation of the society about him. How can it be said, in the face of all this, that his own individual labor wholly creates anjrthing? If it be maintained that he pays for his tools, his clothing and his protection, it may be answered that the land- owner also pays for the land. Nothing is wholly the result of un- aided individual labor. No one has a right to say: This belongs absolutely and completely to me, because I alone have produced it. Society, from this point of view, holds a mortgage on every- thing that is produced. The sociahsts have been in this respect more logical; and that perhaps explains why the movement to which Mr. George gave such an impetus in England and else- where is fast changing from one in favor of land nationaUzation into one for nationalization of all means of production. The socialists, indeed, as well as Mr. George, are in error, because the premises of each are wrong. It is not the labor theory, but the social utility theory, which is the real defence of private property. But if we accept the premises of the single-taxers, we are inevitably impelled to go further than they do. The dif- ference between property in land and property in other things is from the standpoint of individual versus social effort simply one of degree, not of kind. The other fundamental doctrine of the advocates of the single tax is the theory of benefit, — the doctrine that a man ought to contribute to public burdens in proportion to the benefits that he receives. The theory is that, sjnce the individual gets a special advantage from the community in the shape of unearned increment, he ought to make some recompense. To this con- tention, two answers may be made : first, that the benefit theory of taxation is inadequate; and second, that, even if it were true, it would not support the single tax. Let us take up these in turn. It is pointed out in another chapter that the payments made by the individual to the government are exceedingly diverse in character.^ Where the government acts simply as a private individual, in performing certain services for the citizen, the ' Infra, chap. xiv. 72 ESSAYS IN TAXATION payment is a price. It is a case of do ut facias. The govern- ment does something; the individual gives something. Again, even after common interests have developed, the individual may ask the government to do some particular thing for him, to confer some privilege upon him. He may wish to get mar- ried or to run a cab. For this particular privilege it is perfectly proper that the goverimient should make a charge — known in modern times as a fee or toll. Again, the government may be at considerable expense in laying out a new street, the result of which will be to enhance the value of a particular plot of ground. There is here no reason why the government should not demand that the owner of this plot should defray, at all events in part, the cost of this improvement. This is called a special assessment. In all these cases the individual receives an undeniable, special benefit as the result of a special expendi- ture made, or privilege conferred, by the government. The principle of give and take, therefore, is applicable. On the other hand, there are certain actions of the govern- ment which interest the whole community, and from which the individual receives no benefit, except what accrues to him incidentally as a member of the community. If the govern- ment undertakes a war, no one citizen is benefited more than another. If the govermnent spends money for instituting a public school system, for erecting tribunals, or for preserving the public health, it cannot be claimed that any one individual receives a measurable, special benefit; all are equally interested in good government. When pajonent is made for these general expenditures — and such a payment is called a tax — the proper principle of contribution is no longer that of benefits or of give and take, but of ability, faculty, capacity. Every man must support the government to the full extent, if need be, of his ability to pay. He does not measure the benefits of state action to himself first, because these benefits are quantitatively unmeasurable; and secondly, because such measurement im- plies a decidedly erroneous conception of the relation of the individual to the modern state. At one time the doctrine of benefit had a relative justification. Two centuries ago, when the absolute rulers of central Europe loaded down their subjects with grievous burdens and devoted the profits to their own petty pleasures — ^when in France, for example, the peasant was taxable d merd et misericorde of the nobility — it was natural that a school should arise to pro- THE SINGLE TAX 73- test and to proclaim the principle of benefits. Their argument was that as the state protects everybody, everybody is under a duty to pay taxes; in other words, their plea was for universal- ity of taxation. This was a distinct step in advance. Later on, however, the doctrine was stretched to assert that everybody should pay in proportion to benefits received, with the implica- tion that if the state could not be proved to confer any special benefit on the individual, he should not be held to pay any- thing. As thus extended, the theory has been rejected by well-nigh all the thinkers of the last fifty years. It is now generally agreed that we pay taxes not because the state protects us, or because we get any benefits from the state, but simply because the state is a part of us. The duty of supporting and pro- tecting it is bom with us. In civilized society the state is as necessary to the individual as the air he breathes; unless he re- verts to stateless savagery and anarchy he cannot live beyond its confines. His every action is conditioned by the fact of its existence. He does not choose the state, but is born into it; it is interwoven with the very fibres of his being; nay, in the last resort, he gives to it his very life. To say that he supports the state only because it benefits him, is a narrow and selfish doctrine. We pay taxes not because we get benefits from the state, but because it is as much our duty to support the state as to support ourselves or our family; because, in short, the state is an integral part of us. The principle of benefit, moreover, would lead us into the greatest absurdities. If we accept it, we must apply it logic- ally; we must not restrict its beneficent workings to the land- owner. As has been pointed out in another place, ^ the poor man, according to the theory of benefit, ought to be taxed more than the rich, because he is less able than the rich man to protect himself. It is, however, needless to discuss this point because, as we have seen in a previous chapter, so far as the individual is concerned, ability to pay is not only the ideal basis of taxation, but the goal toward which society is steadily working. It lies instinctively and imconsciously at the bottom of many of our endeavors at reform. When we say that in- direct taxes are often unfair to laborers, we mean that they are less able than the wealthier portion of the community to ' Cf. Seligman, Progressive Taxation in Theory and Practice, 2d ed., 1908, pp. 150-157. 74 ESSAYS IN TAXATION pay the tax. When we say that a corporation with large re- ceipts should pay more than one with small receipts, we do so because we know that its ability to pay is greater. The prin- ciple of benefit is, therefore, not the basis of taxation. It is the principle away from which all modern science and progress have been working. It is founded on a false political philos- ophy, and it can result only in a false political economy. It may be contended, however, that the doctrine of the single- taxers is really somewhat different, and that what they desire to emphasize is the principle of privilege or opportunity, rather than that of benefit. This, however, does not really help their case. It is undeniable that privilege constitutes an important factor in the tax problem; but correctly interpreted, privilege as we shall see in a subsequent chapter,^ is simply an element in taxable ability. The lucrative privileges that are conferred on an individual increase his income or his property, and to that extent augment the modern index of his taxpaying ability. There is therefore no real opposition between the two concep- tions; but it is obvious that privilege is the minor factor, ability the major. Privilege is one of the elements that constitute ability, not the sole element. The result of this consideration is that a tax on land values is legitimate because it reaches one of the elements of taxable ability. But the conclusion follows with equal force that the demand for a single tax on land values is inadmissible. This is true for two reasons : in the first place it emphasizes the prin- ciple of privilege to the neglect of all the other constituent ele- ments of faculty; it attempts to erect into the superior position a point of inferior importance; it takes a part and makes of it a whole. In the second place, even if the principle of privilege were put into this position of pre-eminence, the single-taxers err in singling out a particular privilege and basing their sys- tem on this, to the exclusion of other scarcely less important privileges. This point will be more fully discussed below, under the head of the justice of the single tax. Thus in a double way the single-taxers have failed to gain the assent of tax scientists and tax reformers. The arguments, which are of unquestioned validity when advanced in favor of the addition of a land-value tax to existing fiscal systems, lose their force in proportion that the emphasis is laid on the desirability of the single tax. ' Infra, chap. x. THE SINGLE TAX 75 III. Practical Defects Let us now leave the discussion of principles and come to the objections that may be urged against the single tax as a practical method of tax reform. To a certain extent indeed, the paths of American fiscal reformers and of the single-taxers are parallel, so that up to a given point it is the advantages rather than the de- fects of the single-tax movement that might be emphasized. As we have pointed out in a preceding chapter, the general property tax has become a failure in America. Every serious student agrees that the personal property tax as a part of the general property tax must be abolished. What to put in its stead is another question which need not be touched upon here. But the old must always be demolished before the new can be erected. Now so far as the destructive side is concerned, single-taxers and other tax reformers may go hand in hand. So ingrained is the belief of the average American in the virtue of the general property tax that the united efforts of all are necessary to effect a change. And where, as is sometimes the case, the more moderate single-taxers will go further and advocate practicable substitutes for the present-day property tax, there is still more reason for co-operation.^ In the struggle against the common enemy there is no time for the combatants on the same side to lay stress on differences of opinion. This explains why it is that in several of the American states the single-taxers and other tax reformers are working in unison. But this harmony is, after all, destined to be only temporary. After a time, when the period for real constructive work arrives, the differences are bound to make themselves felt and the rift will reappear. So that, however greatly we may prize the co-operation of the single- taxers for a time, the emphasis must ultimately again be put on the defects of the scheme as a practical, constructive solution of tax problems. These defects may be summed up under four heads: First, the fiscal defects; second, the pohtical defects; third, the moral defects; and fourth, the economic defects. 1. Fiscal Defects One of the great aims of every sound financial system is to bring about an equilibrium of the budget — that is, to avoid 1 Among the most interesting and effective of the modern single-taxers is Mr. Fillebrown of Boston. Cf. especially his A. B.C. of Taxation which has gone through several editions. 76 ESSAYS IN TAXATION a surplus as well as a deficit. Now, while many taxes may be suddenly lowered, not many of them can be made to give a suddenly increased yield. ( One of the cardinal principles of taxation, therefore, is elasticity.' In order to secure this, two conditions are necessary. In the first place, the source from which the tax is derived must be of such a nature that an in- crease of the rate will always mean an increase of the yield. There should be in the source of taxation a reserve power which can be drawn upon in case of need. Secondly, the revenue should be secured from a number of objects, so that the shrinkages or deficits temporarily due to the one class may be made good by the increase or surplus revenues of the other class. Among the elastic taxes is the income tax, and it is well known that in English finance one of the chief functions of this income tax is to preserve the equilibrium of the budget. So again, certain taxes on commodities are often utilized for this purpose. The single tax on land values, however, is utterly inelastic; for since, according to the theory of its advocates, the total rental value is to be taken from the landowners, the single tax cannot be increased. Where nothing has been left, nothing more can be taken. In the case of an emergency there would, therefore, be no possibility of increasing the revenues. Even if the total land value were not taken, it would still re- main true that a direct tax on the xmimproved value of land is far more inelastic than other taxes; for when the supply is constant and the price varies with the conditions of demand, the selling value as well as the rental value is subject to far more fluctuations than in commodities where the supply may be altered at pleasure. Furthermore, as we have seen, a single tax of any kind, whether on lands or on anything else, would be less elastic than a system of taxes where one may be played off against the other. Lack of elasticity is a serious defect in the single tax. Another fiscal weakness of the single tax is that it inevitably intensifies the inequahties resulting from unjust assessments. We all know how difficult it is to carry out laws which provide for equal assessments. Under the real estate tax in the United States, for example, the assessors are usually sworn to rate the property at its actual or selling value, and the selling value of a piece of land or of a house is comparatively easy to ascertain; yet it is notorious that in no two counties, nay even in no two adjoining pieces of property, is the standard of assessment the THE SINGLE TAX 77 same. Thus the report of the Iowa Revenue Commission of 1893, states that realty in Iowa was assessed at from seventeen to sixty per cent of the true value. It is well known, too, that in Chicago adjacent plots of real estate were until recently assessed at percentages of ridiculously varying degree. Now, it is manifestly not so easy to assess the land values, — that is, th'e bare value of the land irrespective of all improvements, — as it is to assess the selling value of a piece of real estate. For instance, an acre of agricultural land near a large town may be worth $200; but if used for truck-farming, considerably more than $200 may have been expended on it during the last century or two. Who can tell how much of the $200 present value is the value of the bare land and how much is to be assigned to the labor expended? Under the present method we have at least a definite test — ^the selling value; under the new method we should have no test at all. There is every likelihood, therefore, that the difficulties of the present situation would be intensified. During the past few years a number of American cities and a few states have initiated the system of differentiating between assessments on land values and on improvements. In every case, however, by improvements is meant in practice not the improvements in the land, but the improvements on the land, and not even all the improvements on the land, but only those consisting of buildings. In the cities this is of course all that is needed; but in the rural districts no effort is made to ascertain land values in the proper sense of the term. Any attempt to do so would at once engender the difficulties referred to above. Moreover, under the present system, inadequate as it is, there is always a chance that the imperfect enforcement of a particu- lar tax law will be offset by the assessment of other taxes, direct or .indirect. Under the single tax not only would there be more difficulty than at present in making the original assess- ment, but any inequality in the assessment would be seriously intensified by the very fact that it is a single tax. 2. Political Dejects The adoption of the single tax means the total abolition of all custom houses and import duties; it means that there can be no such thing as a system of protection to home industry. Many would, it is true, favor the single tax precisely on this account; but there are some self-styled " single-taxers " who beheve that as a matter of national policy there is a justifica- 78 ESSAYS IN TAXATION tion for import duties. Whatever we may think of the economic justification of import duties, it must be recognized that they may sometimes form an important pohtical weapon. It is clear, however, that leaving the question of protection entirely aside, the adoption of the single tax will make it impossible to utiUze import duties for pohtical, fiscal or other purposes. In the second place, the adoption of the single tax would render it impossible for governments to utilize the taxing power as a political or social engine. For instance, the United States government now imposes a tax on the circulation of state bank- notes in order to bring about certain desirable results in the currency situation. Again, the United States government levies a high tax on opium, not for the purpose of revenue, but in order to discourage the consumption of opium; and it also assesses a tax on oleomargarine, primarily in order to ensure the purity of butter. Under the single tax, all such efforts would be impossible. Finally, to mention only one other example, one of the chief methods of dealing with the drink question is through the imposition of high liquor licenses, the fiscal im- portance of which is only secondary. Under the single tax we should be prevented from attacking the problem in that way. Governments have always made use of the taxing power to regulate and to destroy, as well as to yield a revenue. Were the single tax to be adopted, this power would be eliminated.^ Thirdly, the political results of the single tax would be dangerous in another way. So far as there is any truth in the assertion that in a democracy it involves some risk for a small class to pay the taxes and for a large class to vote them, it is especially applicable to the single tax. Since the "unearned increment" would flow of itself, silently and noiselessly into the treasury, there would be no need of a budget; and the sense of responsibihty in the citizens would be perceptibly diminished. It is well known that liberty has been intimately bound up with the contest against unjust taxation; the constitutional history of England is to a large extent a history of the struggle of the people to gain control of the treasury; the American Revolution was precipitated by a question of taxation; the French Revolu- tion was brought about primarily by the fiscal abuses of the ancien regime. To take away, then, from the vast majority of ' Mr. George indeed states that he does not object to repressive taxes, because neither a land nor a revenue question is involved. But clearly the tax would then not be a "single" tax. THE SINGLE TAX 79 citizens the sense of their obligation to the government and to divorce their economic interests froili those of the state would, especially in a modern democracy, be fraught with danger. 3. Ethical Defects The advocates of the single tax love to base their arguments on the ground of justice. In this they are certainly wise; for even though all other arguments were in its favor, if the justice of the single tax could be successfully impugned, it would be foredoomed to failiire. Let us then ascertain whether it is indeed true that the single tax is an equitable method of taxa- tion. The two great canons of justice in taxation are universality and uniformity or equality. If anything has been gained by the revolutions of the eighteenth century and by the growing public conscience of the nineteenth and twentieth, it is a recog- nition of the fact that all owe a duty to support the state, that a system of wholesale exemptions is iniquitous, and that every taxpayer should be treated according to the same standard. Judged by any or all of these tests, can it be seriously main- tained that the single tax is an equitable form of taxation? Toward the close of the eighteenth century, there was a school of French writers, the Physiocrats, who first advocated the plan of a single tax on land — the famous impot unique. It was considerably talked about until Voltaire turned his caustic pen upon them and wrote the celebrated essay L'homme d quarante ecus — the man of forty crowns — , one of the most effective bits of mordant sarcasm ever written. Voltaire pic- tured the position of the French peasant toiling laboriously, amid conditions of unspeakable distress, but succeeding in get- ting from the soil a product equivalent to forty crowns. The tax-gatherer comes along, finds that the peasant can manage to keep body and soul together on twenty crowns, and takes away the other twenty. Then the peasant meets an old acquaint- ance, originally poor, who has been left a fortune of 400,000 crowns a year in money and securities. He rolls along the high- way in a six-horse chariot, with six lackeys, each with double the peasant's income; his maitre d'hdtel gets 2,000 crowns salary and steals 20,000; his mistress costs 80,000 crowns a year. "You pay of course half your income, 200,000 crowns, to the state?" asked the peasant. "You are joking, my friend," answered he, "I am no landed proprietor like you. The tax- 80 ESSAYS IN TAXATION gatherer would be an imbecile to assess me; for everything I have comes ultimately from* the land, and somebody has paid the tax already. To make me pay would be intolerable double taxation. Ta-ta, my friend; you just pay your single tax, enjoy in peace your clear income of twenty crowns; serve your country well, and come once in a while to take dinner with my lackey. Yes, yes, the single tax, it is a glorious thing." This little picture, perhaps, did more than all else to nullify the efforts of the Physiocrats. We shall later discuss the effects of the modern single tax on the farmer, but the principle underlying Voltaire's thought is equally applicable here. On what grounds of morals or jus- tice shall the landowner be singled out for taxation? We have seen that the theory of natural rights is not adequate; we have learned that the principle of opportunity does not correctly portray the relations of the individual to the state. Even if the theory of iinearned increment were true, it would not by any means justify the single tax on land values. In the first place, land values do not always or necessarily increase; and, secondly, there are a great many other values which in- crease mainly by the operation of forces which the owner of the property neither creates nor controls. Land values do not always or necessarily increase. Thus, in the testimony given before the Rapid Transit Commission in the city of New York in March, 1895, one of the witnesses spoke of several long avenues being lined with the graves of property- owners. What did he mean? Simply that ten, or twenty, or thirty years before, certain individuals had invested in the land, in hope of a rise in value, just as people invest in bonds or stocks or other securities. Instead of values rising, however, they remained stationary or even decreased; while, in the mean- time, the accumulated taxes and assessments upon this non- productive property completely ruined many of the investors. It is indeed true that in most growing cities land values in cer- tain localities will increase; but it is equally true that there are always sections in such cities where, for obvious reasons, land values decrease. These facts are familiar to all observers in large cities. Moreover, in some European countries the rental value of the land, in whole sections, is less to-day, owing to transatlantic competition, than it was a few decades ago. The tax on land value would in such cases yield only a precarious revenue. THE SINGLE TAX 81 More important still is the fact that even though land values often increase, similar increase in value is not by any means confined to land. Let us ask anyone whose mind is not befogged by the mist of erroneous enthusiasms: Who are the rich men of the world to-day? How has by far the greater part of our huge individual fortunes been acquired? Let us study the way in which men have become millionaires, especially in the United States. The usual cause is some fortuitous conjuncture of events, some chance happening du^ to no one's labor, but to a turn in the wheel of fortune — call it speculation, call it luck, call it by any name we will. How have most of the fortunes in Wall Street been made? Who is responsible for the increased value of investments? Who can say that the successful manager of the ring, the corner, the pool and the trust has worked out his salvation through his own industry? Land speculation is only a part of the sum total. If it be claimed that the fortunate speculator deserves his fortune because of his sagacity and fore- sight, why deny these attributes, at least in part, to the land- owner? It can, of course, not be denied that wealth has been acquired by thrift and industry; but it remains true that most of the very large fortunes that strike the common observer are due to these incalculable turns in the wheel of fortune, and that the so-called unearned increment of land values forms only a portion of these total gains. — Value is a social, not an individual phenomenon. If social environment gives a value to bare land, the same social environ- ment, by increasing the demand for other commodities, may at least in part help to augment their value. It is indeed true that if we contrast land with concrete commodities that can be multipHed at will, the difference seems to be profound. In- creased demand may lower, not increase, the price of the latter by reducing cost of production. But what the single-taxers forget is that property consists of, and income is derived from, not only concrete commodities, but services, relations and privileges of all kinds, ^ where increased demand, outstripping any corresponding decrease in the cost per unit of producing a greater supply, is primarily responsible for the increased value. A newspaper in a desert is worth nothing; a newspaper in a town is worth something; a newspaper in a city is worth still more. The newspaper is in part the product of labor, but the greater demand increases the value. A milk-route also is more profit- 1 Seligman, Principles of Economics, 5th ed. (1912), §§ 84, 113. 82 ESSAYS IN TAXATION able in a city than in a village. If it be said that land differs from all these in that it is a monopoly, the answer is irresistible that if there is any one thing which distinguishes the modern age, it is the development of economic monopolies of all kinds. So important, indeed, have these become that modern economic theory has been compelled to supplement the old doctrine of value which was based on the assumption of free competition by a newer and more comprehensive theory, especially apphcable to all these modern forms of monopoly price. Many of these monopoly profits cannot be reached by a tax on land values. On what possible theory of justice, then, shall we tax the man who has invested $100,000 in land which the next year appreciates fifty per cent; and, on the other hand, exempt the man who has invested $100,000 in the stock of the Sugar Trust, which the next year may also enhance fifty per cent? Why should the earnings invested in land be taxed and the earnings invested in any corporate security be wholly untaxed? It might, indeed, be claimed that a railway stockholder will be affected by a tax on the land owned by the corporation: but it is difficult to see how a railway bondholder can be reached by any tax on land values except in so far as the ultimate security for his debt may be affected. As the bonded indebted- ness of the railways to-day far exceeds their capital stock, it appears that, even in the case of these industries whose increas- ing values are largely due to the influence of the comrounity, the majority of investors would scarcely be touched. In the great mass of industries, of which the Sugar Trust is an example, where the land owned by the corporation is of exceedingly small consequence as compared with its other assets, it is plain that a tax on land values would not reach even the stockholders or the owners proper. Almost every industry, moreover, is de- pendent for its increasing profits upon the development of the community, that is, upon the increasing demand for the product. Land rises in value because there are more people who want to occupy that land; the earnings of a city newspaper increase chiefly because there are more people who want news. In each case the increased returns are due primarily to social causes; and while a larger newspaper indeed costs more to produce, while more land does not, yet so far as actual profits are con- cerned, the distinction between them, for all practical purposes, is one only of degree, not of kind. To confiscate the capital in- vested in land with the chance of the land either falling or rising THE SINGLE TAX 83 in value, while exempting absolutely the capital invested in corporate or industrial securities, is but a travesty of justice. It will be impossible to convince the common people that so- called unearned increments are confined to land. As a matter of fact the "unearned increment" of land is only one instance of a far larger class. So far as a man receives special opportunities from the com- munity, which undoubtedly increase his abihty to pay, they should be taken into account in framing any scheme of taxation. And since the rapid growth of modern towns brings into strong rehef the appreciation of site values which are due primarily to the growth of the community itself, it is not only justifiable but eminently desirable that a part — and a large part — of the revenues should be raised from a tax on land values. But let us not single out one special opportunity, because it strikes the eyes of urban observers, while we neglect all the other oppor- tunities which are equally, or almost equally, the result of social forces. While some kind of -a tax on land values is a legitimate part of a tax system, the single tax on land values is unjust; first, because opportunity is not the only element that must be taken into account in framing a tax system; and, secondly, because, even though it were, revenues from land are by no means the only form of the results of special opportunity. The single tax is unjust because it is exclusive and unequal. Even though the single tax, however, were theoretically just, it would not follow that it is desirable. Let us, therefore, come to the final part of our inquiry. 4. Economic Defects These considerations which have often been overlooked, may be discussed from three points of view: first, the economic effect of the single tax on poor communities; second, the eco- nomic effect on farmers and the agricultural interests in general; third, the economic effect on rich communities. In the first place, what would be the effect on poor communi- ties? In such cases the taxable property of the community consists principally of the often dilapidated farm houses erected on the land; of the tools, implements and beasts of burden used for till- ing the land; and of the personal effects and money that belong to the farmers. Even making due allowance for the relative poverty of the community, it may be said that the great mass of 84 ESSAYS IN TAXATION their possessions, therefore, consists of personalty. In so far as there is any real property at all, it is only to an exceedingly slight extent composed of land values. How then, it may be asked, can taxes be raised in a commmiity like this? How can the roads be maintained, the school houses be kept up, and the other improvements be effected? Since land values are in- significant, a tax imposed on an insignificant basis must be insignificant. In fact it may be said that a total confiscation of the land values would not suflJce to defray any considerable part of the necessary expenditures. If we take any of the assess- ors' reports in the less wealthy and not rapidly growing American states, it will be found that, contrary to the conditions of the rest of the country, the assessed personal property far exceeds in value the total assessed real estate. For instance, in 1890 personalty was to total rea,lty in Montana as 58 to 55 millions of dollars, in Wyoming as 20 to 13 millions, in New Mexico as 28 to 15 millions. Compare these figures with the older sections, as New York or Pennsylvania, where the proportion was as 382 to 3,404 millions and 618 to 2,042 millions respec- tively.' In 1904, the date of the last available statistics, the proportions were about the same. Taxable personalty was to realty in Montana as 107 to 95 millions, in Wyoming as 28 to 18 millions, in New Mexico as 26 to 16 millions; but in New York as 686 to 7,051 millions and in Pennsylvania as 200 to 3,476 millions. The estimated true values were as follows: Montana, as 418 to 328 millions; Wyoming, as 197 to 133 millions; New Mexico, as 177 to 154 miUions; New York as 5,617 to 9,151 millions; Pennsylvania, as 4,882 to 6,593 millions.^ If we are to abolish not only the tax on personalty, but all that part of the tax on realty which is not drawn from land values, it can easily be seen how difficult it would be to carry on govern- ment in these sections. What is true of poor communities as a whole applies also to the poorer sections of a rich community constituted largely or almost entirely of an agricultural population which is not rapidly increasing in numbers or wealth. The single-taxers themselves claim that land values amount to practically nothing in the farming districts. We shall see below the fallacy in this general contention; but so far as the community is a poor one ' These figures are taken from the census reports of 1890. See Abstract of the Eleventh Census: 1890 (1894), p. 195. ' Census Report: Wealth, Debt and Taxation, 1907. THE SINGLE TAX 85 there is undoubted truth in the statement that land values are trivial. In the testimony taken before a recent tax commission of Massachusetts, one of the single-taxers who was testifying as to the situation in certain rural townships was asked the question: How will it be possible for this poor town, in which there is very little land value, to raise its taxes? The witness was compelled to reply that it would be impossible for the com- mimity to do so, and he suggested that the expenses of the poor communities should be defrayed in large part from the revenues of the rich communities.^ This proposal is not easy of accomplishment; for with the American theories of local government, it would be difficult to induce certain sections in the community to assume the burdens of other sections. We are all acquainted with the continual bickerings in our state taxation, due to the efforts of the richer counties to escape paying more than their proportion of the general state taxes; and we have seen the discontent aroused in 1894 by the attempt in the shape of the federal income tax to make certain wealthy sections of the coimtry pay a dispropor- tionate part of the revenue of the national government. Where these efforts have given rise to so much dissatisfaction, it is ob- viously improbable that the purely local expenses of any com- munity will be defrayed by the efforts of other communities. While it is indeed true that the general state govermnent has — and very properly — in recent years constructed highways and built hospitals, and while even according to our present system school taxes levied according to wealth are sometimes, in part at least, distributed according to population, this tendency, however desirable in itself, has well-defined hmits. To a very large extent, at least, it will probably continue to be true that in purely local matters every county and town must stand on its own feet. But if the single tax is unable to defray even the local expenses of a poor community, not to speak of its share of general state or federal expenses, it is clearly beyond the realm of practical politics. In poor communities, unless rapidly in- creasing in population and resources, the single tax would be a somewhat precarious reliance. Let us consider, next, what would be the effects of the single tax on farmers in general. One of the claims of the advocates 1 Cf. Hearings relating to Taxation, 1893, pp. 185-188, and Report of the Joint Special Committee on Taxation, 1894, p. 38. 86 ESSAYS IN TAXATION of the system is that it would relieve the farming population of the burden of taxes now weighing upon them. A careful con- sideration of the facts shows, however, that this claim is un- founded, and that, on the contrary, the result of the single tax would be to make the farmers pay more than they are pay- ing to-day. In only a few states is a distinction made in the assessments between land and improvements on land. Let us take, as a typical instance, Ohio county in West Virginia, in which the city of Wheeling is situated. In the auditor's report for 1892, we find the following figures : ^ — "Value of buildings on lots, "Value of buildings on lands. Total value of buildings. Value of town lots without build- ings, Value of land without buildings. Total value of all land without buildings, Total value of lands, lots and buildings. Value of personalty. Total assessments, Population, In other words, whereas Ohio county then paid ten and one- half per cent of all taxes, and would have paid about the same if real estate alone were taxed, had the single tax been intro- duced it would have paid only five and one-half per cent of the total taxes, or about one-half of what was actually the case. The corresponding figures for 1908 were 9.9 per cent on total valua- tion, 9.8 per cent on real estate alone, and 6.8 per cent on land values alone. If the large towns would pay so much less, of course the farming districts would have to pay so much more. The improvements in the towns are worth more than the value of the bare land; while in the country districts the reverse is true. ' These figures are subject to some qualification because of the inclusion of the value of oil leases in the personal property. But the corrections would probably not suffice to alter the conclusion. Ohio Countt $8,554,010 671,795 Proportion EktibeStatk g-„0™ Per cent $22,840,511 14,371,855 $9,225,805 4,409,152 1,678,962 $37,212,366 14,453,321 95,771,281 25 $6,088,114 15,313,919 6,187,710 21,501,629 41,000 $110,224,502 147,685,972 51,707,093 198,959,920 763,000 5M lOVs 12 5H THE SINGLE TAX 87 As another example let us take California. In the comp- troller's report for 1893, we find the following figures : — Value op Rkal Valxte of Improve- Ratio of Land County Estate ments ON Real Values to Total (i.e. bare land) Estate Real Estate Per cent Colusa, $10,649,318 11,283,265 89 Merced, 11,222,179 1,037,103 92 Tulare, 17,258,512 2,327,705 88 San Francisco, 193,872,645 82,584,775 70 Total state, 757,980,207 242,388,163 76 We thus see that while in the city of San Francisco improve- ments equalled thirty per cent of the total real estate value, in some of the country districts improvements were only ten or fifteen per cent of the total. Taking rhe state as a whole, land values equalled seventy-six per cent of all real estate, while in San Francisco land values were only seventy per cent of all real estate. To levy the single tax would, therefore, make San Francisco pay less, and some of the country counties far more, than at present. Again, let us call attention to the report of the Commission on Valuation, made in 1892 to the Pennsylvania Tax Conference, which is probably the most careful attempt made up to that time to distinguish land values from improvements. We find the following figures : — Value of Land Value op Improvements Philadelphia county, ' 1357,007,936 $646,244,284 Purely agricultural land in Philadelphia county, 21,610,429 3,813,605 Entire state, all land, 1,881,334,522 1,754,525,949 Entire state, agricultural land, 725,485,439 245,494,072 The proportion of land values to total valuation of all prop- erty was in the county of Philadelphia, thirty-six per cent; in the agricultural counties of Sullivan and Greene, eighty-one per cent and seventy-five per cent, respectively; and in the whole state, fifty-two per cent. The Commission concludes: "As a rule, in agricultural counties the land values are the greatest, as would be expected; while in manufacturing counties and those having large cities, the value of the improvements is equal to that of the land, or greater." Let us now choose some Western states. In the report of the auditor of Colorado for 1894 we find the following figures: — 88 ESSAYS IN TAXATION Value of agricultural and grazing land, irrespec- tive of improvements .... $36,907,810 Value of improvements . . . " . . 7,492,022 Value of town and city land, irrespective of im- provements 63,080,205 Value of improvements 34,788,941 In other words, in the towns improvements constituted about one-third of the total values; whereas in the country, improve- ments were only about one-sixth of the total. As to Montana we find, in the report of the Board of Equal- ization for 1894, the f ollowhig figures : — Value of city and town lots .... $29,362,754 Value of improvements on same . . . 15,156,115 Value of land 17,493,680 Value of improvements on same . . . 7,287,887 In Lewis and Clarke county, the home of the largest city in the state, the total value of all land was $11,397,860; that of improvements, $5,269,300. In some of the agricultural or grazing counties, however, the value of the land was far higher in proportion to the improvements; in Meagher county, for example, land was $1,821,385, while improvements were only $629,054. Most striking of all, in this very same county, in the case of agricultural property, the figures were: land $1,218,474, improvements $266,824; while in the town lots the figures were: bare land $602,911, improvements $362,375. In other words, not only are improvements proportionately less in the rural counties, but even in these rural counties by far the larger proportion of the improvements are found in the little towns, as compared -with the farming or grazing land proper. In the state of Washington, the State Board of Equaliza- tion agreed on the following figures for 1893 : — Value of land exclusive of improvements . $ 87,527,472 Value of improvements 8,970,908 Value of city and town lots .... 101,889,377 Value of improvements 29,585,930 In Utah, Salt Lake county, the seat of the chief city, assessed, in 1893, real estate, exclusive of improvements, at $31,347,670; THE SINGLE TAX 89 improvements, at $9,483,141. In rural counties like Rich county and Cache county, the figures were, in the one case, realty $527,666, improvements $81,445; in the other case, realty $3,771,810, improvements $915,614. Here again, the more densely settled the township, the greater in proportion is the value of the improvements. To choose more recent figures, the North Dakota state board of equalization fixed the valuation for 1910 as follows: Land values $146,654,672 Improvements 9,909,143 Town or city lots 11,066,982 Improvements 16,959,192 Almost equally remarkable figures are reported for Wyoming by the Commissioner of Taxation for 1909-1910: — Land values $40,029,518 Improvements 6,338,712 Town lots 12,836,541 Improvements 14,324,496 The same is true in the Eastern states. Thus in New Jersey, in 1911 in certain counties the land values were greater than the value of the improvements : — County Value of Land Value of Impbovements Gloucester 10,474,115 8,574,078 Somerset 9,863,204 7,868,530 Salem 8,870,393 4,062,473 While in the cities the reverse was true.^ City Value of Land Value of Impbovements Camden $18,610,685 $ 30,278,706 Newark $134,764,835 150,144,175 In all these cases — and they might be multiplied — it is seen that the value of the improvements is, on the whole, ' These figures were fortunately not available when Mr. Shearman stated (Natural Taxation, ch. 12) that "in no large city are buildings worth more than 50% of all real estate." 90 ESSAYS IN TAXATION greater in the urban than in the rural districts.-^ To many this will be a surprise, because they are apt to be blinded by the immediate facts about them. The single-tax advocate generally lives in the city, and sees before him a city lot, each foot of which will sell for hundreds or perhaps thousands of dollars. The town lot, he is apt to exclaim, is worth hundreds of times as much as a piece of land in the agricultural districts. This is perfectly true; but it proves nothing as to the compara- tive ability of their owners to pay taxes because it overlooks a point of the greatest importance. When we compare urban with agricultural land values, we do not compare foot with foot, but total units with total units. Thus, an acre of land in New York City may be worth a thousand times as much as an acre of land in the country; but it must be remembered that there are many thousand times as many acres in the country as there are acres in New York City. A lot in New York may be worth ten thousand dollars, but a farm of five hundred acres in the country may also be worth ten thousand dollars, exclusive of improvements. The farmer who has paid ten thousand dollars for his farm, and has then proceeded to improve and cultivate it, will not be satisfied, when the assessor taxes him and exempts all the business men and house-owners in the adjoining village, with the statement that the owner of a ten-thousand-dollar lot in New York City pays a hundred times as much per front foot. He will be apt to reply that it makes no difference to him whether the New Yorker's ten thousand dollars is taxed; but that he objects to his own ten thousand dollars being taxed, while his neighbors in the village, who are far richer than he, pay nothing at all. In short, while attention is directed to the fact that land values are undoubtedly less per acre in the country than in the city, it is forgotten that the number of acres in the country is so many times larger than the number of acres in the cities that the total land values in the ' The only official examination of this matter is found in the government report entitled Taxation in Country and City: An Examination of the Dis- tribution of Property Taxes as shown by Official Statistics of Assessed Valua- tion. U. S. Dep'tm't of Agriculture, Division of Statistics, Misc. Series, 1900. Tiiis examination covered the District of Columbia and the sixteen states which assessed land values separately. The conclusion was that in a majority of the oases land values were proportionately greater in rural than in urban districts. The figures are printed and commented in Max West, "City and Country Taxes," in Political Science Quarterly, vol. 14 (1899), pp. 486-499. THE SINGLE TAX 91 country will form a substantial part of the whole. Moreover, we have seen that the value of improvements is relatively greater in the towns than in the country.^ In the country the farmhouse is built for a few hundreds or thousands of dollars; in the city the fine stone mansion or steel skyscraper is erected at a cost of hundreds of thousands or millions of dollars. If, therefore, all improvements were to be entirely exempted, the result of a tax on land values would be to make the farmers pay more than they do at present. It is not denied that as be- tween the general property tax as actually administered and a tax on real estate only, the farmer would be benefited by the adop- tion of the latter. For personal property, as has been elsewhere explained,^ is assessed chiefly in the agricultural communities. The remedy, however, consists not in taxing land values alone, but in striving to reach the owners of personal property by some other method than that of the general property tax. But even assuming that this reform cannot be effected, what the farmers would gain by the abolition of the personal property tax, they would lose and more than lose, as we have seen, by the total exemption of all improvements.^ As long as the United States remains pre-eminently an agricultural community, it is not likely that the single tax will become a practical question.* 1 The single-taxers claim that much of the present value of farm land — due to fencing, draining, etc. — should be classed as improvements. But, as we have pointed out above, it is quite impossible in practice to distinguish improvements on the land from improvements in the land. No attempt is ever made, in assessing land values, to differentiate between the two. ^ Supra, p. 18. ^ This conclusion is confirmed by Dr. West, after analyzing the official statistics, in the article cited on the previous page, in which he also states that "the exemption of intangible personalty alone would in a majority of cases reUeve urban communities at the expense of rural districts; but that the exemption of both tangible and intangible personalty would benefit the rural districts in three-quarters of the commonwealths." ^ In a pamphlet entitled Peoples Power and Public Taxation, written by A. D. Cridge and W. S. Uren, published by the Fels fund and distributed in 1910 to every voter in Oregon, some remarkable figures are presented as to the effect of the adoption of a land-value tax in lowering farmers' taxes. The figures are worthless because of the naive assumption that the naked land value of tillable lands (those actually in oultivation)_ is no greater than that of the non-tillable lands. In other words, if a piece of good land is cleared, its naked land value, according to this view, would be no greater than that of an adjoining rocky hillside which is not put under cultivation because it would not be worth while. It is such argu- ments that are spread broadcast to the general pubhc! 92 MiiSAYS IN TAXATION Thirdly, and finally, let us consider the economic effects of the single tax on rich urban communities. It is contended by the single-taxers, with special reference to the advantages claimed as likely 1;o accrue to the tenement- house population of the large cities, that the introduction of their system would bring about the social millennium. It is supposed that if we abolish the tax on improvements, that is, on houses, the vacant lots will be built over as if by magic, rents will fall, the wages of the workmen will rise, and a period of general prosperity will be ushered in. It may be asked, in the first place, where all this additional capital which is to be invested in houses is coming from. There is no fund floating about in the air which can be brought to earth simply by the imposition of the single tax; the amounts to be laid out in houses must be taken from the capital now invested in some other form of productive enterprise. The amount of loanable capital in the money market at any one time is definitely fixed. Even deposits in banks are already invested, for the most part, in mortgages or in corporate se- curities; that is, they are already utilized for productive pur- poses. What is put into new houses will, therefore, simply be so much taken away from other productive employments. It may be asked next, how are the rents of our tenement- house population so suddenly to fall? The theory that a tax on houses is shifted to the consumer or tenant is true enough, provided that the tax be exclusive — that is, provided that noth- ing be taxed except houses. If, on the contrary, the house tax is simply a part of a wider system of taxation; if other forms of property are assessed, like investments in land and in personal property; if a corporation tax is imposed to hit the investors in corporate securities; or if we have an income tax which is to reach general profits, — in all these cases the very conditions of the theory according to which a house tax is shifted disappear.^ To the extent, then, that the house tax is not a single tax, the tendency for it to be shifted will be di- minished. The only result, in this direction, of the single tax would be, as a matter of fact, that people would pay their rent to the state instead of to private individuals. We hear a great deal about the unoccupied lands held for speculative purposes in large cities; but it is a fact that south of Fourteenth Street in the city of New York — the home of the major part ' See The Shifting and Incidence of Taxation (3d ed.), pp. 292, 293. THE SINGLE TAX 93 of the tenement-house population — not seven-tenths of one per cent of the building lots lie idle, and of these some lots are occupied as coal yards, and some adjoining factories or large establishments are used for storage purposes.^ How then would the single tax relieve the inhabitants of the slums? They will not go to the suburbs where there is an abundance of land, for the same reason that they do not go there now. Rent in the suburbs is at present relatively less than in the slums, which are nevertheless crowded. The average workman plainly prefers to be near his work, and to enjoy the social opportuni- ties of contact with his fellow-workmen, evenings as well as daytime. Above all, without cheap and rapid transit, he -can- ' not afford the expenditure of time and money, necessary for conveying the various members of his family to and from the suburbs. The single tax, however, would not alter conditions of transit. Even assuming, therefore, that there was some magic fund to cover the suburban lots with houses, the rents in the slums would not be affected to any appreciable degree. Somewhat akin to this is the question of exempting improve- ments from the local tax on real estate, as a part of the whole scheme of taxation. Even here, however, it is scarcely open to doubt that the claims made by its defenders as a cure for urban congestion of population are greatly exaggerated.^ In small towns where it is customary for the owner of the land also to own the buildings, it makes indeed, very little difference whether the tax is imposed in a lump sum on both. land and buildings, or whether the same amount is paid by the owner on his land with the buildings exempted. The chief difference is to be found in the larger cities, where there is a variation in the proportion of the value of the structure to that of the land. Where the building value is sixty per cent of the total, as in the suburbs of a large city, compared with forty and thirty-five per cent in the crowded districts, it might seem that a remission of the tax on improvements would tend to foster the construction of buildings in the suburbs and thus to reduce rents all around and in this way lessen congestion. But entirely apart from the 1 In 1911 there were south of Fourteenth street in New York 467 vacant lots, with a value of $9,844,910 out of a total number of 24,203 parcels of real estate with an assessed valuation of $1,319,866,666. See the Report of the Commissioners of Taxes and Assessments for 1911. 2 See especially Taxation of Land Values in American Cities, The Next Step in Exterminating Poverty. By Benjamin C. Marsh, New York, 1911. 94 ESSAYS IN TAXATION considerations adduced in the last paragraph as to the relative inelasticity of rents in the slums, it may be pointed out that if improvements are wholly exempt the tendency would obviously be for landowners in the crowded slums to erect still higher tene- ments, which would have to return only the interest on the less- ened investment, and which would therefore again increase congestion. In point of fact, suitable transportation facihties, proper housing and building laws, and adequate credit condi- tions exert a far more important influence on congestion and house rents than does any system of exemption of improvements from taxation. ■ The exemption of improvements from the local real estate tax has .been tried especially in Australasia and in Canada. In Australasia the results are inconclusive, and the real impor- tance of the reform lies not so much in the exemption of improve- ments as in the substitution of capital values for rental values in the assessment of land. ^ In Canada several cities and prov- inces have in recent years exempted buildings in whole or in part, from the real estate tax.^ The advantages of the system, however, have not been those advanced by its advocates. In Winnipeg and Vancouver, for instance, house rents have not fallen, but risen; and speculation at large, far from being abated, has increased enormously. This is, of course, due to the fact that taxation, even as a whole, is of incomparably less importance than the economic forces which make for the growth of the community. But it is quite idle to speculate upon what, the result would have been if the improvements had been taxed; we are told that little difference can be noted between the Canadian towns where improvements are exempt and the American towns across the border, where they are taxed.' The true reason why there has been so little opposition to the exemption of improvements in Canada is that the tax rate, in the face of an enormous increase of land values which is nat- urally found in all rapidly growing communities, has been kept very low. Jdined to this is the sentiment against absentee ' For a discussion of this cf. infra, p. 530. 2 For a full and accurate statement of all the facts of the case see chap. viii. of Provincial and Local Taxation in Canada, by S. Vineberg, New York, 1912. This is no. 128 of the Columbia University (Series in History, Economics and Public Law. ' See especially F, C. Wade, The Single Tax Humbug in Vancouver. Vancouver, 1912. Wade contends that the other Canadian "non-single- tax " cities have increased still faster than Vancouver. THE SINGLE TAX 95 ownership, which is often apt to be strong in any young com- munity, as is evidenced by similar movements toward the exemption of improvements that are found in the early history of prosperous American states.^ The situation in Canada is the same as that in Australasia.^ As soon as the normal conditions of a long established community present themselves, with only a gradual and moderate increase of prosperity, but with the rapidly growing expenditure of a complicated economic life, the real problem will present itself, as it is, for instance, found in the cities of the Eastern United States. So far as it is true that land in or near cities is held largely for speculative purposes, the difficulty can be met by the enforce- ment of now existing laws, and by the imposition of a special or a higher tax on unoccupied lands in or near the city. The tax laws of the American states everywhere instruct the officials to assess property at its true or selling value, but it is notorious that xmimproved lots are, as a rule, considerably undervalued as compared with those on which improvements have been erected. If, then, we simply enforce the laws as they exist, it will be more difficult for anyone to hold land too long on specu- lation. If in addition we impose a special tax or a higher tax on imimproved city lots, it will be still more difficult to do so. It is thus evident that the desired end may be accomplished without invoking the aid of the single tax. ' In the territorial days of Iowa, for instance, improvements were ex- empted for a time in 1840, and a few years later an important discussion took place in which the disadvantages of the unearned increment accruing to non-settlers and especially to absentee speculators were fully set forth, with reflections on the dangers of land monopoly. As the country was built up, however, absentee ownership diminished in its relative impor- tance and the demand for the exemption of improvements disappeared. Cf. J. E. Brindley, History of Taxation in Iowa, 1911, i., pp. 23-28, and the interesting editorials from contemporary newspapers, pp. 370-371. Still further back, namely in the seventeenth century we find a similar movement although for somewhat different reasons. In 1652 Director Stuyvesant of New Amsterdam proposed a tax on unimproved lands only. The bill was drawn and would have passed but for the necessity of a larger revenue from more general sources, due to the war between Holland and England. See O'Callaghan, Laws and Ordinances of New Netherlands, 1 638-1674, *"& anno. Two years later it was proposed that Vacant lots in New Amsterdam, Beverwyck and other towns, which had been granted for building purposes, should be sold at an official valuation " in case the present owners and proprietors either neglect or are disinclined to build on aforesaid vacant lots." Ibid., p. 181. 2 Cf. infra, chap, xvii, sec. vi. 96 ESSAYS IN TAXATION Furthermore, so far as the idea of unearned increment is really applicable to urban real estate, the problem can be solved not only by extending the American system of special assess- ments which takes for public purposes, and precisely at the time of its creation, the increased value which may properly be said to be due to any positive action on the part of the community; but also by imposing an additional increment-value tax, which will take for the community a part of the increased value caused by the silent growth of the community itself.^ By enforcing the tax laws as they exist to-day, by extending the law of special assessments to all the cases which are properly referable to the principle of benefits, by levying a special tax on unbuilt city lots and by adding to the existing code of taxation some form of increment-value land taxes, we shall in all probabihty do as much as is under existing conditions either practicable or equitable. IV. Conclusions We have studied the single tax from different points of view. It is undoubtedly true that the single-tax agitation has been of great value. It has in some countries served to direct attention to the abuses of a mediaeval land system. It has in the United States helped to disclose the shortcomings of the antiquated general property tax. It has everywhere done yeoman's service in emphasizing the question of unjust privilege. But none the less we have found ourselves miable to accept its demands. We have seen that the single tax is defective fiscally, politically, morally and economically. We have learned, first, that it would be inelastic, and that it would intensify the inequalities resulting from unjust assessments; secondly, that although itself pro- posed chiefly from social considerations it would prevent the government frorn utilizing the taxing power for other social purposes, and that it would divorce the interests of the people from those of the government; thirdly, that it would offend against the canons of universality and equality of taxation, and that it would seriously exaggerate the difference between ' profits from land and profits from other sources; and finally, that it would be entirely inadequate in poor communities, that it would generally have an injurious influence on the farmer, and that even in the large urban centres it would ex- 1 As to this cf. infra, pp. 491 et seq., 508 et seq. THE SINGLE TAX 97 empt large sections of the population without bringing any- substantial relief to the poorer classes. This is clearly not the place to discuss the wider claim of the single-taxers, that the application of their scheme would intro- duce the social millennium. Even as a method of tax reform, however, the project is, as we have seen, a mistaken one. Our system of taxation is far from being ideal, or even comparatively just. But whatever be the much needed reform and however desirable may be the addition of a tax on land values to existing revenue systems, it is not probable that either the common people or the student will accept a scheme which is at bot- tom palpably unjust, which abandons one of the fundamental theories of modem taxation — that of relative ability or faculty — and which seeks to put the burdens of the many on the shoulders of the few. CHAPTER IV DOUBLE TAXATION Double taxation in the simplest sense denotes the taxation of the same person or the same thing twice over.^ This is at once a very old and a very new phenomenon. It is very old so far as it is founded on mere extortion, on the caprice of govern- ment and on the desire to raise revenues without any regard to the relative burden on the taxpayer. All government was at first based on might. Although this was the original cause of the double taxation of one man and the exemption of his neighbor, it is in modem times entirely overshadowed by the second cause, which is essentially of recent growth. We live in an age of industrial complexity and differentiation. In former times property rights were simple, and the little capital that existed was largely owned by the producer. To-day not only does the same capitalist invest in different enterprises, not only is the producer often dependent for a part of his capital on sums that belong to others, but the old geographical unity has been dis- solved, and there is no necessary connection between the residence 1 Cj. in general, Francis Walker, Double Taxation in the United States, published in the Columbia University Studies in History, Economics and Public Law, vol. v., no. 1 (1895). C/. also T. Sutro, " Double and Multiple Taxation " in Proceedings of the Second International Tax Conference, Colum- bus, 1909, p. 547 and C. Crocker, " Some Judicial Opinions against Double Taxation," Fourth Conference, 1911, p. 261. For the eariier American literature oh the subject see A. L. Perry, Extra-territorial Taxation, Boston, 1875; George G. Crocker, An Exposition of the Double Taxation of Personal Property in Massachusetts, Boston, 1885; and the same author's The In- justice and Inexpediency of Double Taxation, Boston, 1892; J. C. Ropes, Double Taxation. Argument before the Joint Committee, Cambridge, 1884; ■ Josiah P. Quincy, Double Taxation in Massachusetts, Boston, 1889; Richard H. Dana, Double Taxation unjust and inexpedient, Boston, 1892; and the same author's Double Taxation in Massachusetts, Boston (1895). The continental hterature is singularly weak in the discussion of the general problem, although more satisfactory in some detailed questions. For a more recent treatment of the problem as a whole, see Eheberg, Doppelbesteuerung in Conrad's Handworlerbuch der Staatsmssenschaften, 3d ed. (1910), vol. iii.; and M. J. Brincour, Des doubles impositions fiscales au point de vue national et au point de vue international. Louvain (1910). DOUBLE TAXATION 99 of the capitalist and the place where his capital is employed. A system of taxation, therefore, which may have been per- fectly just under the older and simpler conditions, may now be entirely inadequate because of the failure of government to take account of these new compUcations in property rights. As a matter of fact, almost all existing double taxation in civilized nations is due to inattention to these modern industrial intri- cacies. If we approach the subject of double taxation more closely, we are confronted by serious difficulties. There are almost as many kinds of duplicate taxation as there are kinds of taxes or of industrial relations. We find the term used with the utmost looseness, so that what may be in one state a very im- portant species of double taxation may be quite insignificant in another. In the first state, then, the phrase "double taxa- tion" always calls up a particular set of problems; while in the other state the same phrase will denote something entirely differ- ent. Let us therefore endeavor to give an analysis of the phenomena which, while not entering into the details of the problem, will explain the principle in all states. There are two distinct categories of double taxation — that by competing jurisdictions or authorities, and that by the same jurisdiction or authority. The first is essentially geographical in character. It is partly due to the fact that modem wealth is more or less cosmopolitan. A man living in one state and owning property in another may be taxed on the same property by both states, because they compete with each other in claim- ing jurisdiction over that property. Not only is this true as between foreign countries, but it is equally true, and in fact of far greater importance, as between conflicting authorities in the same country. The separate commonwealths in a federal state, the separate counties in a commonwealth, the separate towns in a county — each and all of them may make conflicting claims on the same individual or on the same piece of property. Double taxation — or it may be triple or quadruple taxation — by competing jurisdictions is thus a product of the modern mo- bility of capital and labor; and with the growing importance of local taxation, the difficulties are multiplied. It may happen, however, that a single authority — the same town, county, commonwealth or nation — is confronted by essentially similar difficulties as to property or persons within its jurisdiction. Thus a man buys a piece of land, and borrows 100 ESSAYS IN TAXATION part of the purchase price from another man living in the same town. If the town taxes the value of the land, which in this case includes the value of the mortgage, and then taxes the mortgage, the question of double taxation immediately presents itself. So, again, if a man invests his property in the stock of a corporation doing business in the same place while the state taxes both the investor and the corporation, we are confronted by the same difficulty. In such cases the taxes are imposed by the same authority or jurisdiction. Let us discuss each class in turn. I. Double Taxation by the Same Authority The simplest case arises when a person is taxed on his prop- erty, income or profits, while an additional tax is imposed on the property, income or profits of the business in which he is a partner. This is such a flagrant case of double taxation that it is not practised by any civilized government. For, clearly, the business income is to that extent the individual income. This case may therefore be neglected as of no practical moment. The first important instance of double taxation arises when an attempt is made to tax property and also to tax income; or to tax either property or income, and also to levy a business or license tax. On this point there is much misconception. Many consider this to be wrong, because it is double taxation. As a matter of fact, however, if all are put upon the same plane, the simultaneous taxation of property and of income works no injustice. If all the members of the class are treated alike, it makes no difference whether there is one single high tax on property, or a low tax on property and another low tax on the profits of the property. In fact, the goveriunent would be perfectly justified in taxing the property, the income of the property and also the expenses or any other attribute of the property. All such duplicate or triplicate taxes are perfectly rea- sonable so long as they fall equally on all. Taken together, they amount simply to a high rate for a single tax on the prop- erty. Double taxation, therefore, is not always wrong; it is unjust only when one taxpayer is assessed twice while another in substantially the same class is assessed but once. It is the inequality of taxation that instinctively shocks us. But if all persons within the class are equally subjected to the burden, there can be no just complaint. It may be objected that people are not treated alike when DOUBLE TAXATION 101 they pay different taxes on the same income. Our opinion must depend, however, entirely on the attitude we take toward what is called "differentiation" of taxation. If we maintain that all incomes should be taxed alike, irrespective of source, the objection would be valid. But modern theory has formulated the demand for a distinction between earned and unearned incomes, or between incomes from labor and incomes from property. Even so conservative a writer as John Stuart Mill was an adherent to this principle, which is at present quite generally admitted. This "differentiation" may be secured in two ways. A lower rate may be levied on labor incomes than on property incomes, as in the present North Carolina income tax, as in the former Virginia income tax, and as in Italy, in Holland and in some of the Australian states. But instead of making a difference in the rates, the same result may be reached by levying a uniform tax on all incomes and an additional tax on property, so that the income from property thus indirectly pays a higher rate. This is the case in Prussia and in some of the Swiss cantons, where the property tax and the income tax are levied on the same property. In other words, property income is put into a different class from labor income. It is taxed twice — once on property and once on income — because the seeming inequality is considered to be really a higher equality. It is double taxation, but it is not unjust double taxation. In some places the principle of differentiation has not yet been adopted. When the income tax is added to the property tax, the income from property already taxed is exempted, as in Massachusetts and in some of the Swiss cantons. Many difficul- ties have, however, arisen in the endeavor to distinguish these property incomes. Thus in Massachusetts the question pre- sented itself whether the income from a business could be taxed, if the property invested in the business was already taxed. In a leading case this practice was upheld on the ground that business profits are the result not only of the capital invested, but of the industry and skill of the capitalist.^ Although this is no doubt true, as a matter of fact the interpretation of the Massachusetts law is unjust because incomes derived solely 1 Wilcox vs. Middlesex, 103 Mass. 544. Cf. the interesting discussion in J. A. Lane, Address on Taxation with Special Reference to Taxation upon Income derived from Property subject to Taxation, Boston Executive Busi- ness Association, 1891. Cf. also Report of the Special Commission on Taxa- tion, Boston, 1891. 102 ESSAYS IN TAXATION from land or from other investments pay only once, while incomes derived from business enterprise pay twice, once on the property invested and again on the income derived. It is this inequality of the tax which renders the system crude and inequitable. This has been recognized in practice, and the custom has arisen for the assessor to allow six per cent on the capital invested in the business as representing the income from capital, and to levy the income tax only on the surplus profits. In the Swiss cantons similar provision is made by law and applies to incomes from all property, the amount exempted being four to five per cent of the capital. These figures are, indeed, entirely arbitrary, although they represent an inter- esting attempt to avoid double taxation.-^ If, however, we accept the principle of differentiation, this attempt is to a certain extent mmecessary. The higher taxa- tion of income from property as compared with income from other sources is theoretically defensible, although the exact amount of increase cannot be fixed a priori. It is only when the additional rate exceeds this amount that we can really speak of unjust double taxation. Up to that point it may indeed be double taxation, but it is not necessarily unjust taxa- tion. We may, then, conclude that to tax property and also the income from property is not of itself inequitable, provided that the income from all property is taxed. To single out a special class, as is done in Massachusetts, does indeed involve injustice. But if the tax applies to all property, the simul- taneous taxation of property and income is not of itself repre- hensible double taxation. Incomes from property should be taxed higher than incomes from labor. The second important case of double taxation is connected with the question of indebtedness. Shall debts be deducted from assessments for the property tax, or the interest on indebt- edness from assessments for the income tax? ^ Is it double taxation to tax the creditor on the debt, and the debtor on the whole property including the debt? Put in this way the answer is plain. A man must be taxed upon what he has, not upon what he has not. What he owes to another is not really a part of his property. The one great reason why the countries of continental Europe are changing their ' For some additional considerations, see infra, chap, viii, sec. ii. 2 The fullest study of this case is Heckel, Die Einkommensteuer und die Schuldzinsen, 1890. DOUBLE TAXATION 103 system from taxation of product to taxation of income, is that under the former method, which disregards the personal posi- tion of the individual, no deduction is made for indebtedness; whereas by the income tax such deduction is made. For net income can mean only the surplus above all necessary outlays — including interest on debts — coimected with the acquisition of the revenue. Every income tax, whether in Europe or in America, therefore permits interest on indebtedness to be de- ducted. What is true of the income tax is equally true, in theory, of the property tax. But the practical limitations to the applica- tion of the theory in the case of the latter, and more especially in the tax on personalty, are very considerable. The unfor- tunate experience of the United States has already been dis- cussed. There is, however, one special phase of the question which is of widespread interest. In the case of a tax on land or on real estate, what should be done with the amount of the mortgage? The problem of double taxation arises, as in several of the American states, when the borrower or mortgagor is assessed on the full value of his land, and the lender or mortgagee is also taxed on the amount of the mortgage debt. If A, the owner of a $100,000 farm, borrows $50,000 from B, the state thus taxes $150,000, when there is really only $100,000 of property; and so far as B is able to shift his tax on A, the latter pays the taxes for both.^ On the other hand, if the mortgagor is allowed to deduct the value of the mortgage, and if the mortgage debt is not taxed at all to the mortgagee, the state loses a legitimate revenue. It now taxes A on $50,000 and does not tax B at all, thus getting a revenue from $50,000, when there is really $100,000 of property. In the one case we have double; in the other, we have inadequate taxation. What is the remedy? Several plans have been tried. Ac- cording to the first the mortgagor is taxed on the full amount of the property, but the mortgagee is exempt. This method is based on the theory that the tax on the lender will be shifted at any event to the borrower, that as a result of the exemption of mortgages capitalists will lend more readily and at a lower rate, and that the benefits of exemption will accordingly be ' In 156 Pa. 488, the taxing of both land and mortgage was held not to be double taxation. 104 ESSAYS IN TAXATION diffused throughout the community. ^ This plan is obviously the simplest and most effective method of avoiding double taxation. Several American states have now adopted this plan, with great satisfaction to all concerned. For under this scheme, in the case mentioned above, the state will still get the revenue on the entire $100,000 worth of property, and the mortgagor will not have to pay the double tax, once to the state and again in the shape of interest to the lender. A second plan consists in exempting not the lender, but the borrower; not the credit of the mortgagee, but the hability of the mortgagor; that is, to tax the lender on the amount of the mortgage and the borrower on the value of the property minus the mortgage. In working out this scheme, however, several commonwealths, like California and Massachusetts, adopted a slight modification. According to the amended plan, the mortgagor can offset the amount of the mortgage debt. The mortgage, on the other hand, is taxable in the hands of the mortgagee, but it is treated as realty, not as personalty — ^that is, its situs does not follow the domicile of the mortgagee, but it is taxed in the locality where the mortgaged property lies. If the tax is paid by the mortgagor, he may recoup it from the mortgagee. In Massachusetts, indeed, this provision is practi- cally void, because nearly all mortgages contain a clause requir- ing the mortgagor to pay taxes upon the mortgaged estate, and a further agreement to pay all taxes upon the debt in the event of the repeal of the law. The practical result, therefore, is virtually the same as if mortgages were exempt, and the bor- rower taxed on the total value of his land.^ In California, where 1 See Seligman, The Shifting and Incidence of Taxation, 3d ed. (1910), pp. 332-337. 2 See the Report of the Special Committee of the Boston Executive Business Association on Taxation, 1889, p. 31. For an investigation of the question as to how far the rate of interest has been affected, see Thomas Hills, Ad- dress on Taxation, delivered before the Boston Executive Business Association, 1890, p. 20; and Nathan Matthews, Jr., "Double Taxation of Mortgaged Real Estate," in Quarterly Journal of Economics, iv. (1890), p. 339. Cf. also R. H. Dana, Double Taxation in Massachusetts. Published under the auspices of the Massachusetts Anti-Double-Taxation League, 1895, pp. 72-86. For earlier discussions of the subject see Benjamin A. Willis, Remarks on the Bill providing for the Exemption of Mortgages on Real Estate from Taxation, New Yorlc, 1873; John C. Ropes, Taxation of Mortgaged Real Estate, Boston, 1881; A. W. Beard, Taxation of Mortgaged Property. Remarks before the Legislative Committee, n. p. 1881; Henry Winn, The Exemption of Money Lenders from Taxation: its Effect upon the Interest Rate, Turners Falls, DOUBLE TAXATION 105 the plan was incorporated into the constitution of 1879, all such agreements between mortgagor and mortgagee were void. This continued until 1907 when, after an amendment to the constitu- tion in 1906, a law was passed permitting separate contracts. Legal enactments, however, cannot prevent the operation of economic law. As a matter of fact, the interest rate on mort- gages rose as a consequence of the law, and it has even been claimed with some degree of truth that interest rose by a slight amount over and above the tax, to compensate the lender for trouble and risk.^ By the end of the nineties this was beginning to be recognized, and during the next decade the conviction of the futility of the old scheme became so widespread that in 1910 the constitution was again amended so as to provide for the complete exemption of mortgages. In the meantime, how- ever, the Massachusetts or California system had been intro- duced in 1903 in Wisconsin, leading there also to practical exemption.^ In addition to these methods of attempting to avoid double taxation we find some alternative and halfway schemes. Sev- eral states which recognize the inevitable shifting of a tax on mortgages to the borrower or, on the other hand, the practical impossibihty of the discovery of mortgages by the assessors, are nevertheless not ready to abandon all revenue from this source. A few of these states try to solve the problem by levying a special tax on mortgages, but at such a low rate that there is 1883; and the same author's Mortgage Exemption mid Taxation of Real Estate only, Boston, 1889. 1 See C. C. Plehn, "The Taxation of Mortgages in California," in The Yale Review, viii. (1899), pp. 31-67. For later studies on the question of the incidence of the tax on mortgages see Mortgage Taxation and the Bost- wick Bills. Prepared by the New York Tax Reform Association, New York, 1904; Mortgage Taxation and Interest Rates, New York, 1906, a study made by the New York Tax Reform Association; T. B. Adams, "Mortgage Taxation in Wisconsin," in the Quarterly Journal of Economics, xxii. (1907), pp. 1-27; and R. A. Campbell, Mortgage Taxation, Madison, 1908. 2 The same system at one time existed in Michigan, Missouri and Oregon. The Missouri constitutional amendment of 1900 was declared by the state court to be opposed to the federal constitution in Russell vs. Croy, 164 Mo. 69, on the ground that corporate mortgages were not treated in the same way as those of individuals. In Oregon the law of 1882 was declared unconstitutional in 1884 for much the same reason, but the defect was removed by an amendment of 1885. In 1893, however, the law was re- pealed. The Michigan law was also repealed in 1893, and mortgages were again taxable as personal property until 1911 when the mortgage-recording law was enacted. 106 ESSAYS IN TAXATION less inducement to conceal them. A few others attempt to solve the problem by levying a small tax on the mortgage when it is recorded, and thereafter exempting it.^ The first method involves practical exemption from the beginning, the latter complete exemption after the first year. Thus the tendency may be said to be everywhere in the direction of exemption as the best means of avoiding double taxation.^ In the above discussion we have treated primarily of indi- vidual indebtedness. The same question often arises in con- nection with corporate debts, especially in the shape of mortgage bonds. It has usually been overlooked, however, that there is a distinction between individual and corporate property or in- come. In the case of individuals, to tax both the property and the amount of the mortgage debt is theoretically unsound, be- cause the individual's true taxable property consists in his surplus above indebtedness. The capital stock of a corporation, however, represents, in many cases, only a portion of the prop- erty, while the remainder is represented by the bonded indebted- ness. In the United States, for example, it is well known that railroads are built mainly on the proceeds of mortgage bonds. To exempt the mortgage debt in the case of these corporations would thus be inequitable; for only by taxing both capital stock and mortgage debt can the state reach the true faculty of the corporation. In the case of individuals, indebtedness diminishes the capacity to pay taxes; in the case of corporations, indebted- 1 As to this see C. F. Robinson, " The Mortgage Recording Tax " in the Political Science Quarterly, vol. xxv (1910), p. 609. 2 At present (1912) twenty-eight of the American states and territories still tax both mortgagor and mortgagee; eight (Arizona, California, Colo- rado, Delaware, Idaho, Louisiana, Utah and Washington) exempt mort- gages completely; one (New Hampshire) exempts money loaned at not exceeding five per cent, and secured by note or mortgage on real estate within the state; one (Indiana) exempts mortgaged land to the extent of $700, provided that this does not exceed one-half of the value of the real estate, but the mortgage credit is then assessed to the mortgagee at his residence; four (Connecticut, Massachusetts, New Jersey and Wisconsin) deduct the mortgage from the value of the land, but permit the mortgagor to assume the tax, the mortgage being treated as an interest in the real estate, as explained in the text; four (Iowa, Maryland, Pennsylvania and Rhode Island) tax mortgages at a special low rate; and four (Alabama, Michigan, Minnesota and New York) tax mortgages at a low rate when they are recorded, through the mortgage-recording tax. For a detailed account of the situation in 1908 see Robert Argyll Campbell, Mortgage Taxation, Comparative Legislation Bulletin No. 17, Legislative Reference Department, Madison, 1908. DOUBLE TAXATION 107 ness often augments that capacity because the so-called debt is in reality an integral and constituent part of the capital. Strictly speaking, the proper distinction is not between cor- porate and individual credit, but between production and con- sumption credit. In the case of individuals, money borrowed for purposes of consumption or to meet pressing emergencies cer- tainly comes under the above rule that indebtedness is to be re- garded as a burden. When, however, money is borrowed in order to enlarge the business, the credit takes the place of capital and may enable the borrower to make larger profits. The income of the borrower therefore is really increased by the surplus of the additional net profits, due to the loan, over and above the amount of the interest on the loan. In an in- come tax this is automatically provided for, since the addi- tional profits figure on the one side, and the interest charge on the other side, of the income account. Where the tax is levied on property, however, no allowance is made. Strictly -speaking, only so much of the borrowed money ought to be assessed to the borrower as represents the capitalization of the surplus profits. Practically, however, this is impossible to ascertain, and we are therefore justified in demanding an exemption of debts from the property tax. On the other hand, in the case of corporations, while debts are sometimes contracted to meet pressing exigencies, and may thus in a way be considered a kind of consumption credit, mort- gage bonds at least are almost exclusively issued in order to provide capital. Economically, the corporate capital consists of the bonds and the stock. In England, as is well known, there are even no railroad bonds at all, but simply debenture stock. It is therefore quite fitting that the interest on corporate bonds should not be deductible in case of the income tax, nor the mortgage bonds themselves in case of the property tax. It is the correct recognition of this fact that has led to the intro- duction of the tax on corporate loans in many states, American and foreign.^ We come now to the third case of double taxation, which in the modern days of corporate industry has assumed much ' The great defect in the otherwise admirable study of Heckel, mentioned above, is the failure to distinguish between corporations and natural per- sons. He is indeed forced to the practical conclusion that corporations must be liable for the tax on mortgage debts, but his arguments are not con- vincing; c/. p. 182 of his work. 108 ESSAYS IN TAXATION importance, — that of the double taxation of a corporation and of the investor in corporate securities. If we tax the corpora- tion, shall we also tax the individual stockholder or bondholder? The great divergence of practice in America, as well as abroad, will be discussed in another chapter; ^ but the economic theory is simple. If the tax — whether on income or on property — is general, and appHes to all classes of corporations and to other non-corporate investments as well, it is manifestly double taxa- tion to assess the security holder as well as the corporation. The tax on the corporation diminishes his income from the corporate security; an additional tax on the security would in- volve double taxation of the same income or property. But if the tax is a special or exclusive tax instead of being a general tax, the matter is different. In that case the general doctrine of capitalization of taxation will apply.^ If only one class of corporations is taxed, the purchaser of these corporate securities will escape taxation, because the amount of the tax is discounted in the depreciation of the security. For example, let us suppose that a corporation previously untaxed has been paying five per cent dividends on its stock quoted at par. If a special tax of ten per cent be imposed on these dividends, the stockholders will get only four and a half per cent. But since by the supposition other classes of corporations, or at all events other non-corporate investments, are not taxed, the price of the stock will fall to ninety. People who can get five per cent on their capital will not ordinarily consent to take four and a half per cent. The original holders of the stock will indeed lose, but the new pur- chasers will not be affected, because the tax is capitalized and leads to a depreciation of the capital value of the stock. A dividend of four and a half dollars on stock costing ninety is as good as one of five dollars on stock costing a hundred. A tax levied only on corporate profits, or only on some special classes of corporations, does not affect anyone except those who become stockholders before the imposition of the tax. To tax the new purchaser on his security would not in such a case involve unjust double taxation.^ ^ Infra, chap, viii, sec. v. ^ See Seligman, The Shifting and Incidence of Taxation (3d ed.), pp. 221- 226. ' This and the following point is not considered at all either by Professor Wagner who is opposed to such double taxation of corporations, "Direkte Steuern " in Schonberg's Handbuch der Politischen Oekonomie, III. 1, 4th DOUBLE TAXATION 109 There is one other condition under which the simultaneous taxation of the corporation and the security holder is not unjust. In the case of a stockholder, we have seen that if the tax is gen- eral it is unjust to tax both the corporation and the stock- holder. In the case of a bondholder this would also ordinarily be true when the income tax on the corporation is, for instance, deducted from the interest of the bondholder as well as from the dividends of the stockholder. In some cases, however, it hap- pens that the corporation is willing to assume the tax as a whole, and to count the tax among its fixed charges, declaring the coupons free from tax. In such a case it is really the stock- holders who pay; for the interest on the bonds is fixed, and what is not deducted from the interest must be paid out of the surplus earnings which would otherwise ultimately go to the stockholders. The bondholders are not reached at all by such a tax, except in the very indirect way that they may be exposed to an ultimate diminution in the security of their lien. But the tax as such does not strike them at all; their property or income in the corporate bonds goes scot-free. An additional tax upon the bondholder would thus really not involve any injustice to them. Here, as well as in the preceding case, a study of the real incidence of the tax becomes important. What is apparently double taxation may turn out not to be such. We may, therefore, sum up by saying that in so far as the tax is general, it is manifestly unjust to tax both corporation and security holder; but that when the tax is partial or when the corporation assumes the tax as a whole, the additional taxation of stockholder or of bondholder is not necessarily either double taxation or inequitable taxation. There remains the fourth and final form of double taxation by the same jurisdiction, which has given rise to considerable difficulty. This applies especially to corporations. The ques- tion here is: Is it permissible to tax the corporation on its property and again on its capital stock? The answer from the economic standpoint is simple. While the exact relations between capital stock and property are dis- cussed more fully below,^ it is clear, for the purposes of this ed., p. 428; or by Professor Schaeffle, who is in favor of such double taxa- tion (Die Steuern, vol. ii (1895), p. 24). 1 Infra, chap, viii, see. iii. 110 ESSAYS IN TAXATION argument, that corporate property is at all events one of the elements that contribute to the value of the capital stock. If this be true, to tax the corporation on its property and then to levy an additional tax on its stock, is pro tanto duplicate taxa- tion of an unjust character. If other persons are taxed only once on property, corporations should not be taxed again on what is at all events a part of their property. This concludes the discussion of the important cases of double taxation arising from the actions of the same tax jurisdiction. Equally important are the cases due to the conflicts of juris- diction between independent taxing authorities. These we now proceed to take up. II. Double Taxation by Competing Authorities The problems included under this head are essentially of modem growth. Until very recently they have received Uttle attention, for three reasons. In the first place, the international relations of commerce and industry were comparatively unim- portant; and even within the same state business methods and business investments were far more localized and less com- pUcated. Secondly, the stranger in primitive sopiety was originally an enemy. The survival of this idea in the concep- tion that the foreigner, as such, is an especially desirable subject of taxation has only slowly given way to the broader conceptions of the modern age. Thirdly and chiefly, in former times but Uttle attention was given to the question of justice in taxation. Even when the general problem was considered, the details of double taxation were regarded as insignificant. But nowadays the question is forging to the front. It need not be pointed out that amid the complexities of modern industrial life equality of taxation cannot be attained without a careful consideration of these problems. To-day a man may live in one state, may own property in a second and may carry on business in a third. He may die in one place and leave all his property in another. He may spend all his income in one town and may derive that income from property or business in another town. He may carry on business in several states, or if he has invested in corporate securities, the corpora- tion may be the creature of another state and may be situated' or do business in a third. All these cases may affect foreign states or separate commonwealths of the same federal state, or DOUBLE TAXATION 111 separate cities or counties of the same commonwealth. The possible entanglements are well-nigh innumerable.^ The question thus arises: Where shall a man be taxed? Whatever principle we lay down, it is plain that, if every state or every tax authority followed the same principle, it would be easy to avoid double taxation. The comphcations , arise from the fact that one state follows one principle, and that another state follows an opposite or conflicting principle. Let us discuss the different principles that have actually been employed. The oldest principle is that of citizenship or pohtical alle- giance. Originally only the citizen of the state or the burgess of the town had any obhgation to the government under which he lived. But it soon happened that commercial relations de- veloped, until in modern times the actual population of any state or community is by no means limited to citizens. To tax only the citizen and to exempt the stranger, whether the stranger be from another state or only from another city, would plainly be inadmissible. Political allegiance in this sense is nowhere to-day made the basis of taxation. Yet when political allegiance involves a positive rather than a negative attitude, it is still followed, at all events in international relations. While the stranger is not exempted, the citizen living abroad is fre- quently held responsible to his country. Pohtical fealty cannot be so easily abandoned; political rights involve pohtical duties. Among them is certainly the duty to pay taxes. In modern times, however, the force of political allegiance has been considerably weakened. The political ties of a non- resident to the mother country may often be merely nominal. His life may be spent abroad and his real interests may be indissolubly bound up with his new home, while his loyalty to the old country may have almost completely disappeared. ^ The question has naturally attracted some attention in federal states. We find httle discussion of the problems in French or English books on finance. It is only lately that the matter has been' seriously discussed in Germany and Switzerland. See especially Schanz, "Die Ort der Bes- teuerung," in Finanz Archiv, vol. ix (1892); and G. Antoni, "Die Steuer- subjekte im Zusammenhalte mit der Durchfuhrung der AUgemeinheit der Besteuerung," in Finanz Archiv, vol. v (1888), p. 916- A more recent work is J. Fischer, Die Doppelbesteuerung in Staat und Gemeinde. Fine Untersuchung liber die Besteuerung der Bundesverwandten und Ausldnder, Sonne der Forensen, nach den direkten Staats- und Gemeindesteuergesetzen Deutschlands und der Schweiz, Berlin, 1909. Cf. also H. Kramer, Die Einkommen- und Vermogenbesteuerung der Aiisldnder und Forensen, Berhn, 1909. 112 ESSAYS IN TAXATION In many cases, indeed, the new home will also become the place of a new political allegiance. But it is well known that in some countries the political bond cannot be dissolved even by per- manent emigration; while it frequently happens that the immigrant has no desire to ally himself politically with what is socially aiyi commercially his real home. In the modern age of the international migration of persons as well as of capital, pohtical allegiance no longer forms an adequate test of individual fiscal obhgation. It is fast breaking down in practice, and it is clearly insufficient in theory. The second principle that may be followed is that of mere temporary residence; every one who happens to be in the town or state may be taxable there. This, however, is also inade- quate. If a traveller chances to spend a week in a town just when the tax collector comes around, there is no good reason why he should be assessed on his whole property by this par- ticular town: the relations between him and the government are too slight. Moreover, as he goes from place to place, he may be taxable in each place or in none. Temporary residence is plainly inadmissible as a test. The third principle is that of domicile or permanent resi- dence. This is a far more defensible basis, and it has many arguments in its favor. Those who are permanently resident in a place ought undoubtedly to contribute to its expenses. But the principle is not perfectly satisfactory. For, in the first place, a large part of the property in the town may be owned by outsiders: if the government were to depend only on the permanent residents, it would lose a portion of its rightful dues. In the second place, most of the revenues of the resident population may be derived from outside sources, as from busi- ness conducted in other states. In this case, the home govern- ment would be gaining at the expense of its neighbor. Thirdly, property owners like the absentee landlords of Ireland or the absentee stockholders of the railways in the western states of America cannot be declared devoid of all obligation to the place whence their profits are derived. Domicile, therefore, cannot be the exclusive consideration. The fourth principle is that of the location of the property. This again is undoubtedly legitimate to a certain extent. For a man who owns property has always been considered to have such close relations with the government of the town or county where his property is situated, as to be under a very decided DOUBLE TAXATION 113 obligation to support it. But for reasons just the reverse of those mentioned in the preceding case, the location of the property clearly cannot be the only test. Permanent residents of means owe some duty to the place where they live, even if their prop- erty is situated elsewhere. A New Yorker who has invested even his whole property abroad cannot be said to be entirely without any duty to support the New York or American govern- ment. We see then that each of the last three principles — tem- porary residence, domicile and location of property — has a certain, but none a complete justification. There is, however, one final principle, toward which all modern governments are tending, which reconciles the three preceding tests. This is the principle of economic interest , or economic allegiance, as against the antiquated doctrine of political allegiance. Every man may be taxed by competing authorities according to his economic interests under each authority. The ideal solution is that the individual's whole faculty should be taxed; but that it should be taxed only once, and that it should be divided among the tax districts according to his relative interests in each. The individual has certain economic interests in the place in which he happens to live, in the place of his domicile, and in the place or places where his property is situated or from which his income is derived. If he makes money in one place, he often spends it in another. It has been 'pointed out elsewhere that the conception of faculty in taxation involves two considerations, — those con- nected with acquisition or production, and those connected with outlay or consumption.^ In apportioning the total fiscal obligation of the individual it is therefore necessary to ascer- tain from what place or places his earnings are derived, and then to observe in what place or places they are expended. Only in this way can his real economic interests be located. From this point of view the solution of the problem would be easy. Let the state or states from which the earnings are received divide among themselves the taxes on production, that is, the taxes levied according to property or income or business or any other measure of productive capacity: let the state where the individual lives and where the earnings are spent levy taxes on consumption, whether direct or indirect. 1 See Seligman, Progressive Taxation in Theory and Practice, 2d ed. (1908), pp. 290-294. 114 ESSAYS IN TAXATION This plan, however, involves one serious difficulty. Ex- penditure, for obvious reasons, is no longer considered so satis- factory a basis of taxation as revenue. And although taxes on consumption are still largely employed and are defensible for the central authorities, their use for local or commonwealth purposes tends everywhere to be restricted to narrow limits. Where taxes on consimiption are abandoned, it becomes nec- essary to devise some compromise in apportioning the taxes on production. Some writers have suggested that three-quarters of the tax on property or business or earnings should go to the state of domicile, while others have proposed an equal division. It may be conceded that the exact division is nec- essarily arbitrary; but even an arbitrary division is better than no division at all. Whatever figures we adopt, it is none the less clear that the principle of economic interest will help us out of many a difficulty. In international relations we have scarcely begun to apply the doctrine; in fact, we still cling in part to the principle of political allegiance. The result is much imjust double taxation.^ In internal relations, as in the federal states of America, Ger- many and Switzerland, more progress has been made. In the United States, as to a large extent every-where else, the rule of situs has been applied to real estate. This is taxed where it is situated. But in the case of personalty or business most countries waver between the doctrines of situs and of domicile. In America, for example, while most of the states tax per- sonal property actually located within their bounds,^ we find in many places the legal principle, which had its origin in entirely different reasons, that personalty follows the owner — mobilia personam sequuntur.^ Accordingly if the owner is a non- resident, his personal property may be taxed twice — once by the state where it is located, and again by the state of his domicile. ' Cf. from the point of view of international law various essays by E. Lehr, "Les doubles impositions en droit international," in Journal Clunet, 1901, p. 722; "Les bases de l'imp6t en droit international," in Retme de droit international, 1897, p. 428; "Les Bases legitimes des imp6ts en droit international," ibid., 1903, p. 547. Cf. also L. von Bar, "Observations sur les prinoipes du droit international concemant les imp6ts, notamment les doubles impositions," ibid., 1900, p. 436. 2 That this is permissible is recognized in Coe vs. Errol, 116 U. S. 517. ' Or, as it is sometimes put, mobilia inhaerent ossibus domini. Cf. in general, Story, Conflict of Laws, §§ 362, 383, 550. The original use made of this principle in America may be seen in Catlin vs. Hall, 21 Vt. 152. DOUBLE TAXATION 115 In the United States several commonwealths have indeed provided by statute for the exemption of a resident's person- alty, if permanently located and taxed in another state. Such is now the law in Alabama, California, Connecticut, Indiana, Louisiana, Maine, Missoxiri, New Jersey, Ohio, Rhode Island, South Carolina, Vermont and West Virginia.^ The same rule has been extended by judicial interpretation to lUinois, Kansas, Missouri, New York, North CaroKna and Ohio.^ In other commonwealths the rule is applied only in part. Thus in Arkansas, South Carolina and Virginia a similar exemption is made for all personalty except in so far as money, credits or investments in business are concerned.' In Delaware only so much of the personalty is exempt as consists of non-productive securities of other commonwealths.* Finally, in Michigan all the personalty of a resident is taxable except that which is invested in another commonwealth.^ But in most of the commonwealths the legal fiction still prevails, and the individual is taxed on all his personalty irrespective of its location. The obvious result is double taxation of a nature which caimot possibly be justified. 1 Ala. Code (1896), § 3911; Cal. Polit. Code (1903), § 3607; Conn. Gen. Stat. (1902), § 2321 et seq. (applies to property actually invested in mer- chandizing or manufacturing); Ind. Annot. Stat. (1894), §8410; La. Act July 9, 1890, no. 106, § 1; Me. Rev. Stat. (1904), eh, 9, § 13-11; Mo. Rev. Stat. (1889), §§ 7503, 7508, 7531; N. J. Rev. Stat. (1877), p. 1151; O. Rev. Stat. (1892), § 2735; R. I. Pub. Stat., chap. 42, § 9 (applies only to ma- chinery, machine tools, stock in trade, merchandise, lumber, coal and stock in livery stables) ; S. C. Code (1902), § 268; Vt. Stat. (1894), § 362-IV; W. Va. Code, chap. 29, § 48. 2 Mills vs. Thornton, 26 111. 300 (1861); Fisher vs. Commissioners of Rush County, 19 Kan. 414; State vs. St. Louis County, 47 Mo. 594 (1871); State ex rel. Dunnica vs. County Court, 69 Mo. 454 (1879); Valle vs. Ziegler, 84 Mo. 214 (1882); People ex rel. Hoyt vs. Commissioners, 23 N. Y. 224 (1861), which decided that shares of foreign corporations are exempt from local taxation in New York because they have no siius in the state; People ex rel. Trowbridge vs. Commissioners, 4 Hun, 595 (1875); 2 Jones Eq. Rep. 53, where the principle mohilia persormm sequuntur is declared to be "a fiction which has no apphcation to questions of revenue"; Carrier vs. Gordon, 21 Ohio, 605 (1853). Cf. for the practice and cases up to 1871, (First) Re-port of the (New York) Commissioners to revise the Laws for the Assessment and Collection of Taxes (1871), pp. 130-147; and for a more systematic discussion of the later cases, F. Walker, Dovble Taxation in the United States, 1895, chap. vi. ' 3 Ark., Mansfield's Digest, sec. 5048; S. C. Gen. Stat., chap. 11, sec. 149; Va. Code, sec. 492. * Del. Laws 1879, chap. 2. ' Mich. Laws 1885, no. 153, sec. 2. 116 ESSAYS IN TAXATION According to the doctrine of economic interest, the solution is plain. A large part of the tax should go to the place where the property lies or whence the earnings are derived; a smaller share to the domicile of the owner. But this presupposes uni- form action on the part of the conflicting authorities. As long as no interstate or intercommunal agreements are made, the simplest plan would be for the state of location to tax the tan- gible property, and the state of residence to tax the intangible property or income therefrom. This conclusion, however, is complicated by several con- siderations. In the first place, the intangible property may consist of corporate securities, while the corporation may al- ready be taxed in the state where it is situated; secondly, the intangible property may consist of a mortgage on real estate abroad, which in that state is treated as realty and already taxed; and finally, the American experience with the taxation of intangible personalty in general is very sad. For practical purposes, therefore, the conclusion would be: Tax only realty and tangible personalty, and tax this in the state of location. When the era of interstate agreements is finally reached, it will be feasible to attempt the more ideal plan of taxing the en- tire property or income, dividing the proceeds among the states of location and domicile according to a pre-established proportion, and in harmony with the doctrine of economic interest. In the interval it may be possible to reach intangible personalty through some form of national taxation, the general government then to apportion the proceeds to the states. In Germany and Switzerland the situation is much simpler than in the United States because of the existence of federal laws regulating the entire subject. In Germany the federal regulation dates from 1870, and was further developed by a law of 1909.' A German citizen is now subject to direct taxes only in the state of his domicile or, where he has no domicile, in the state of his residence. Real estate and so-called fixed industry {stehende Gewerbe) can be taxed only in the state where the real estate or place of business is situated. If there ' Cf. Th. Clauss, "Das Reichsgesetz vom 13 Mai, 1870 wegen Beseiti- gung der Doppelbesteuerung unter vergleichender Beriicksichtigung des Schweizer Bundesreohts erlautert," in Finanz Archiv, vol. v. (1888), p. 138 d seq.; "Deutsches Doppelsteuergesetz vom 22 Marz, 1909," ibidem, vol. xxvi. (1909), p. 809 et seq.; R. Bloohmann, "Das Reichsgesetz wegen Beseitigung der Doppelbesteuerung vom 13 Mai, 1870 erlautert," in Annalen des Deutschen Reichs, 1887, nos. 7-10. DOUBLE TAXATION 117 are several such places of business, the tax is divided among the various states according to a fixed proportion. If anyone is assessed in one state for a direct tax when he has paid a similar tax in another state for the same period, he has a right to reimbursement. The German law, however, is not complete in that it does not regulate the interlocal taxation. In the matter of local taxation it was thought best to leave the adjust- ment of conflicts to inter-state agreements, and of these not a few have been consummated.^ In Switzerland, on the other hand, the federal law appUes to local as well as to state taxation. It was not until 1874 that the constitution empowered the federal government to prevent double taxation. After that time the federal council rendered a number of decisions most of which were summed up in the law of 1885.^ The principles enforced are the same as in Germany, but are carried out in further detail and with greater effective- ness. The law apphes also to inheritance taxes, which accrue in the case of real estate to the canton where it is situated, and in the case of personalty to the canton where the de- ceased was domiciled. It will be well now to take up in turn the most important cases of double taxation by different jurisdictions. As the problems apply to interstate or inter-municipal complications as well as to difficulties between foreign countries, the word alien must be understood to include persons from another town or commonwealth as well as from a foreign country. And since the questions are precisely the same when applied to corporate business as when apphed to individuals or indi- vidual business, the term citizen must be understood to mean legal as well as natural persons. Let us proceed to discuss the cases in order. ^ Cf. Dr. Strutz, "Die Gemeindebesteuerung des Einkoinmens aus auslandischem Grundbesitz und Gewerbebetrieb in Deutschland," in Verwaltungsarchiv, vol. iv. (1896), p. 209; and Brincour, op. cit., p. 10. ^ Cf. the two works by E. Ziircher and F. Schreiber, each entitled, Kritische Darstellung der bundesrechtlichen Praxis betreffend das Verbot der Doppelbesteiierung und Vorschldge zur Regelung dieser Frage, and each pub- lished in 1882; B. Van Muyden, Exposi critique de la jurisprudence federate en matiere de doubte imposition suivi des propositions en vue de regtement de tette question par une loi fedSrale, 1882; P. Speiser, Das Verbot der Doppel- besteuerung (1887); C. A. Brodtbeok, Unser Bundesrecht in Doppelbe- ete-uerungssachen (1898); P. Steiger, "TJeber die Grundzuge eines Bundes- gesetzes betreffend das Verbot der Doppelbesteuerung," in Zeitschrift filr Schweizerisches Recht, vol. 43 (1902). 118 ESSAYS IN TAXATION 1. Shall a resident citizen he taxed on his property abroad or on his income from abroad? In international relations the principle of political alle- giance is still largely followed. Thus in England, and many other countries, as formerly and again more recently in the United States, a resident citizen is subject to the income tax on his entire income, whether received abroad or not. If, as is usually the case, the income is again taxed where it is earned we have a glaring case of double taxation. It is only in the inheritance tax that the principle of citizenship has begun to be weakened, and that the doctrine of location is applied to a small extent. In state and local taxation the principle of economic inter- est has made more headway. In the United States, as well as in several of the German commonwealths and Swiss can- tons, the rule of situs is generally apphed to real estate and to tangible personalty and business; the rule of domicile to other forms of property or revenue. In Germany the taxes on busi- ness, salaries and pensions, as well as on land, must be assessed according to location. But all these rules are only an approx- imation to the ideally correct principle. In the case of business — whether individual or corporate- America is as yet in the rear of some of the European states. In purely local taxation the American commonwealths generally levy the entire property tax at the place of the principal office, although most of the business profits may be earned in other places within the state. In the case of corporation taxes, how- ever, a few states now pursue the more sensible policy of taxing the domestic corporation only on that part of its capital or earnings which is employed or received within the state. This is perhaps as near as we can get at the present time to any practicable solution. 2. Shall a non-resident citizen be taxed on his property abroad or on his income from abroad? This seems to involve a great stretching of the principle of political allegiance; yet we find it to be the practice at the present day in international relations. For instance, in the national income tax of 1894 in the United States, an .Amer- ican was taxed on his whole income, whether he resided in America or abroad. Some states, however, like England and Austria, do not carry the doctrine of citizenship to this point, — they make no attempt to tax a non-resident citizen on his DOUBLE TAXATION 119 foreign income. Other countries cling only nominally to the principle, by providing for a remission of taxes in case the citizen is actually taxed abroad. And still others, like Russia, compromise the matter by exempting the citizen after he has lived abroad two years. In state and local taxation, the tendency is far more evi- dent to settle the matter according to the doctrine of economic interests. According to this principle, there is no imagina- ble reason why a non-resident citizen should be taxed for his property abroad. Moreover, neither the principle of location nor that of domicile has any apphcation. Even if it were desira- ble to levy such a tax, it is difficult to see how the obligation could be enforced, unless the non-resident happened also to own some real estate at home. And even then, the home prop- erty would scarcely be liable for the taxes of the non-resident on his foreign income. 3. Shall a non-resident citizen he taxed on his property at home or on his income earned at home? Here, again, the ideal solution would be, as in the first case, that the home government should levy not the entire tax, but only the greater part, leaving a small share to the foreign govern- ment. But in default of such an arrangement, the most prac- ticable method is for the home government to levy the whole tax, and to trust to the foreign government to avoid double taxation. As a matter of fact, this is the practice in international relations. Almost everywhere the income earned at home is taxable even though the citizen lives abroad; for in this case the principles of citizenship (or pohtical allegiance) and of location come together. In state and local taxation, however, the practice is considerably modified by the principle of dom- icile, as appUed to certain forms of personalty or income. We have seen the practice in America in regard to property; and in the few cases of income taxation, the custom is still further restricted. In Massachusetts and Virginia, for instance, the income tax applies only to residents. 4. Shall a resident alien be taxed on his property or income in the state of residence? This, together with the two following cases, is the reverse of the preceding cases. It is indeed evident that the aUen should not be treated with greater favor than the citizen. Accordingly, if the non-resident citizen be taxed, the resident alien should 120 ESSAYS IN TAXATION certainly not be exempt in so far as the same property is con- cerned. In international relations most states have here aban- doned the doctrine of political allegiance. There is no reason why it should not be abandoned; for the principles of domicile and of location here converge and, combined, far outweigh that of ' citizenship. In state and local taxation the matter is somewhat complicated by a survival of the old jealousy of strangers. Not only is the resident alien taxed, but he is some- times taxed at a higher rate than the citizen, or is taxed when the citizen is exempt. We find this, for instance, in the United States where a higher rate is imposed on certain foreign com- panies (i.e. resident aliens). A way out of the difficulty has been outlined in the so-called reciprocal laws, according to which a state taxes resident aliens in the same way that its citizens resident in the foreign state are there taxed. ^ The wholesome dread of reprisals is often sufficient to prevent imjust double taxation. 5. Shall a resident alien be taxed on his property abroad or on his income earned abroad? This case is not quite so simple. We have seen that if we abandon the principle of political allegiance and substitute that of economic interest, a large part of the tax should be paid to the country where the property is situated, and only a small part to the country of domicile. But where this ideal cannot be attained, we found it simpler to apply, as far as possible, the doctrine of location. In international relations it is to be noticed that almost all states have abandoned the doctrine of political allegiance and have substituted that of domicile. That is, in England and in most of the German states residents are liable to the income tax on their whole income, whether they are aHens or citizens, and whether the income is derived from the home country or from abroad. This was also the case in the 1894 income tax in the United States. To put it in another way: when the principle of citizenship is advantageous to a state, it is applied; when it is disadvantageous, it is not appUed. Only a few countries exempt the foreign property or income of a resident alien. If the foreign state appUes the principle of citizenship and the home state the principle of domicile, as is frequently the case, it is not to be wondered at that there should be so much double taxation. ' See infra, chap, vi, sec. ii., § 2. DOUBLE TAXATION 121 In state and local relations the doctrine of economic inter- ests has made considerably more headway. Little attention is paid to the question whether the resident is a citizen or a foreigner, or whether we are dealing with a foreign or a domes- tic business or corporation. The' problem is solved very much as in the case of the resident citizen. 6. Shall a non-resident alien he taxed on his property or income in the state? In international relations, here again, the principle of polit- ical allegiance has been abandoned, and that of location has been substituted. It is the almost universal custom for states to levy a tax on incomes arising within their borders, irrespective of the question whether the recipient lives abroad or is a foreigner. The income tax law of 1894 in the United States formed no ex- ception. The difficulty arises in the practical enforcement of the law, where the property or the source of income does not con- sist of tangible property. In state and local taxation the problem is comparatively simple as regards tangible property, which is taxed where it is located. But in the case of intangible property, not capable of a situs, the question arises whether it should follow the dom- icile of the owner, and to that extent be beyond the jurisdiction of the taxing power; or whether the intangible property may not be declared to have at least an economic situs in connection with the tangible property on which it is based or which it represents. In so far as corporate securities are concerned, this question will be treated in a subsequent chapter. In the case of earnings from business, since there must generally be an office or an agent in the state through which the earnings are received, the ahen (or foreign business or corporation) is to that extent no longer a non-resident. But even here the prin- ciple of economic interest is clearly applicable. In the case of the inheritance tax international complications have recently assumed important dimensions. In the British empire the difficulty has become especially acute in view of the high inheritance taxes levied simultaneously by the mother country and by the states of Australasia or South Africa. At the last imperial conference in London this was made the sub- ject of urgent representation by New Zealand; but the British government could not see its way to abandon the large revenues now derived on the estates of non-resident citizens. Of recent years the problem of double taxation has also be- 122 ESSAYS IN TAXATION come acute in the United States in the case of the inheritance tax which is now so widespread.^ At first, as in the case of the general property tax, while real estate was usually taxed only in the state of its situs, most of the commonwealths taxed not only all the personal property of resident decedents but also such personal property of non-resident decedents as was ac- tually or technically within the state, as moneys or securities in the local banks or deposit companies, or other evidences of debt. Some states even went further and taxed the securities of corporations organized imder their laws, even though the decedent was a non-resident and the securities were in some other state. In this way there was the possibility of not only double, but triple or quadruple taxation. For if the citizen of state A, whose entire fortune consisted of railroad bonds, hap- pened to die in state B, leaving on deposit in state C the securi- ties of a railroad organized in state D but actually operating in state E, his whole estate might be taxable by each of the five states. A case actually occurred a few years ago in New York where a decedent's estate was compelled to pay no less than four taxes to different states on the same portion of the estate. About one-half of the American commonwealths still follow the old method. Several states, however, now endeavor to avoid double taxation by maintaining the principle that per- sonal property should be taxed only at the domicile of the de- cedent.^ Others, again, have adopted this principle only in part. Maine and Vermont, for instance, allow a resident dece- dent's estate credit to the extent of taxes imposed on the same inheritance by another state. As to non-resident decedents, however, their personal property in the state is still taxable, but only to the extent that the amount of tax may exceed the amount imposed by the state of the decedent's domicile. A few states, again, have a reciprocal provision. Massachusetts, for instance, allows a credit for taxes paid to other states, but only if the law of such other state contains a similar reciprocal provision. Finally in a few states we find retaliatory provisions. Connecticut, for instance, taxes the stock or registered bonds of domestic corporations to non-resident decedents only when the ' Cf. infra, chapter v. 2 Such are Arkansas, Idaho, Kentucky, Louisiana, Maryland, Minne- sota, Missouri, Montana, Nebraska, New York, North Dakota, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia, Washing- ton, West Virginia and Wyoming. DOUBLE TAXATION 123 state of residence taxes similar securities of its own corporations when owned by a decedent of Connecticut. This whole subject was carefully considered by a committee of the National Tax Association, which reported a so-called model law in 1911.^ The committee recommended the adoption of the simple rule that the tax should be imposed, in the case of residents, upon all their intangible property and upon such tangible property as was within the state; but that in the case of non-residents the tax should be imposed only on the tangible property within the state. The New York law of 1911 followed this recommendation closely and limited the taxable property of non-residents to tangible property which was defined as " corporeal property such as real estate and goods, wares and merchandises, and shall not be taken to mean money, deposits in banks, shares of stock, bonds, notes, credits or evidences of an interest in property or evidences of debt." ^ The same principle has been adopted in the Massachusetts law of 1912. Were all the states to follow the same rule, the situation would be simplified. In the meantime, however, in default of a fed- eral compulsion or of an interstate agreement, the possibility of double taxation is by no means eliminated. Residents of a large financial centre like New York are especially exposed to simultaneous taxation on the securities of foreign corporations,' and will remain so unless a provision is adopted as in Switzer- ' Addresses and Proceedings of the Fourth International Conference of the International Tax Association, Columbus, 1911, p. 279 et seq. As to the change of name from International to National Tax Association, cf. supra, p. 20, note. 2 The history of the New York law is typical. The original law of 1885 did not tax the personal property of a non-resident decedent. An amend- ment of 1887 was designed to accomplish this, but the law was so worded that the result ensued only when the decedent also owned real estate within the state. In 1892, however, this condition was abrogated, and from 1892 to 1911 the revenue from the tax on the personal property of non-resident decedents amounted to from one-ninth to one-twelfth of the entire proceeds of the tax. This deficit was, however, more than made good, under the law of 1911, by an increase of the rate. Cf. the following chapter. ' We are told, for instance, that the securities of about 450 large cor- porations are dealt in on the stock exchange of New York. Of these, 32 are incorporated in New York, 84 in New Jersey, 70 in Massachusetts, 33 in Michigan, 33 in Maine, 27 in Pennsylvania, 21 in Illinois, and 14 in New Hampshire. In all these states, except Pennsylvania, a tax is imposed on the stock of such corporations when owned by a decedent of New York. Cf. Annual Report of the Comptroller of the State of New York, Albany, 1912, p. xiii. 124 ESSAYS IN TAXATION land or as in Maine and Vermont. Moreover, it is not very probable that the Western states which suffer from absentee o'OTiership will agree to abandon the taxation of the securities of railroads owned in the East. As long as the present condi- tions continue it is most desirable that some interstate arrange- ment be effected whereby only such proportion of the securities be taxed as corresponds to the mileage or other criterion of property within the state. From the above review, it is evident that the question where a tax ought to be imposed involves a rather simple theoretical problem and many very difficult practical problems. It is the same with almost every question of taxation. As a matter of principle, it is easy to decide that a man should be taxed ac- cording to his faculty; as a matter of practice, it is not so easy to apply the principle of faculty in the actual tax system. So we have found that in the case of double taxation due to con- flicts of jurisdiction the ideal principle is that of economic in- terest or economic allegiance, modified in a few cases by that of political allegiance. The difficulty arises when we attempt to embody this principle in equitable assessments. If we observe the legislation of the most progressive coun- tries, we find, especially as regards internal or federal relations, a distinct tendency toward the realization of this principle. Economic interests are divided between the places of location, of -domicile and of residence. However differently various states may measure the relative importance of each, there is a steady progress toward the recognition of the principle. In the case of real estate the solution is obvious; in the case of intangible personalty, of business earnings and of interest from loans the problems are far more complicated. To work out the solution ^ for each kind of tax would take us too far afield. But it cannot be too strongly emphasized that in federal states no satisfactory system of taxation can be attaiaed until two condi- tions are realized. We need, in the first place, a substantial interstate agreement to pursue the same general policy in cases of conflicting jurisdiction; and we need, in the second place, a virtual acceptance of the doctrine of economic interests in taxation. When once these conditions exist, it will make com- paratively little difference how the principle is interpreted. For if it is everywhere interpreted in the same spirit, there can be ^ For a study of the practical problem as applied to the corporation tax, see infra, chapter viii, sec. iv. Cf. in general the monograph of Walker. DOUBLE TAXATION 125 little double taxation; and with increasing experience we may expect to find closer and closer approximation to strict justice in the application of the principle. In international relations we are still very far removed from the ideal; in internal taxa- tion — ^federal, state and local — the drift is unmistakably in the right direction. CHAPTER V THE INHERITANCE TAX The inheritance tax/ as now understood in most ' countries, is essentiallgj^'product of modern democracy. . It was, indeed, not unknowrito antiquity. In Rome the vicesima hereditatium, a tax of a twentieth part of inheritances, was imposed at the beginning of the empire to pay the pensions of the veteran sol- diers. In thejiddle ages the rehef and the heriot were exacted by the overlord* in return for the privilege of succeeding to the possession of property. But while the influence of the mediaeval idea is still to be seen in a few of the continental countries where the payment is regarded as made for the privilege of succession, the tax is almost everywhere of independent and comparatively recent origin. In Holland, in France and even in England, parts of the existing inheritance taxes are survivals of the sys- tem of charges on transfers and transactions. In many English- speaking states the term probate duties is still employed, signi- fying that the original conception was a charge for the privilege of having the will probated; and in some places the various forms 'of the inheritance tax are included among the stamp taxes, or taxes on transactions. But in most countries the older idea has been abandoned, and has been supplanted by the view that the tax must be regarded as a charge rather on the recipient of the ' The term inheritance tax is here used in its popular sense, as a tax on the devolution of property, whether real or personal, whether by will or by intestacy. By all means the ablest, as it is the only complete, discussion of this topic from the points of view of economics, law and history (Ameri- can as well as European), is to be found in The Inheritance Tax, by Max West, in Columbia University Studies in History, Economics and Public Law, vol. iv., no. 2, 1893 (2d ed., 1908). Less complete are: von Scheel, Erbschaftssteuem und Erbschaftsreform (2d ed., 1877); Esohenbach, Er- brechtsreform und Erbschaftssteuer, 1S91; Krtiger, Die Erbschaftssteuer, 1889; Garelli, L'Imposta Successoria, 1896. Cf. also several articles by Schanz in Finanz Archiv, vols. xv. and xvii. For the United States cf. A. W. Blackmore and Hugh Bancroft, The Inheritance Tax Law containing all American Decisions and existing Statutes, Boston, 1912; and Peter V. Ross, Inheritance Taxation, Albany, 1912. 126 THE INHERITANCE TAX 127 inheritance than on the transaction itself. The inheritance tax is to-day found primarily in democracies like those of England, Switzerland, Australia and America; and in other countries its development has gone hand in hand with the spread of demo- cratic ideas. It may be asked why democracy should favor the inheritance tax. The answer depends upon the point of view from which we regard democratic tendencies. If we say, as some believe, that the trend of democracy is necessarily toward socialism, the answer is plain: the inheritance tax is imposed because democracy is jealous of large fortunes. But if, on the other hand, we hold with the less pessimistic critics that modern democracies are endeavoring simply to do away with the abuses that have come down to us from the aristocracies of the past, we may claim that the inheritance tax is only a means of secur- ing equality Ln taxation and of realizing the principle of ability to pay. Because the tax has frequently been urged by those who are opposed to large fortunes, it has usually been overlooked that it may be defended on purely economic grounds as in com- plete harmony with the general principles of equitable taxation. The earliest argument ^ for the inheritance tax had its origin in the plan to abolish intestate inheritance; that is, to provide, when there was no will, for the devolution of the property to the state. This scheme was propounded in the celebrated essay of Bentham, entitled " Supply without Burden." ^ The title of the essay is explained in the following problem: "What is that mode of supply of which the twentieth part is a tax, and that a heavy one, while the whole would be no tax, and would not be felt by anybody? " The solution of the problem, according to Bentham, lay in the abolition of intestate succession except in the case of im- mediate relatives. To this he added the hmitation of the power of bequest of testators without direct heirs. The old principle of escheat was to be extended to include the inheritances or bequests then going to collateral relatives. But Bentham 1 The fullest account of the arguments is to be found in the article by Dr. Max West, "The Theory of the Inheritance Tax," Political Science Quarterly, viii., p. 426 (1893). They are also summarized in his book. i^The full title is "Supply without Burden, or Escheat vice Taxation, being a Proposal for a Saving of Taxes by an Extension of the Law of Escheat, including Strictures on Collateral Succession comprised in the Budget of 7th December, 1795." In Jeremy Bentham, Collected Works, Browning's edition, ii., p. 585. 128 ESSAYS IN TAXATION claimed, further, that the state should have an equal share in the sums going with or without a will to such close relatives as grandparents, uncles and aunts, and perhaps nephews and nieces, as well as a reversionary interest in the succession of childless direct heirs without prospect of children.^ Bentham held that this was not a tax, and that precisely in this fact lay its chief advantage,^ — that of "unburthen- someness," or, as we would say, freedom from oppressiveness. According to the general principles of human nature, said he, a man is led in the case of a tax on successions to look upon the whole of what is left to him as his own, of which he is then called upon to give up a part. But if under the law regulating successions he knows that nothing, or only a small share, is due him, Bentham claimed that he would suffer no hardship. "For hardship depends on disappointment; disappointment upon expectation, and if the law of succession leaves him noth- ing, he will not expect anything." ^ Exaggerated as Bentham's distinction undoubtedly is, it contains a kernel of truth; namely, that there is no such thing as a natural right of inheritance, and that the extension of intestate succession to collateral relatives is under existing social conditions defensible only to a very limited extent. Whatever may have been the original family theory of prop- erty, it may be argued with some force that the bonds of the wider patriarchal family life have been considerably loosened in modern times, and that the family consciousness extends nowadays only to the nearest relatives. While Bentham looked upon the matter primarily from the ^ The plan is defined to be "the appropriating to the use of the public all vacant successions, property of every denomination included, on the failure of near relations, will or no will, subject only to the power of bequest, in respect of the half of whatever property would be at present subject to that power." ''As he puts it in another place: "The riddle begins to solve itself: a part taken and a sense of burthen left; the whole taken and no such effect produced; the effect of a part, greater than the effect of a whole; the old Greek paradox verified, the part greater than the whole. Suffer a mass of property in which a man has an interest to get into his hands, his expecta- tion, his imagination, his attention at least fastens upon the whole. Take from him afterward a part . . . the parting with it cannot but excite something of the sensation of a loss. . . . Take from him now (I should not say take), but keep from him the whole, so keeping it from him that there shall never have been a time when he expected to receive it; all hardship, all suffering, is out of the case." THE INHERITANCE TAX 129 point of view of escheat, it was but a step to extend the argu- ment, and to say, as many writers now do, that, since it is ex- ceedingly difficult to draw a sharp line where the family con- sciousness ends, it is more just and more practicable for the state to take away a small part from direct relatives and an increasingly larger sum from the more remote relatives. The tax, in other words, would be graduated according to the degree of relationship. What was originally nothing but an extension of escheat, thus grew into the idea of a graduated collateral inheritance tax. Even Bentham himself, although protesting against the use of the word tax, virtually advocated a graduated tax when, as we have seen, he proposed the exemption of direct heirs; the confiscation of fifty per cent from grandparents, uncles and aunts; and the seizure of the whole in case of intes- tacy. Thus the extension-of-escheat argument, which was meant originally to apply only to intestacy, has been made to include also a limitation of the power of bequest. A supposed variation of this line of reasoning is seen in what is called the theory of state co-heirship or co-partnership. It originated with Bluntschli, who used the expression siaatliches Miterbrechf, and has found its way into some recent treatises. Its most vigorous recent defender is Andrew Carnegie, who is as enthusiastic about a progressive inheritance tax as he is opposed to an income tax.^ Sometimes Bentham is cited as the origi- nator of the doctrine, but this is a mistake. As Dr. West so well puts it: — "Bentham's plan was to abolish intestate inheritance except be- tween immediate relatives, to restrict the power of bequest of testa- tors having no direct heirs, and to give the state a part of the property of decedents ia certain cases. He called the system which he pro- posed an extension of escheat, and based it not upon any right of in- heritance in the state, but upon the absence of any reason for the operation of intestate inheritance between individuals not closely re- lated. It is therefore a mistake to call Bentham a representative of the theory of state co-heirship. But later writers have combined with his argument the thought that the state should inherit property from individuals because of what it does for them during their Uves. The state is sometimes represented as a larger family; according to Umpfen- bach, the bond of kinship between distant relatives loses itself in the whole nation, which therefore inherits the property of individuals as 1 Mr. Carnegie stated that the "American republic is the partner in every enterprise where money is made honorably." Cf. Seligman, Progres- sive Taxation, 2d ed., 1908, p. 322. 130 ESSAYS IN TAXATION the family inherits the property of its members. Such expressions as these, however, must be regarded as metaphorical rather than scien- tific. The state may acquire property by escheat, but not by inherit- ance. Inheritance implies kinship, and the modern state is not a genetic association. The representation of the state as co-heir is either a mere figure of speech (and as such it is as old as Pliny), or else it results from a confusion of inheritance and escheat. Inheritance is not a matter of pubhc law; it is for private law to prescribe how far inheritance shall be permitted between individuals, • and for public law to ordain that where inheritance ends escheat shall begin." '■ We now come to the second theory, which may be called the sociahstic or diffusion-of-wealth theory. It is based upon the doctrine that it is the function of government to use the power of taxation as an engine of social reparation in checking the growth of large fortunes and in bringing about a more equal distribution of wealth. In its origin this theory was not socialistic. John Stuart Mill accepted Bentham's reasoning, but developed it. Since he did not consider the right of inheritance as necessarily in- volved in the private ownership of property, he desired to extend the abolition of intestate succession to direct heirs, as well as to collateral relatives. Moreover, even in the case of a will, no one, he thought, was justified in demanding more than a fair competence. His plan was as follows : — "That no one person shoiJd be permitted to acquire by inheritance more than the amount of a moderate independence. In case of in- testacy, the whole property to escheat to the state: which should be bound to make a just and reasonable provision for descendants, that is, such a provision as the parent or ancestor ought to have made, their circumstances, capacities, and mode of bringing up being considered." ^ This argument is not necessarily socialistic; but it is per- haps open to question on other grounds. It may be regarded as opposed to the family theory of property, which even in its narrower sense, assumes that as a man acquires property largely in order to leave it to his children, for whom he ought to provide, there is reasonable ground for demanding the per- petuity of the means of family support. Denial of the right of inheritance by direct heirs thus seems to involve an attack upon the unity of the family. On the other hand, the right ' Political Science Quarterly, viii., p. 436. 2 Political Economy, book v., chap, ix., sec. i. Cf. book ii., chap, ii., sees. iii., iv. THE INHERITANCE TAX 131 of inheritance within the family has already been largely modi- fied by the freedom of bequest; and if a man is at liberty to give away his whole fortune to outsiders, we cannot well speak of a family right. In parts of continental Europe, indeed, we have the survival of the old idea in the institution of compulsory children's share {'portion Ugitime, Pflichttheilsrecht). Even in the United States some of the commonwealth laws prohibit the bequeathing of more than a certain portion of the estate to charitable or public uses when there is a child, a widow or a parent. But, as a general rule, in English-speaking countries the right of bequest is free. It is well known that inheritance is older than bequest, and that the latter system was introduced into the Roman law, not to limit inheritance, but to provide heirs in default of near relatives.. The modern right of free bequest is, therefore, really opposed to the older family idea of property, which takes shape in the assertion of the right of inheritance. It thus becomes a very difficult question to de- cide how far inheritance may be demanded as of right. Never- theless, it may be said that most thinkers, as well as the mass of the public, would still to-day maintain the custom of in- heritance, not indeed as a natural right or as a necessary consequence of the right of private property, but as an in- stitution that is on the whole socially desirable. Even Mill says of his own scheme: "The laws of inheritance have probably several phases of improvement to go through, before ideas so far removed from present modes of thinking will be taken into serious consideration." While there is some scientific justification for the doctrine as originally expounded, it is unquestionable that most of its defenders plant themselves squarely on the ground that it is the function of the state to check the aggregation of wealth into a few hands, and to provide for the equalization of for- tunes. These writers would put a limit not only to the amount of wealth acquired through inheritance or bequest, but to the amount acquired in any manner. No fortunes should exceed a definite sum. Such a doctrine is very distinctly socialistic. Those who are not prepared to accept sociafistic premises and sociafistic methods of reasoning cannot acknowledge the vafidity of the diffusion-of -wealth argument. While the premises may thus be regarded as wrong, the con- clusion may nevertheless be right, for the same conclusion may conceivably be drawn from utterly dissimilar premises. Just as 132 ESSAYS IN TAXATION it has been elsewhere shown that progressive taxation may be upheld by decided opponents of socialism/ so it can be shown beyond dispute that the inheritance tax may be supported through entirely different arguments by those who oppose the doctrine of the diffusion of wealth. Brushing aside, therefore, the socialistic doctrine as inadequate and unsound, let us exam- ine these other arguments. The so-called cost-of-service theory, which is occasionally found, treats the inheritance tax simply as a fee. The probate courts are a source of expense to the government and a source of special benefit to those that utilize their services. What is more reasonable, then, than that those who receive the special benefit should defray the cost? This argument, however, would justify only very light charges, and it would result not so much in an inheritance tax as in a system of probate fees. Such probate fees are occa- sionally found; ^ but as soon as they exceed the cost, the theory is no longer applicable. The probate duty in England, for in- stance, soon outgrew its original character of a fee. Another objection to this theory is that logically the charge ought to be regressive, not proportional or progressive; that is, since it costs proportionally less, to probate a large sum than a small sum, the rate ought to be lower on a large inheritance than on a small one — or, at all events, it ought not to grow with the size of the inheritance. As a matter of fact, the inheritance tax of 1889 in Wisconsin was regressive.^ A somewhat more substantial theory is that which con- siders the inheritance tax as the price of a special privilege. It is regarded not so much as a fee paid to defray the cost of government services as a charge proportioned to the advantages that accrue to the recipient of the inheritance. From the legal point of view, this has much to recommend it. In the United States, for instance, if regarded as a tax on property, the charge would conflict with the constitutional provision found in many ' See Seligmaji, Progressive Taxationin Theory and Practice, 2d ed. (1908), p. 142. 2 So in the American commonwealths, as Wisconsin, Minnesota, Illinois and New Hampshire. ' Estates not exceeding $3,000 were exempt; up to $500,000 they paid one-half of one per cent; on the excess above this, one-tenth of one per cent. The charge was declared to be "in lieu of fees," but it was held to be a tax, and therefore unconstitutional because apphcable only to one county. 76 Wis. 469. See West, op. cit., p. 77. THE INHERITANCE TAX 133 commonwealths, requiring all property to be taxed equally. If a general property tax were levied, and then an additional inheritance tax were imposed, we should have technically un- equal taxation of some property. Again, the tax, if imposed by the federal government, would militate against that section of the constitution which requires all direct taxes to be appor- tioned according to population. Accordingly, many of the American states have contrived to uphold the constitutionality of the tax only by declaring it to be a tax on the devolution of property. It is declared to be a tax not on wealth, but on the transfer of wealth. So the Louisiana inheritance tax was origi- nally upheld by the federal Supreme Court as a simple regulation of inheritance.^ But since the federal government possesses no constitutional power to regulate inheritances, the federal in- heritance tax was sustained as being neither such a regulation nor a direct tax on the land, but an excise on the right to suc- ceed to the ownership of property.^ From the economic point of view, there is a partial justifica- tion for this contention. It is indeed true that if the inheritance tax is to be regarded as an indirect tax on transactions or trans- fers, it might be declared obnoxious to the general tendency of modern theory to restrict the scope of taxes on acts and trans- actions to their narrowest limits. But this opposition to taxes on economic phenomena, as we shall see later ^ has been pushed too far. Again, to regard the tax as a charge on the mere priv- ilege of succession, is in reality to merge it with the theory to be discussed in the next paragraph, because of the undoubted fact that the result of the privilege of succession is to enhance the ability of the recipient.* We come then to the theory which regards the inheritance tax as a direct tax on the recipient of the inheritance. If we grant that the basis of taxation is the faculty of the in- dividual, it is evident that any addition by inheritance to the wealth of the individual increases his ability to pay. If we grant, further, that the best test of faculty is the revenue of the individual, it is clear that this accretion to his revenue is of a peculiar character. Income, as the term is commonly employed, denotes a regular periodic return; but an inheri- tance is an irregular, a spasmodic, a chance return. In a logical 1 Mager vs. Grima, 8 How. 490. ^Soholey vs. Rew, 23 Wall. 331. ^ Cf. infra, chap. ix. * As to the relation between privilege and ability, cf. infra, chap, x, sec. 3. 134 ESSAYS IN TAXATION income tax there is no room for such accidental or fortuitous revenues. Yet they clearly add to the ability of the individual, just as the chance gains from speculation undoubtedly increase the faculty of the taxpayer. From this point of view, the inheritance tax may best be defended by the accidental, or fortuitous-income argument. It may be claimed that there are possible cases where this argument is inapplicable. Thus, after a man's death, his widow or children may have to depend entirely on the income from his property, where before his death they enjoyed not only this sum but also the additional income due to his personal exertions. The family abihty to pay may be diminished, not increased. It may be answered that the state deals with in- dividuals, not with families, and that the individual members now have incomes where before they had none. And even if we concede this claim, the difficulty can be met by exempting a certain amoimt, and imposing a progressive tax on the re- mainder. For in proportion as the family income was derived from property, rather than from the labor of the head of family, the share due to his influence becomes correspondingly smaller, and the loss due to his absence will be less keenly felt; while, on the other hand, the family expenses themselves are dimin- ished by his death. Finally, in proportion as the inheritance goes to self-supporting direct heirs or to collateral relatives, it may be maintained with truth that there is a decided increase in tax-paying abihty. When, therefore, we have a system of income taxes, the in- heritance tax may be regarded as a supplementary tax to reach the real ability of the individual. Moreover, it may be regarded as a convenient method of appljdng the principle of differentia- tion in the taxation of income. It is now commonly recognized that incomes from property should pay a higher rate than in- comes from labor. Instead of making a difference in the rates to reach this end, the proportional income tax may be supple- mented by a property tax; or where this is for any reason un- desirable, by the inheritance tax. The latter would then serve the double purpose of reaching not only accidental incomes, but also property incomes, since all inheritances take the shape of property. Even in those states where the chief direct tax is that on general property, the inheritance tax may be defended on the accidental-income theory. For in so far as property is at all THE INHERITANCE TAX- 135 an adequate test of faculty in taxation, it is simply a mode of estimating the regular revenue or income. Accidental income is as little taken note of in a property tax as in an income tax. In fact, as between the two systems, an inheritance tax is more necessary to supplement the former tax than the lattfer. An additional theory which has been advanced more re- cently is the so-called back-tax theory. Since general property taxes are to a large extent evaded during life, it is said to be no more than just that the property should be made to pay when the tax cannot be evaded. But in this case it is the property of the decedent, rather than the abihty of the heir, that is con- sidered. Moreover, the validity of the argument is questionable chiefly because it is well-nigh impossible to prove the relation between the amount of the inheritance tax and the aggregate of taxes evaded dm-ing life. In the United States, for example, taxes on realty are generally paid; it is the tax on personalty that is evaded. The inheritance tax Ought then to take the shape only of a tax on the successions to personal property. As an actual fact, this was for some years the case in New York and several other states in the direct inheritance tax. The reasoning, therefore, does not apply to real estate at all. Finally, in proportion as other taxes are substituted for the personal property taxes, the argument falls away. Where there is a property tax or an income tax, there may well be some pro- vision for an inventory of the estate after death (as in Switzer- land and Germany) with severe penalties for the evasion of back taxes. But such a provision is entirely independent of the in- heritance tax. The theory sometimes advanced ^ that the inheritance tax is to be regarded as a capitalized income tax paid once and for all at the close of life, instead of in small amounts during each year, is not so strong. In the first place, the existing tax system either does, or does not, reach the income or property of the living taxpayer. If it does, as it ought to do, to capitahze what has already been paid involves double taxation. If it does hot, the tax is still objectionable on the score of inequality, because when two people with the same fortune die at different ages and pay the same tax, the amount, if regarded as a capitahzed income tax, would mean a very divergent rate of income tax. If the tax payable by A, ,who has enjoyed his income forty 1 Bastable, Public Finance, p. 526. 136 ESSAYS IN TAXATION years, is equivalent to the capitalization of a five per cent income tax, the amount payable by B, who has enjoyed his income only ten years, would be tantamount to a twenty per cent income tax. An inheritance tax, from this point of view, would be grossly unjust. This objection, due to the varying frequency of the transfer, was first made by Adam Smith, but is applicable only when the, tax is considered as a property or capitalized income tax. According to either the price-of-devolution, the privilege-of-inheritance or the accidental-income argument, the frequency of transfer is im- material; for the tax is paid each time by a different person.^ Finally, \mder the capitalized-income theory no graduation according to relationship would be possible. In short, the whole theory seems defective. The logical defence for the inheritance tax isthus the accidental- income argument as supplemented by the privilege of inherit- ance argument. It is in harmony with the general basis of taxation — the faculty or ability of the individual to pay; it rounds out the existing system, whether based on property or on income; "and it is not open to the objections which may be urged in one form or another against each of the other theories. A corollary from this theory is that the inheritance tax should be regarded primarily as a tax on the recipient of the inheritance rather than on the estate itself. Where the tax is proportional this makes very little difference, for the sum of the shares is equal to the entire estate. But where, as is now frequently the case, we have a graduated tax, the difference is marked. The higher rates on the larger amounts would obviously result in greater revenue to the state when the tax is imposed on the estate as a whole than if it is levied on the shares. Neverthe- less the taxation, of the shares constitutes a far more equitable method. -For if A receives $10,000 from a $50,000 estate, and B receives a like amount from a million dollar estate, it does not comport with justice that B should be taxed ten times as high as A simply because the rate on a milHon dollars happens to be ten times than on $50,000. This principle of taxing the share rather than the estate is now gradually being recognized. Eng- land pursues both plans, taxing the. estate as -a whole through the estate duty, and the separate shares through the legacy and ' Some .states, however, 'provide for this supposed inequality by exempt- ing-the second devolution, if it takes place within a certain pumber of years. Chili fixes the term at ten years. See West, oy. cil., p. 33. THE INHERITANCE TAX 137 succession duties. In the United States the tax is generally levied on the estate as a whole, but the noteworthy New York statute of 1911 introduced the principle of taxing the indi- vidual shares.^ Granting the desirability of the tax, we are at once con- fronted by the problem of graduated or progressive taxation. Graduation of the tax according to relationship has met with well-nigh universal acceptance; graduation of the tax according to amount has given rise to more controversy. This question has been fully discussed in another place ^ with the conclusion that the theory of progression is more applicable to the inherit- ance tax than to any other part of the fiscal system; and that, whether we base our demand on the limitation-of-inheritance theory, the faculty theory, or the compensatory theory, some scale of progression is both desirable and practicable. The inheritance tax to-day scarcely needs defence. It is found in almost every country; and the more democratic the country, the more developed is the tax. In some of the Cana- dian provinces, in the Australasian states, in the Swiss cantons, in England itself, the rates are not only progressive^^but highly progressive. The recent reforms in England are fully described in another chapter.^ In the United States also, there is now a decided movement toward the progressive inheritance tax. The collateral inheritance tax is virtually the product of the last two or three decades. Up to 1890 it existed in only six states,* but between 1890 and 1900, it was adopted by fifteen additional states, making twenty-one in all.^ During the next 1 For a defence of taxing the share instead of the entire estate see the Report of the Special Tax Commission of Istew York of 1907, of which the author was a member. Cf. especially the section on the Inheritance Tax. 2 Cf. Seligman, Progressive Taxation, 2d ed. (1908), pp. 319-322. ' Infra, chap. xvi. * The date when first imposed is put in brackets: Connecticut [1889], Delaware [1869], JMaryland [1845], New York [1885], Pennsylvania [1826], West Virginia [1887]. ' California [1893], Illinois [1895, although it existed for ,Cook county alone since 1887]. Iowa [1896], Maine [1893], Massachusetts [1891], Michigan' [1893-1894, and again from 1899], Minnesota [1897;' although an earlier tax had existed from 1875 to 1886], Missouri [1895-1898 and again in 1899], Montana [1897], New Jersey [1892], North Carolina [1897, al- though an earUer tax had existed from 1847 to 1874], Ohio [1893], Tennessee [1891], Vermont [1896] and Virginia [1896 although an earlier tax had ex- isted from 1844 to 1884]. 138 ESSAYS IN TAXATION decade this number was almost doubled, through the addition of nineteen states. '^ The collateral inheritance tax is therefore found at present in thirty-eight states, being lacking only ia Alabama (where it existed from 1848 to 1868), Arizona, Florida, Indiana, Mississippi, Nevada, Rhode Island and South Caro- lina. The tax was declared unconstitutional in six states,^ but the constitutional objections were in every case obviated by later laws as indicated in the preceding notes. The direct inheritance tax came somewhat later. It was first introduced timidly and with insignificant rates, and fre- quently applied only to personal property. Gradually the rates were increased, the exemptions were reduced and the tax was made applicable to real estate as well. The tax was first imposed in New York in 1891, but by the end of the century it had spread to six states.^ During the next decade the progress was more rapid and three times as many states, that is, eighteen, were added to the list.'* With the addition of another state in 1911,^ the number of states with a direct in- heritance tax now amount to twenty-six, or about two-thirds the number of those possessing a collateral inheritance tax. There is of course none in the former class that is not to be found in the latter class. As to the rates, which are naturally higher in the collateral taxes, the most interesting recent development had been the gradual spread of the progressive principle. The first case in which that principle was applied was the direct tax of Ohio of 1 Arkansas [1901], Colorado [1901], Idaho [1907], Kansas [1909], Ken- tucky [1906], Louisiana [1904, although there existed from 1828 to 1877 and again from 1894 to 1899 a tax applicable only to foreign heirs], Ne- braska [1901], New Hampshire [1905, although an earlier tax had existed from 1878 to 1882], North Dakota [1903], Oklahoma [1908], Oregon [1903], South Dakota [1905], Texas [1907], Utah [1901], Washington [1901], Wis- consin [1903, although an earlier tax had existed from 1899 to 1902] and Wyoming [1903]. 2 Louisiana in 1899, Michigan in 1894, Minnesota in 1886, Missouri in 1898, New Hampshire in 1882 and Wisconsin in 1902. ' The date when first imposed is put in brackets: Connecticut [1897], Illinois [1895], Michigan [1899], Montana [1897], New York [1891] and North Carolina [1897]. ^ In 1901 Colorado, Nebraska, Utah and Washington joined the ranks; in 1903 Oregon, Wisconsin and Wyoming; in 1904 Louisiana; in 1905 California, Minnesota and South Dakota; in 1907 Idaho, Massachusetts and West Virginia; in 1908 Oklahoma; and in 1909 Arkansas, Kansas and Tennessee. * Maine. THE INHERITANCE TAX 139 1894, which was declared unconstitutional for that reason by the state court in the following year.^ In the same year, 1895, the progressive principle was applied to the collateral inheritance tax by Missouri and Illinois. The Missouri law was overthrown by the state court although for other reasons.^ But the Illinois law, of a far more radical character, was upheld, not only by the state court but by the federal Supreme Court in what has become a leading case.^ For it settled the principle that progressive taxation is not a denial of the equal protection of the laws demanded by the constitution, and thus made it difficult for any state court to annul a progressive tax because of some vague provision in the state constitution. When the same question arose in Wisconsin as applicable to the direct inheritance tax the Wisconsin court stated that the decision of the federal Supreme Court was con- clusive.* As a result of this decision by the Supreme Court, and in part also as a consequence of the highly progressive inheritance tax temporarily imposed by the federal government during the ' Spanish war and lasting from 1898 to 1902,^ the progressive principle spread rapidly throughout the country. As a result, at the present time (1912) about one-third of the states levying a direct inheritance tax enforce the progressive principle. In two (Illinois and Maine) the rates vary from one to two per cent, in four (Idaho, Minnesota, West Virginia and Wisconsin) from one to three per cent; in two (Massachusetts and New York) from one to four per cent; in two (California and Kansas) from one to five per cent, and in one (Oklahoma), if the letter 1 State vs. Ferris, 53 Ohio State, 314. 2 State vs. Switzler, 143 Mo. 245. ' Kochesperger vs. Drake, 167 111. 122; Magoun vs. Trust and Savings Bank, 170 U. S. 283. * Nunnemacher vs. State, 129 Wis. 190. '° The federal tax applied only to personal property over $10,000. On estates between $10,000 and $25,000, the rate varied according to five classes of relationship, from three-quarters of one per cent to five per cent. On estates from $25,000 to $100,000, these rates were increased one-half; from $100,000 to $500,000 they were multiplied by 2; from $500,000 to $1,000,000 by 2}4; over $1,000,000 by 3. On the highest amounts the tax thus varied from two and a quarter to fifteen per cent. The federal tax was also up- held as constitutional in the leading case of Knowlton vs. Moore, 178 U. S. 41. The point in this case was as to whether the injunction of vmiformity in the constitution meant anything more than geographical uniformity. The court, by deciding in the negative, upheld the law. 140 ESSAYS IN TAXATION of the law is to'be followed, from one per cent indefinitely up- ward without any limit. ^ In the other states the direct tax is proportional at the rate of one per cent in nine cases (Arkansas, Connecticut, Michigan, Montana, Nebraska, Oregon, South Dakota and Washington); at one and a quarter per cent in Tennessee; at two per cent in Colorado, Louisiana and Wyoming and' at the high figure of five per cent in Utah. In the collateral inheritance tax the progressive rates are naturally both more numerous and more elevated. Although the proportional rate is foimd in eighteen states (one at two per cent, one at two and a half per cent and all the rest at five per cent) the majority of the states, twenty in number, now utilize the progressive scale. The graduation in these twenty states begins at one and a half, two, three or even four per cent and rises to as high as ten per cent in Colorado, Illinois and South Dakota; twelve per cent in Texas and Washington; fifteen per cent in Idaho, Kansas, Minnesota, North Carolina, West Virginia and Wisconsin; and twenty-five per cent in California. Finally it might be added that not alone have the rates been slowly advanced, but the exemptions have been gradually reduced. In the collateral inheritance tax the exemptions are now usually from $100 to $2,000. Utah and North Dakota are remarkable exceptions, the former with an exemption of $10,000, the latter with one of $25,000. In the direct inheritance tax the exemptions, however, are very much higher than in the collateral tax, varying from $5,000 to $10,000 and even reaching $20,000 in Illinois, $24,000 in California and $25,000 in West Virginia. A comparison of the recent fiscal development in demo- cratic states would not be uninstructive. In only three coun- tries does the old general property tax still survive — ^in Switzer- land, in Australia and in the United States; and in all three the system has become so defective that it has been supplemented by other sources. The Swiss cantons first developed the in- 1 In McGannon, admrx., vs. State ex rel. M. E. Trapp, no. 2669 of Okla. Sup. Ct. it was, however, decided in 1912 that the words "the rates pro- vided for herein shall be increased 1-125 of 1 % for every $100 increase in valuation of such excess " are to be interpreted as if the sentence stopped with the words 1%. In other words, the maximum rate becomes 1%+1-125 of 1% or 1.008% instead of 100%. THE INHERITANCE TAX 141 come tax, then the inheritance tax, and have only recently been paying attention to the corporation tax. The Australian colonies were first in the field with the inheritance tax, later developed the income tax, and have scarcely yet realized the importance of the corporation tax. The American common- wealths, finally, were the first to introduce the corporation tax, have more recently turned their attention to the inheritance tax, and have only just begun to experiment with the income tax. The differences are suggestive, but are easily explicable when we recall the economic and administrative conditions in each country. With all the variations in detail, it is clear that the democratic trend is in one general direction; and it is more than probable that progressive inheritance taxes will play by no means an iasignificant role in the fiscal systems of the future. CHAPTER VI THE TAXATION OF CORPORATIONS I THE HISTORY In a previous chapter we have considered the inadequacy and practical failure of the general property tax. In all ages and in all countries it has been found almost impossible to reach intangible personalty. What has always been a difficult task has become immensely complicated to-day through the growth of the modem corporation. At present, especially in industrial countries, the far greater part of the personalty in the hands of individuals consists of intangible property — mainly of corporate securities. The first reform of our direct taxation, therefore, is conceded by all to lie in this direction. Govern- ments are everyTvhere confronted by the question, how to reach the taxable capacity of the holders of these securities, or of the associations themselves. Whom shall we tax and how shall we tax them in order to attain a substantial justice? Perhaps no question in the whole domain of financial science has been answered in a more unsatisfactory way. In the United States we have a chaos of practice — a complete absence of principle; in Europe, with the possible and partial exception of England, the situation is scarcely, if at all, better. Moreover, in spite of the generally recognized need of reform, there has thus far been no comprehensive attempt, from the standpoint of theory, to evolve order out of the chaos into which the whole subject is plunged.^ • A satisfactory treatment of this subject is still lacking. The English writers have paid little attention to it. Cf. however, J. Bucham, The Law relating to the Taxation of Foreign Income, London, 1905, which deals in part with corporations. In the American hterature there may be men- tioned as the only book which treats of the subject in general, although limited to a single state, H. G. Friedman, The Taxation of Corporations in Massachusetts in the Columbia University Stitdies in History, Ecorwmics 142 THE TAXATION OF CORPORATIONS 143 The first requisite in any scientific investigation of this kind is to have the facts; for without a knowledge of existing con- ditions, any propositions for reform would be valueless. Never- theless, the facts of corporate taxation have never been pre- sented in their entirety. Given the laws, it is necessary next and Pvblic Law, New York, 1907. Cf. also a shorter article on the same subject by C. J. Bullock, in the Qvarterly Journal of Economics, vol. xxi. (1907), p. 181 et seq. The studies on the different classes of corporations and on the special problems will be mentioned below in their proper place, but it may be pertinent here to call attention to some of the more important recent studies on the group known as pubhc-service or quasi-public cor- porations. Under the latter name see the articles by F. N. Judson and by F. C. Howe, in Publications of the American Economic Association, .Third Series, vol. ii. (1907). Under the former name see esp. the articles by Adam Shortt and by C. C. Plehn in Addresses and Proceedings of the First Con- ference of the National Tax Association, New York, 1908, pp. 622 and 634; and by A. E. Holcomb in the Fifth Conference, Columbus, 1912, p. 149. For the facts, see Taxation of Corporations. Report on Systems employed in Various States. Prepared under the direction of the Industrial Commis- sion. By G. Clapperton, Expert Agent, Washington, 1901; and esp. Taxation of Corporations. Report of the Commissioner of Corporations on the Systems of taring Manufacturing, Mercantile and Transportation and Transmission Companies. This comprehensive investigation has appeared in sections. Section I., devoted to the New England States, was published in 1909; Section II., dealing with the Middle Atlantic States, in 1910; Section III., treating of The Eastern Central States, in 1911; Section IV., dealing with Minnesota, Iowa, Missouri, Kansas, Nebraska, North and South Dakota in 1912. The entire work will probably be completed in seven sections. Much material will also be found in Carl C. Plehn, Revenue Systems: State and Local Governments, reprinted from the Census Report on Wealth, Debt and Taxation, Washington, 1907. In a few of the states we find special treatises on the tax law and tax legislation, devoted in whole or in part to corporate taxation. These are: J. T. Davies, A Compilation of Constitutional Provisions, Statutes and Cases relating to the Assessment of Taxes in the State of New York, New York, 1886, and again in 1888; John T. Merrill, Manual of the Taxation of Corporations by the State of New York, New York, 1897; J. H. Hammond, Taxation of Business Corporations in New York State, New York, 1901; H. M. Powell, Taxation of Corporations in New York for State and Local Purposes, Albany, 1905; the same author's Manual of Corporate Taxation in New York for State Purposes, New York, 1907; F. M. Eastman, Taxation for State Purposes in Pennsylvania, Philadelphia, 1898; the same author's The Law of Taxa- tion in Pennsylvania, 2 vols., Newark, 1909; C. C. Black, Law of Taxation with special reference to its Application in the State of New Jersey, 2d ed., Newark, 1906; J. P. Dunn, Jr., The New Tax Law of Indiana and the Science of Taxation, Indianapolis, 1892; F. M. Judson, A Treatise upon the Law and Practice of Taxation in Missouri, Columbia, 1900; Compilation of Tax Laws and Judicial Decisions of the State of Illinois, made by Albert M. Kales and Elmer M. Liessmann [Springfield, 1911]. Of the general legal treatises on taxation only a few are devoted partic- 144 ESSAYS IN TAXATION to consider the interpretation put upon them by the courts. Even then we have only the legal, not the economic view; for, unfortunately, good law is not always sound economics. It is therefore advisable to subject the legal principles involved to an analysis from the economic point of view. Only after such ularly to corporations. The most important is: J. H. Beale, Jr., The Law of Foreign Corporations and Taxation of Corporations, both Foreign and Domestic, Boston, 1904. In the ordinary treatises, however, frequent references are made to corporations. Cf. esp. T. M. Cooley, Treatise on the Law of Taxation, 3d ed., 1903; R. Desty, The American Law of Taxation as determined in the Courts of last Resort, St. Paul, 1884; W. H. Burroughs, A Treatise on the Law of Taxation, New York, 1877, new ed., 1883; F. M. Judson, The Taxing Power, State and Federal, in the United States, St. Louis, 1903. Cf. also the appropriate chapters in the encyclopaedic works on Corporation Law by Cook (6th ed., 1908, 4 vols.); and by Thompson (2d ed., 1908-1910, 7 vols.). Material on corporate taxation will be found in the histories of taxation in the various states. These are: W. M. Gouge, Fiscal History of Texas, 1834-1852, Philadelphia, 1852; T. K. Worthington, Historical Sketch of the Finances of Pennsylvania, Baltimore, 1887; W. P. Snyder, Compendium and Brief History of Taxation in Pennsylvania, Harrisburgh, 1906; N. W. Evans, A History of Taxation in Ohio, Cincinnati, 1906; E. W. Bogart, History of Taxation in Ohio, Columbus, 1912; F. A. Wood, History of Taxation in Vermont, New York, 1894; F. H. Noble, Taxation in Iowa: Historical Sketch, present Status and suggested Reforms, St. Louis, 1897; J. E. Brind- ley, History of Taxation in Iowa, 2 vols., Iowa City, 1911; E. J. Benson, Taxation in Kansas, Baltimore, 1900; J. E. Boyle, The Financial History of Kansas, Madison, 1908; R. V. Phelan, The Financial History of Wisconsin, Madison, 1908. The financial histories of Jones on Connecticut, Douglas on Massachusetts, Ripley on Virginia, and Schwab on New York deal with the earlier periods, anterior to the formation of corporations. Of the earher German literature — and there was none in any other lan- guage — there maybe mentioned: Dietzel, Die Besteuerung der Aktiengesell- schaften in Verbindung mit der Gemeindebesteuerung , Cologne, 1859; G. S. Meili, "Rechtsgutachten liber die Besteuerung von Aktiengesellschaften," in Zeitschrift fiir schweizerische Gesetzgebung und Rechtspflege, 1882, p. 489 et seq.; F. Hecht, " Die staatUche Besteuerung der Aktiengesellschaften in Deutschland," in Finanz Archiv, vol. vii. (1890), p. 37 et seq.; G. Schanz, "Die Besteuerung der Aktiengesellschaften in den deutschen Staaten," in Wocheri- schriftfiir Aktienrecht und Bankwesen, 1892, no. 20. Since the first edition of this book a number of foreign studies have appeared. In German there may be mentioned D. Feitelberg, Die Einkom- mensbesteuerung nicht physischer Personen, Jena, 1900; Wangemann, " Die Heranziehung der Aktiengesellschaften zur Gemeindeeinkommensteuer in Preussen," in Verwaltungsarchiv, 1901, p. 489; A. Dehlinger, "Die Besteuer- ung der Aktiengesellschaften in WUrttemberg," in Finanz Archiv, vol. xxi. (1904), p. 499; F. J. Neumann, "Die Aktien-und ahnliche Gesellschaften als Rechts- und als Steuersubjekte," in Annalen des Deutschen Reichs, 1905, pp. 321, 418, 602; F. Dinglinger, Die staatUche und kommunale Einkommens- THE TAXATION OF CORPORATIONS 145 an examination and comparison of the facts of taxation in the United States and in Europe, will it be possible to reach any conclusions that may lay claim to scientific precision. Only such conclusions, arrived at through such a method, should be made the basis for practical reforms. This then is the program of the present series of chapters on the taxation of corporations. The great importance of having all the facts accurately stated leads me at the outset, even at the risk of tediousness, to an examination of the history and of the actual conditions of such taxation in the United States, while the theory and criticism will be reserved for future con- sideration.^ I. Early Taxation of Corporations During the first two decades of the nineteenth century, banks and insurance companies formed the chief examples of corpora- tions, apart from the numerous turnpike roads and toll bridges. During the twenties and thirties the development of transpor- tation facilities led to the creation of many canal and railway companies; and it was not long before many other forms of commercial and industrial enterprise followed in the same path of incorporation. The early tax laws made no mention of corporations. But as the general property tax was in vogue throughout all the commonwealths, it was tacitly assumed that the property of artificial as well as of natural persons was liable. Corporations were new institutions which the legislators in happy-go-lucky fashion, tried to tax under existing methods, whether they naturally belonged there or not. Our Solons had besteuerung der Aktiengesellschaften in Preussen und Baden, Berlin, 1905; L. Blum, ZH'e steuerliche Ausnutzung der Aktiengesellschaften in Deutschland, Stuttgart, 1911; E. Steinitzer, "Zur Besteuerung der Aktiengesellschaften in Oesterreich," in Conrad's Jahrbucher, vol. 83 (1904), p. 319; W.'Ger- loff. Die Kantonale Besteuerung der Aktiengesellschaften in der Schweiz, Bern, 1906. In French we may mention A. Wahi, Traii& du regime fiscal des sociitis etdes valeurs mobilieres, Paris, 1909; H. Truchy, "Lesvaleurs mobili^reset les projets de r^forme fiseale," in Revue d'economie politique, 1909, p. 763 and 1910, p. 31 1 This chapter, as well as the two immediately following, will contain few direct references to the laws and the legal decisions. For a full state- ment of the laws as they existed in 1890 the reader is referred to the notes in the original articles in the Political Science Quarterly, vol. v., from which the present chapters are adapted. When the present tense is used in the following pages it refers to the conditions as they existed in 1912. 146 ESSAYS IN TAXATION neither the leisure nor the inclination to make a more careful study of the subject. The first commonwealth law which treated of the taxation of corporations in general was the New York law of 1823. This provided that "all incorporated companies receiving a regular income from the employment of their capital" should be considered "persons" liable to the general property tax. They were required to make returns to the county officers of all their property and their capital stock, paying the tax them- selves and deducting it from the dividends of stockholders. They might, however, commute the tax by paying to the treas- urers of the counties where they transacted business ten per cent on their "dividends, profits, or income," (which the legis- lator evidently presumed to be identical). These taxes were paid by the county ofl&cers to the state, and were then credited to the counties in proportion to the amount of stock held within each county, after deducting the state tax. In 1825 and again in 1828 the system was slightly changed so as to conform more closely to the general property tax. The tax was made applicable to "all monied and stock corporations deriving an income or profit from their capital or otherwise." The real estate of these corporations was separately taxed; and in addition, they paid the property tax on their capital stock paid in or secured to be paid in, deducting the amount paid for real estate and the stock belonging to the state and to liter- ary and charitable institutions. Manufacturing and turnpike companies paid on the cash value, not on the amount, of the capital stock; turnpike, bridge and canal companies, whose "net income" did not exceed five per cent of the capital stock paid in, were exempted; while manufacturing and marine in- surance companies under the same conditions might commute by paying five per cent of their net income. It is thus seen that by this law corporations were divided into different classes, and that the system followed was the general property tax, with the exceptions that if a corporation had no profits it paid no tax on its stock, and that certain classes might commute by paying an income tax to the local officials. This remained the tax system, except for banks and for foreign insurance com- panies, until the middle of the century In 1853 the total exemption of non-profit-paying corpora- tions was aboHshed and all companies were taxed on their real estate and on their capital stock, together with their sur- THE TAXATION OF CORPORATIONS 147 plus profits or their reserve funds in excess of ten per cent of the capital, with the same deductions as above. All corporations, however, whose profits did not equal five per cent on the capital stock might commute by paying five per cent on their "net armual profits or clear income." It seems that very few ever availed themselves of this doubtful privilege, and accordingly in 1857, the law was again changed. The principle of commu- tation was abandoned; and since there was no distinction be- tween profitable and unprofitable companies, so far as personal property was concerned, all corporations were taxed on their realty and on the actual value (not the amount) of their capital stock plus the surplus profits or reserve in excess of ten per cent of the capital. In addition to the previous deductions a further abatement was made for the capital invested in taxable shares of other companies. The remainder was then taxed in the same manner as the other personalty and realty of the county. This remained the law of New York, with the exception of some special provisions as to banks and insurance companies, until the recent changes in the taxation of corporations. These changes, however, affect only taxation for state purposes, leav- ing the local taxation still governed by the provisions of the law of 1857. Foreign corporations, however, are taxable for local purposes, under a law of 1855, on all sums actually in- vested in the state. It appears, then, that the New York system was a taxation of the real and personal property of corporations by the local assessors, and that the personal property was virtually defined as the capital stock not invested in real estate. In the other commonwealths, where corporations were taxed at all they were included in the general property tax; and most of the laws lacked even such provisions as those of the New York statute in reference to the capital stock. A typical enactment of this kind is the Connecticut law of 1826, which provided simply that the personal property of a corporation should be taxed in the place where its principal business was transacted. In Mas- sachusetts, on the other hand, where the first general law ap- pHcable to manufacturing corporations was passed in 1832, only the real estate and machinery of corporations were taxed. In heu of the tax on personalty there was substituted the property tax on the corporate shares in the hands of individuals, a pro- portionate amount being deducted from each for the part of the capital stock invested in machinery and in real estate. In 148 ESSAYS IN TAXATION the other commonwealths, when the corporation was taxed, the shares in the hands of individuals were usually exempt. The only state which from the very outset broke with the principle of the general property tax was Pennsylvania, whose method we shall learn a little farther on. With this one exception, then, the early principle of cor- porate taxation was the assessment of all real and personal property by the local officials; corporations, in other words, were taxed by the same method as individuals. This primitive system has been retained up to the present day by many com- monwealths for almost all classes of corporations; and in several states, indeed, the constitutions require that corporate property be taxed in the same manner as that of individuals. The prac- tical defects of such a system, however, have led to numerous changes in many of the progressive states, and the tendency is everywhere away from the original plan. In a previous chapter we have seen that the shortcomings of the general property tax were five in number; inequality of assessment, failure to reach personalty, incentive to dis- honesty, regressivity and double taxation. With few exceptions, these objections are as applicable to the taxation of corporations as to that of individuals. All the facts here to be recoimted set the stamp of disapproval upon the original plan. In the words of a celebrated report on taxation, this method of assess- ing corporations locally on their general property, is "as a system, open to almost every conceivable objection." ^ II. Development of the Corporation Tax As a result of these practical defects many commonwealths have abandoned in part, or altogether, the taxation of corporate property by local officials. The movement away from this original position has taken three directions: (1) the property of transportation companies, especially railroads, has been as- sessed separately by a special board and according to well- defined rules; (2) certain classes of corporations, beginning with banks and insurance companies, but gradually including the so- ' Taxation of Railroads and Railroad Securities. By C. F. Adams, Jr., W. B. Williams and J. H. Oberly, a Committee appointed at a Convention of State Railroad Commissioners, to examine into and report the methods of Taxation as respects Railroads and Railroad Securities now in use in the various States of the Union, as well as in foreign countries; and further to report a plan for an Equitable and Uniform System of such Taxation, New York, 1880, p. 8. THE TAXATION OF CORPORATIONS 149 called public-service corporations and in not a few cases other corporations, have been taxed, not on their property, but on certain elements supposed to represent roughly their taxable capacity; (3) all corporations in general have been taxed by a uniform rule, according to principles varying more or less in the different commonwealths. The first tendency has progressed so far that there is now not a single commonwealth which applies, for both state and local purposes, the primitive method of the general property tax, locally assessed, to railroads. In 1895 there were still nine such states,^ but in 1912 Rhode Island formed the only exception. In that year, however, Rhode Island supplemented the older system by a different method. About two-thirds of the Ameri- can states ^ have broken away from the original custom so far as to have the railroad property assessed not by local officials, but by a state board known under various names.^ The tax, it is true, is usually imposed at the customary rate of the general property tax, but many of the difficulties of local assessment of property have been obviated. In a few states the departure from the primitive system is only very slight. Thus in Louisiana although by the constitu- tion of 1898 a state board of appraisers assesses the property, corporate real estate continues to be taxed at the locality where situated and personal property at the domicile of the corpora- tion. And in Texas, while the comptroller of state apportions the rolling stock to the counties, and a state board by a recent 1 Louisiana, New Mexico, Oklahoma, Oregon, Rhode Island, Tennessee, Texas, Utah and Washington. 2 Alabama, Arizona, Arkansas, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Utah, West Virginia, Washington, Wisconsin and Wyoming. Mississippi, Ohio, North Carolina, Texas and Virginia, which also use this newer method, supplement it by special taxes. ' It is called the board of railroad assessors in Kansas, Oklahoma and Tennessee; board of railroad commissioners in Arkansas, Kentucky and Mississippi; board of public works in Virginia and West Virginia; board of assessment for railroads in Alabama; state board of assessors in New Jersey; board of appraisers in Louisiana; corporation commission in North Carohna; state executive council in Iowa; board of tax commissioners or board of state tax commissioners in Indiana and Oregon; and board of equalization in all the remaining states except Florida (where the assess- ment is put in the hand of the attorney general, comptroller and treasurer) and Texas (where it is in part entrusted to the comptroller). 150 ESSAYS IN TAXATION law appraises the franchise, the real estate of corporations is still assessed in the old way by local officials. In most of the states, however, the pohcy of centralization of assessment has proceeded much farther. In some of the states which practice this so-called ad valorem system, the state board assesses the entire property. In others it assesses the roadbed, rolling stock and all other operative property, i.e. property actually used for purposes of operation, leaving the remainder of the prop- erty to be appraised by the local assessors. In still others the state board includes over and above the tangible property the value of the so-called franchise. As soon as this is done, how- ever, a departure is made from the principles of the general prop- erty tax. For although an individual may be assessed to the property tax on his so-called intangible property, an attempt is rarely, if ever, made to assess to an individual the good will of a business. Yet a corporate franchise, as we shall see later, is in a certain sense, in part at least analogous to the good will of a business and its value as a piece of property can be reached only through a consideration of the corporate earnings. In proportion, however, as the assessment of frarichises acquires greater importance, the simpler machinery of ad valorem assess- ment becomes inappHcable, and this method of taxation really merges into the one to be discussed below. In not a few of the states which levy the ad valorem tax the so-called unit rule is followed. The first provision for this seems to have been made in the California constitution of 1879. By this is meant that instead of the property of the corporation being valued piecemeal, its entire value is appraised as a unit. If part of the property is without the state the property is none the less valued as a unit, and deductions are then made to compensate for that part of the property which is deemed to be without the state. In the case of railways relative mileage is usually taken as the criterion. The same rule is observed as between the various local divisions in the state, the property being assessed not by local assessors piecemeal but by a state board as a unit. The existence of the unit rule is entirely irre- spective of the particular method employed to reach the value of the entire property. Sometimes only the realty and the tangible personalty of the corporation are added together; sometimes the value of the intangible personalty is added; some- times the value of the so-called franchise is taken into account; sometimes the result is reached by ascertaining the value of THE TAXATION OF CORPORATIONS 151 the capital stock or again of the stock plus the bonds and either with or without certain deductions. But whatever the method of ascertaining the value, the point is that the entire value of the corporation is taken as a unit. For the reason mentioned above, as well as for others to be discussed later, this first reform of railroad taxation has not been completely satisfactory. As a consequence a number of im- portant commonwealths — sixteen in all — have wholly or par- tially abandoned property as the basis of assessment.^ The methods adopted by them are comprised in the second of the three tendencies. This second movement away from the property tax has con- sisted in subjecting particular classes of corporations to special taxes on other elements than their general property. It will be well to discuss these classes in order. 1. Banks The direct taxation of banks dates back to the beginning of the nineteenth century. During the war with England the federal government imposed certain stamp duties on notes issued or discounted by banks. But this law of 1813 contained a fur- ther provision permitting the banks to compound for the duty by paying one and a half per cent on the amount of the annual dividends. The first state law providing for a direct tax on banks was the Georgia act of 1805, which levied a tax of two and a half per cent on their capital stock and one-half of one per cent on their circulation. New Jersey followed in 1810, with a tax of one and a half per cent on the paid up capital stock of specified banks. The first Massachusetts law was the act of 1812 which imposed a tax of one-half of one per cent on the amoimt of their capital stock. A more important law was the Pennsylvania act of 1814, for Pennsylvania from the very outset assumed an ^ Of these, nine states use only the new method — Connecticut, Cahf omia, Delaware, Maine, Maryland, Massachusetts, Minnesota, New York and Pennsylvania. Vermont uses the new system as an alternative method. Mississippi, Ohio, North Carolina, Rhode Island, Texas and Virginia im- pose similar taxes in addition to the ad valorem system. lUinois uses the method only in the case of one railroad. Michigan, Washington and Wis- consin at one time employed the newer method, but subsequently reverted to the ad valorem system. North Dakota at one time employed the new method as an alternative system, until it was declared unconstitutional. 152 ESSAYS IN TAXATION attitude different from that of the other states. According to this law, banks were taxed at the rate of six per cent upon their dividends or net profits; if exempted from the national tax, the rate was to be eight per cent. In 1824 the rate was definitely fixed at eight per cent, and a few years later the principle of graduated taxation was introduced. The act of 1835 imposed on banks of issue a tax on dividend^, which varied from eight to eleven per cent as the dividends were under six or over eight per cent; and in 1840 banks were also subjected to the capital stock tax imposed on all corporations. In 1849 the dividend tax was increased. In 1850 a tax of four and a half mills on capital stock was substituted for the earlier general tax, but in 1852 this was repealed and the old tax reintroduced, which in 1859 was extended to banks of discount, deposit and savings institutions. In 1861 the progressive tax on dividends was increased so as to vary from eight per cent if the dividends were six per cent, up to thirty if the dividends were twenty- five. In 1866 a tax of one per cent was imposed on capi- tal stock, in lieu of all other taxes on the capital stock of banks, and after some minor changes the whole system of taxing banks was replaced in 1889 by the method to be ex- plained below. Ohio and Virgmia were the only other states which began, and for some time continued, to tax banks on dividends, although several states, like Vermont, in chartering special banks some- times inserted a provision in the charter, reserving a portion of the profits or dividends. In Ohio a tax of four per cent on dividends was imposed in 1815, but in 1816 the general banking law obliged the banks to set aside profits which at the expira- tion of the charter would amount to four per cent of the total stock. In 1825 this charge was commuted into a tax of from two to four per cent on dividends, and in 1831 the rate was raised to five per cent. In 1845 banks were required to pay, in lieu of the tax on dividends, six per cent on the profits, de- ducting expenses and ascertained losses. Five years later the taxation of profits or dividends was abohshed, and the banks were henceforth taxed at the rate of the general property tax on the amoimt of their capital stock and contingent fund. In Virginia the dividends tax did not begin until 1846, when the banks were required to pay one and a quarter per cent on divi- dends. This rate was gradually changed until during the Civil War it reached seventeen per cent. In 1870 a new system was THE TAXATION OF CORPORATIONS 153 introduced, based partly on capital stock, partly on income or dividends above $1,500; but in the following year the present method was adopted. While Pennsylvania and Virginia were the only common- wealths to retain dividends as the basis of taxation, a few states taxed banks on their capital stock. Thus the Massachusetts tax of 1812, changed in 1828 to a tax of one per cent on the amount of the capital stock actually paid in, remained in force practically without change until the Civil War, when the state banks were superseded by the national banks. This tax was in addition to that levied on the individual stockholders but, curiously enough, it applied only to the chartered, not to the free banks.^ In Louisiana a tax was imposed in 1813 on the "stock in trade" of all banks; and in Kentucky a tax was levied in 1818 on the capital of the branches of the Bank of the United States. In other states, again, a special tax was levied only on the proportion of the capital stock owned by non-residents, as in the first Connecticut law of 1830, which imposed such a tax at the rate of one-third of one per cent. In most of the com- monwealths, however, the special state taxation of capital stock came much' later, since the principle of the property tax pre- vailed. When the capital stock was taxed at all, it was simply as representing the personal property, and hence it was taxable locally at the general rate of the property tax. The real estate was taxed separately, as in New York, where the personal prop- erty tax was levied on bank stock and was payable by the cor- poration. According to the law of 1823,^ the tax was assessed on the par value of the stock, but in 1847 the basis was changed to the actual market value of the stock, without deduction for debts. It is worthy of note that in North Carolina, where the taxation of capital stock did not come until 1859, the rate of the tax varied with the dividends. Since the inception of the national banking system most of the commonwealths have again changed their methods of taxing banks. The history of this change can be well traced in the legislation of New York. According to the laws mentioned above, banks were taxable on so much of their capital stock as represented their personal property. Under these acts the ^ For a discussion of this point see W. B. Stevens, The Taxation of State Banks. Boston, 1865. ' One of the earliest discussions of the bank tax is to be found in S. M. Hopkins, Speech on the Subject of taxing Bank Stock. Albany, 1822. 154 ESSAYS IN TAXATION banks claimed exemption for that part of their capital invested in United States bonds; but their claim was disallowed by the court of appeals, on the ground that no unfriendly discrimina- tion was thereby shown to the United States as a borrower. In 1862, however, the national government provided by law for the total exemption from state taxation of all stocks, bonds and other securities of the United States. The court of appeals then held that this provision applied only to stock and bonds issued after the date of the law, but that all securities issued prior thereto were still taxable, according to the state statute. This decision was reversed by the federal Supreme Court, which held that any "stock of the United States constituting a part or the whole of the capital stock of the bank is not subject to state taxation." The legislature then sought to evade this decision by enacting that banks should be taxable "on a valua- tion equal to the amount of their capital stock," with similar deductions and exemptions as in the law of 1857; and the court of appeals pronounced this law vahd, on the ground that the tax was on capital stock, and not on property. This decision was in turn reversed by the Supreme Court, which held the tax to be levied on the property of the bank, and therefore subject to deduction for non-taxable investments. In 1864 the na- tional banking act was passed, which permitted the taxation of national bank shares in the hands of individuals, but not at a greater rate than other moneyed capital. This gave the New York legislature the desired opportunity, and in 1865 it enacted a law providing that all shares in national banks should be in- cluded in the valuation of the personal property of individuals. The court of appeals held this to be valid. It must be remem- bered, however, that the state banks were still taxed on their capital. The Supreme Court of the United States now upheld the principle of the taxability of shares, on the ground that a tax on the- shares in the hands of individuals was not a tax on the capital of the bank. Nevertheless it reversed the New York decision on a minor point, namely, that since the capital of state banks invested in national securities was exempt, a tax on the capital was not equivalent to a tax on the share- holders, and hence to tax state banks on their capital and share- holders of national banks on their shares constituted a dis- crimination against national banks. This decision led to the New York law of 1866, which aboHshed the taxation of bank capital and provided for the taxation of shareholders of both THE TAXATION OF CORPORATIONS 155 state and national banks in the same way, i.e., on the value of the shares, with deductions for the capital invested in real estate. The banks were no longer taxed on their capital, but were required to retain the dividends from the stockholders until the tax was paid. The Supreme Court sustained this law, holding that no deduction should be made from the value of the shares for any part of the bank's capital which might consist of United States bonds. Later it decided the state tax on shares to be valid, even if it were collected from the banks. The ques- tion then arose whether it was competent for the shareholder to deduct the value of his debts, as was the case in the taxation of all other personal property. The court of appeals decided in 1867 in the negative, holding that there could be no deduction of debts from the assessment of bank shareholders. This case slumbered for thirteen years; but in 1880 a decision involving this precise question was reversed by the United States Su- preme Court on the ground that "the prohibition against the taxation of national bank shares at a greater rate than that imposed upon other moneyed capital could not be evaded by the assessment of equal rates of taxation upon unequal valua- tions." The consequence was an alteration in the New York law, which now in 1880 permitted the same deductions as in all other taxable property and which provided for the assessment of shares, whether owned by residents or non-residents, at the place where the bank was located.^ The result of this development was that bank shareholders paid a large proportion, and in some towns the greater part,^ of all the taxes on personal property, and that they alone were unable to evade the otherwise so laxly executed tax on personalty. A later attempt of the banks to remedy this obvious inequality was frustrated by a decision of the Supreme Court that the words "moneyed capital," in the revised statutes, are practically confined to banks and pri- vate money lenders, and that the imposition of a lower rate 1 For contemporary views see The State and National Banks. The Ques- tion of Taxation, Albany, 1864; Report of the Committee of Bank Officers of the City of New York in relation to Bank Taxation, New York, 1875; T. J. Hillhouse, Taxation of Banks of the State of New York, New York, 1880; C. P. Williams, The National Banks and State Taxation, New York, 1887; [Seven] Reports of the American Bankers' Association upon Bank Taxation, New York, 1875-1889. 2 In Albany the banks paid fifty-eight per cent of all taxes on personalty. New York State Assessors' Report, 1878, p. 16. 156 ESSAYS IN TAXATION of taxation on other corporations does not invalidate the bank tax.^ The system of taxing banks that had been reached in New York by the close of the nineteenth century is now general throughout the United States. It may be summed up as the separate taxation of the real estate owned by the bank together with a tax paid by the bank and then withheld from dividends,^ levied sometimes by local, but more frequently by state, offi- cials on the value of the shares, less the value of the real estate and other exempt property. In only a few states, like Maine, Maryland, New Hampshire, New Jersey, Oregon, Texas and Vermont, is the primitive method followed of attempting to assess the shares to the owner where they reside; and even in many of these instances an exception is made in the case of national banks and of non-resident stockholders, when the tax is assessed to the bank itself. In most states the same method is applied to state and national banks. In the eyes of the law, the tax although assessed at the bank, is generally considered to be a tax on the shareholders, advanced by the bank. As a matter of fact the tax is in most cases assessed in the name of the shareholder, and has even been declared invahd if the law does not grant in specific terms the right to collect the tax again from the shareholder.^ Practically, of course, it is not a tax on the shareholders, because of the famifiar fact that new purchasers of bank shares will escape the tax through the operation of the principle of capitalization of taxation.^ The shares are' generally taken up at market or book value; but in some cases book value is not admitted and in others, arbi- trary methods of ascertaining the value are prescribed. Thus in New Jersey the assessors until recently added the capital stock, surplus and undivided profits; deducted the value of the non- taxable securities and of the real estate; and then divided the re- mainder by the number of shares. The result was an assessment 1 The cases in their order are as follows: 23 N. Y. 192; 26 N. Y. 163; 2 Black, 870; 2 Wall. 200; 33 N. Y. 161; People vs. Weaver, 3 Wall. 673; 4 Wall. 244; 9 Wall. 353; 36 N. Y. 59; Van Allen vs. Assessors, 100 U. S. 539; Mercantile National Bank vs. New York, 129 U. S. 138. = The Supreme Court has repeatedly held that the tax on the share- holder may be required to be paid by the corporation. Aberdeen Bank vs. Chehalis County, 166 U. S. 440; Merchants' Bank vs. Pennsylvania, 167 U. S. 461; Cleveland Trust Company vs. Lander, 184 U. S. 111. ' Home Savings Bank vs. Des Moines, 205 U. S. 603. * See infra, chap, viii, sec. vi. THE TAXATION OF CORPORATIONS 157 which is in few cases even approximately equal to either the mar- ket or the par value.^ So in Idaho by a law of 1912 the surplus and imdivided profits are added to the face value of the shares and the amount of the capital invested in real estate is then de- ducted. In some cases again, where it is customary to assess property at only a portion of its real value, the law provides that a definite percentage of the market value of the shares be put into the assessment list. In Iowa, for instance, it is twenty per cent; in Idaho forty per cent. In most of the states, even where the assessment of bank shares is fixed by a state official, the proceeds are distributed to the localities in which the shareholders reside. Some com- monwealths have enacted more detailed provisions to avoid the confusion arising from the taxation of non-residents' stock. The Massachusetts law, for example, which dates from 1868, pro- vides that the assessors of a town where a national bank is located shall omit from the town valuation all shares held by non-residents, and that the taxes paid by the bank on these shares shall be credited to the state. The system sketched above is the one generally found in the United States. Since the commencement of the twentieth century, however, a number of states have substituted a special corporation tax on banks at a fixed or flat rate, in lieu of the older method. Thus in New York the law of 1901, as amended in 1903, provides for the imposition of a tax of one per cent on the value of the bank stock, which is arrived at by adding to- gether the capital stock, surplus and undivided profits and dividing the result by the number of shares. Owing to the lower rate there is no deduction for the value of the real estate, nor is the shareholder entitled to any deduction for debts, as is the case in the general property tax.^ The tax is payable to the county officers and is then distributed to the localities. In California a similar tax of one per cent was imposed in 1910, with the difference that the amount of the real estate locally taxable is deducted, and that the tax is payable to the state. The California tax is in lieu of all other taxes and licenses, state and local, except the local tax on real estate. In Connect- icut since 1901 the banks pay to the state a tax of one per cent ' By a recent decision the New Jersey method has been altered so that the market value less the non-taxable is taken for assessment purposes. ^A New York case involving the right to deny a shareholder deduction for debt is now [1912] in the United States Supreme Court. 158 ESSAYS IN TAXATION on the market value of the shares, less the amount of the real estate, but the tax is then returned to the towns in proportion to their shareholdings. The tax on non-resident shares, how- ever, goes to the town where the bank is located. In Penn- sylvania by somewhat earlier legislation (namely, the laws of 1879 and of 1881 as amended in 1889, 1891 and 1897) the banks may pay the so-called four mills tax on the actual value of their shares or a ten mills tax on the par value of their capital stock. In the four mills tax the value of the shares is ascer- tained by adding together the paid in capital, surplus and un- divided profits and dividing the result by the number of shares, whereupon the bank is exempted from the state tax on personal property and from local taxation on so much of its capital and profits as is not invested in real estate, but including in the exemption any bonds or mortgages whether of individuals or corporations held by them.^ If, however, they elect to pay the ten mills tax on par value they are not relieved from the pay- ment of the tax on mortgages. Accordingly, virtually all the banks choose the four mills tax. National banks are in any case exempt from the state tax on mortgages. A three per cent net earnings tax, changed in 1901 to a gross earnings tax, applies only to unincorporated banks without capital stock. In Delaware there is a tax of one-fifth of one per cent on the book value of the bank shares, paid to the state in lieu of all state taxes except franchise taxes; and there are also special taxes on seven of the older banks in the state. In some of the Southern common- wealths, as North Carolina and Florida, we find in addition to the tax on bank shares a license or occupation tax fixed accord- ing to the capital or the business transacted. Again, in a few states, especially in New England where it is customary to tax the deposits of savings banks, we find special taxes on bank deposits in general. So in Connecticut bank deposits are taxed in the same way as savings bank deposits, described below; and in Maine banking companies pay one-half of one per cent on average amount of interest on time deposits and deposits bear- ing interest of three per cent and over, deducting the value of federal, state and local bonds. In Vermont national bank deposits bearing more than two per cent interest are taxed at a special rate of three-twentieths of one per cent. ' This was decided in Commonwealth vs. Clairton Steel Co., 222 Pa. 293 (1898); and People's Savings Bank vs. Monongahela Consolidated C. and C. Co., 29 Pa. Superior Ct. 153 (1908). THE TAXATION OF CORPORATIONS 159 Finally there are a few cases of special taxation on foreign banks. New York, for instance, levies a tax of five per cent on the interest of monej's loaned or employed within the state, and Maine taxes the branches of foreign banks at the rate of three- quarters of one per cent on the amount of business transacted within the state. California, on the other hand, taxes branches or agencies of foreign banks on their capital employed within the state at the same rate as domestic banks; while some states like Idaho tax foreign banks at the ordinary rate on the general average of moneys used. Since the advent of trust companies, the bank tax has fre- quently been extended to them, as in New York, In other states as in many of the New England commonwealths, loan and trust companies are taxed like savings banks, rather than like banks in general. In other cases again, as in California, the same methods apply to banks, savings banks, and loan and trust com- panies. Occasionally also, as in Idaho, surety and fidehty com- panies are included in the system of bank taxation. There remains the subject of savings banks. These, when incorporated, as is usually the case in the western states, are taxable in the same way as banks proper. This is true also in Permsylvania, even when they are not incorporated, for in that state they pay the same special taxes as banks in general. In New York they are taxable only on surplus. In New England, however, the custom is, and has for a long time been, to tax savings banks, which are almost always unincorporated, on their deposits. In Massachusetts, where up to that time, the deposits had been nominally taxable as the personal property of the in- dividual depositors, the new system came into use in 1862; in Vermont, not until 1878; in the rest of New England, in the in- terval. The rate of tax is, however, in every case far below that on property in general; ^ and it is customary to allow various de- ductions. Thus in Massachusetts the rate is one-half of one per cent on deposits, less the amount invested in taxable real estate, mortgages and state bonds. In New Hampshire the rate is three-quarters of one per cent on deposits, deducting the amount invested in real estate, mortgages bearing not more than five per cent interest, and state and local bonds. In the case of special deposits, however, the rate is one per cent. In Vermont there is a tax of seven-tenths of one per cent on the deposits and ' Cf. in general W. G. Abbott, Objections to the Taxation of Savings Banks. New York, 1880. 160 ESSAYS IN TAXATION accumulations less the amount invested in real estate or in federal bonds (if not more than ten per cent of the assets) , and excluding also individual deposits over $2,000, provided these are hsted to the depositors where they reside.'- In Maine a tax of five-eighths of one per cent is imposed on the deposits, reserve fimd and undi- vided profits, with deductions for the assessed value of real estate, the amount invested in federal bonds or in shares of corporate stock which are tax-free to stockholders by law, and deducting also two-fifths of any other assets which are invested in the state. In Connecticut there is a tax of one-quarter of one per cent on deposits exclusive of the surplus over $50,000 and over the amount invested in real estate, in state or local bonds issued to aid railway construction or in the stock of banks, trust, insur- ance, investment and bridge companies. In Rhode Island the tax is at the rate of four-tenths of one per cent on deposits and undivided profits. Outside of New England the tax on savings banks deposits is found only in Maryland where the franchise tax on savings banks amounts to one-quarter of one per cent on the deposits, three-fourths of the tax going to the place where the bank is located, and one-fourth going to the state. In many states outside of New England, however, deposits in savings banks are nominally taxable to the owner as part of his personal property. In New York, however, such deposits are exempt by statute. In the matter of bank taxation, therefore, we are beginning to reach uniformity, with the exception of savings banks in the New England states. Two points are especially to be emphasized in the present situation. One is that bank taxa- tion has been comparatively successful in proportion as we have attempted to apply to the property tax what in the case of the income tax is usually called the stoppage-at-source system. That is, not the income receiver, or in this case not the owner of the property, is taxed, but the corporation which pays out the in- come or which, in this case, represents the owner of the property and deducts the tax from the income of the property. The second point is that the imiformity which has been attained has been to a large extent imposed upon the states by national law. Were it not for the existence of the national banks and the provision of the national banking law of 1864 as to equal taxation, men- 1 Deposits under $2,000 arc exempt from any taxation. THE TAXATION OF CORPORATIONS 161 tioned above, the system of taxation of banks in general would probably be as iittle satisfactory as is at present the taxation of other intangible property. The real progress that has been made is the result of federal pressure, not in the sense of de- ciding what must be done, as in Germany or Switzerland, but in the sense of affirming what cannot be done. The mere fact of a national prohibition has sufficed to bring order into the state systems. This is a lesson which has not yet been learned in most of the other corporation taxes with which we shall have to deal. 2. Insurance Companies The next corporations to break away from the general prop- erty tax were the insurance companies. At first only foreign companies ^ were taxed. The earliest law was that of 1824 in New York, which provided that foreign fire insurance com- panies should pay ten per cent on all premiums for property insured within the state. In 1829 the law was extended to foreign marine insurance companies, and in 1837 the rate was reduced to two per cent. Domestic companies were taxable on their capital stock, like all other corporations, according to the general law of 1828. Ohio started out by taxing insurance companies as well as banks, assessing them in 1830 four per cent on their dividends. But this form of taxation was soon abandoned. In Permsylvania, where domestic companies were included in the general law of 1840, foreign insurance com- panies were not specially taxed until 1849, when the law im- posed a tax of one per cent on the gross premiums of foreign life insurance companies. In Maryland the custom dates from 1839, when a tax of two per cent was imposed on the premiums received by the agents of foreign insurance companies. In Vermont foreign fire insurance companies were taxied eight per cent on their premiums in 1825; but the law was repealed five years later. In Massachusetts where domestic fire and marine insurance companies were first taxed in 1862, and domestic life insurance companies not until 1880, a tax on foreign companies was first levied by the law of 1832, which is of special interest ' The use of the term foreign corporations in the American statutes is confusing. Generally it designates companies incorporated in another of the American commonwealths. In only a few cases does it refer to non- American states. In these chapters it will be used in the former sense unless otherwise indicated. 162 ESSAYS IN TAXATION as the prototype of what is known in several of our common- wealths to-day as the "reciprocal acts." The act provided that if any commonwealth taxed the agents of Massachusetts insurance companies, the insurance companies of such com- monwealth were to pay one-half of one per cent on the whole amount insured by such companies in Massachusetts. At pres- ent the reciprocal acts go somewhat further and prescribe that foreign insurance companies are to be taxed at the same rate (if higher than the home rate) that is imposed on home in- surance companies by the commonwealth chartering the foreign company. Such reciprocal acts are found in over two-thirds of the American states; and in a few states like Connecticut, Ilh- nois and New Jersey they still constitute the only form of taxation of foreign insurance companies. The Kansas court calls them "an appeal for comity," "a demand for equahty;" ^ but in reality they are retaliatory, rather than reciprocity, laws,^ and are even so called in some of the states. This premiums tax on foreign companies was gradually ex- tended to domestic companies, until at present it is found in almost every commonwealth, only a few of the Western states clinging to the original custom of taxing them on their property. Occasionally the tax is known as an insurance license or an in- surance fee. In some of the Southern states the companies must pay both fees and taxes. In most cases the laws apply to all kinds of insurance companies, of which the chief examples are fire and life insurance companies. In several states casualty companies are included and in a few states others as well are specifically mentioned, such as plate glass, indemnity, accident, surety, fidelity and employers' liabiUty companies in Florida; plate glass and boiler insurance companies in North Carolina; river, security and indemnity companies in Louisiana; live stock, plate glass, lightning and tornado companies in Missis- sippi; storm and lightning companies in Texas; and marine companies in quite a number of states. The taxes are in gen- eral the same on the various classes, although not infrequently somewhat lower rates are imposed on life insurance, and es- pecially mutual companies. Yet in a very few cases the reverse is true. Thus in Louisiana the graded' tax rises to $4,500 in the case of fire insurance companies, but to $5,250 in the case of ' Cf. 29 Kan. 672. '' Alabama declared them unconstitutional for this reason; 60 Ala. 217. In the other states they have been upheld. THE TAXATION OF CORPORATIONS 163 life insurance companies; and in Texas life insurance companies may be taxed up to 3% on premiums, other companies only 3^ of 1%. These are, however, exceptions to the general rule. Fire and life insurance companies, again, are usually taxed not only at the same rate but in the same manner. Yet exceptions to this rule are occasionally found. In Pennsylvania, for in- stance where fire and marine companies pay three mills per dollar of capital stock, life companies (except mutual) pay on gross premiums. In New Jersey insurance companies, other than life, are taxed one per cent on premiums, while domestic life insurance companies- pay one per cent on their surplus plus thirty-five hundredths of one per cent on their premiums; but the payments from the foreign companies are credited to the domestic companies. New Jersey, however, is one of the very few states where the (net) assets of domestic life insurance companies are in addition subject to local taxation. On the other hand, it is customary to make a distinction be- tween domestic and foreign companies. In nine states^ domes- tic life insurance companies are not taxed at all, while foreign companies pay on gross receipts or, as in Nevada, are subjected to a license tax. In six states, domestic life insurance companies are taxed at a lower rate than foreign companies — Alabama 1% as against 2%, Iowa 1% as against 23^%, Mississippi 2J^% as against 2^^%, Pennsylvania 8 per mill as against 2%, South Dakota 2% as against 2^%, and Tennessee 13^% as against 23^%. Yet in a few cases the situation is the reverse. Thus in Maine foreign life insurance companies pay 13^% on gross receipts, while domestic companies pay not only 2%, but in addition a tax on surplus after deducting the value of the real estate owned in the commonwealth. So in Vermont while all insurance companies pay 2% on premiums, domestic Hfe, fire and casualty insurance companies pay in addition 1% on the surplus above the necessary reserve of 4%, although with a deduction for the real estate locally taxed. In Wisconsin foreign hfe companies pay a license fee of $300, but domestic com- panies are subject to a tax on gross receipts. Here, however, as in not a few of the other states the retaliatory law is in force. In some states, again, like Rhode Island, mutual in- surance companies are taxed at a lower rate than others. New York takes perhaps the palm in the matter of complexity of rate ' Indiana, Kansas, Kentucky, Maryland, Nevada, North Dakota. Oklahoma, South Carolina and West Virginia. 164 ESSAYS IN TAXATION of insurance taxation. Life insurance companies, whether domestic or of any other American state, pay one per cent on premiums, while life insurance, health and casualty companies of foreign countries pay under the insurance law two per cent. On the other hand, while domestic fire and marine insurance companies pay one per cent on premiums, similar companies of other American states pay two per cent, and similar companies of foreign countries pay one-half of one per cent to the state treasurer and in addition two per cent to the local fire depart- ment or superintendent of insurance respectively. In addition all foreign companies are subject to the retaliatory tax. In some states, again, foreign and domestic companies are taxied on a different basis. Thus in Delaware, District of Colum- bia, Michigan, Missouri, Ohio and Oregon, foreign companies are taxed on their premium receipts while domestic companies are taxed on either surplus or net premiums. Finally in Con- necticut, Illinois and New Jersey foreign life companies are taxed only by reciprocal laws, while domestic companies are taxed either on assets or on surplus. Although the premiums tax is the general tax we find not a few cases where the tax is based on a different element. Some of the Southern states impose license or privilege taxes of a fixed amount, frequently in addition to the tax on premiums. In North Carolina insurance companies pay licenses from ten to two hundred and fifty dollars together with a tax of 23^% on gross receipts; in Florida from fifty to two hundred dollars together with a tax of 2% on gross receipts. In Mississippi they pay both fixed licenses and taxes on premiums, but the latter tax is not imposad when the ad valorem tax is levied. In Louisiana life and accident insurance companies pay a fixed license tax based on gross premiums, divided into 69 classes, the tax being graded from $150 to $5,250. In Illinois, Michigan, Missouri and Ohio, the tax on domestic life insurance compan- ies is imposed on surplus. In Connecticut the tax is imposed on assets at the rate of J^ of 1%. In Wisconsin the tax on domes- tic life companies is at the rate of 3% on gross income excepting that derived from the rents of real estate, and excepting also premiums collected outside of the state on policies held by non- residents. Other states combine various taxes. Thus Maine levies on domestic life insurance companies a tax of 2% on gross receipts in addition to a tax of }/^ of 1% on surplus after deducting the THE TAXATION OF CORPORATIONS 165 value of the real estate owned within the commonwealth. Mas- sachusetts imposes on life insurance companies a tax of 23/^ mills on each dollar of insurance, as compensation for the state valuation of pohcies and ^an excise tax of J^ of 1% on the net value of all policies in force. Other domestic insurance com- panies, including fire, marine, and real estate title companies, pay an excise tax of one per cent on premiums and assessments; while foreign companies pay two per cent, or as much more as is necessary according to the retaliatory law — which law ap- plies also to life insurance companies. Non-American com- panies pay four per cent on premiums (or two per cent if there is a guarantee fund of $200,000), while non- American accident, fidelity and guarantee companies pay two per cent. It need scarcely be added that when the reciprocal law is in force, as in New York and Massachusetts, there is a highly diversified system of insurance taxation. The tax on premiums is generally levied on gross premiums or gross receipts. In only a few states, as in Montana, Nebraska, New Mexico and Oklahoma is the tax levied on net receipts. In Illinois, however, the net receipts of foreign insurance com- panies are entered as personal property, and are included in the general property tax; whereupon the companies are then free of all local taxes, except for the benefit of the fire depart- ments which may impose a tax not exceeding two per cent on gross receipts. In many states where the tax is imposed on gross premiums certain deductions are made. Thus in the case of fire companies return premiums and reinsurance pre- miums are deducted in eleven states,^ and losses and return pre- miums in a few others. In the case of life insurance companies the deductions are more diversified. In Indiana losses are de- ducted; in Oklahoma, South Carolina, Vermont and Washington dividends are deducted; in Idaho losses and dividends; in Arkansas losses and commissions; in Maine dividends to domes- tic policy holders only; in Mississippi death claims, matured endowments and cash dividends paid under contracts in the state; in Iowa losses, matured endowments, dividends, increase in reserve and amounts paid in cancelled policies; and in Utah the property tax paid on any real or personal property. More- over, it has been decided in many states including Kentucky, Louisiana, Minnesota, Nebraska, New York, Pennsylvania 1 Georgia, Kentucky, Maine, Michigan, New Hampshire, Ohio, Penn- sylvania, Rhode Island, Vermont, Virginia and Wisconsin. 166 ESSAYS IN TAXATION and Tennessee, either by the courts or by the administrative authorities, that the words "gross premiums" or "premiums received" do not mean the premiums stipulated for, but that the so-called rebates or dividends paid to policy holders should be deducted, as they diminish to that extent the premiums ac- tually received by the companies.^ The rates of taxation are now exceedingly varied, being from K of 1% to 3% in the case of life insurance companies, and from }/2 of 1% to 33^% in the case of fire insurance and other companies. In the case of life insurance companies the rates have tended to increase during the past few decades. Toward the middle of the eighties of the last century the average rate in all the states was a little over one per cent on gross premiums. By 1892 the average had risen to one and a half per cent. By the end of the century it was over two per cent, and at present it is still higher — about 2.08 per cent.^ It must be remem- bered further that insurance companies are in almost all cases also taxable locally for their real estate, and that six states, chiefly in the south, permit the counties or municipalities or both to levy additional taxes on premiums;' while not a few of the Southern states like Florida levy in addition fixed licenses, state, or local or both. The growing burdens on life insurance have led in recent years to a discussion as to their propriety. In view of this and of the further fact that life insurance companies differ in im- portant respects from the other corporations treated in these chapters we shall depart from the general order of treatment and discuss briefly in this place the principle involved. On the one hand it is claimed that life insurance companies, or at least mutual life insurance companies, should not be taxed at all. For such companies it is said, are not profit- making organizations. A tax on them is really a tax on the pol- icy holders, and thus in effect a tax on thrift and foresight, constituting an interference with a socially most commendable ' A full account of the law and practice on this point will be found in the Memorandum on Interpretation of Sees. 65 and 73 of Chap. 77, Acts of 1907 of the State of West Viriginia relating to the Tax on the Premiums of Life Insurance Companies. By Alfred Hurrell, Attorney of the Association of Life Insurance Presidents. [1910.] ^ Cf. J. F. Dryden, Taxation of Life Insurance Companies in the United Stales. An Address, New York, 1908, pp. 11-12 ' These are Alabama, Georgia, Kentucky, Montana, South Carolina and Virginia. THE TAXATION OF CORPORATIONS 167 and beneficent practice.^ Other writers do not go quite so far as ttiis, but make a plea for great leniency of treatment and suggest tiiat a tax be imposed in tiie nature of a license fee for the privilege of doing business, the amount of the tax to be restricted to a sum just sufficient to cover the necessary cost of supervision. For life insurance companies, according to these authors, enjoy no special privilege, but constitute primarily a means .of co-operation to distribute the cost of providing for dependent widows and children and of saving a fund for old age.^ To this view, however, several objections may be urged. In the first place, modern Ufe insurance companies are often utiUzed, in part at least, to afford a safe means of investment "as well as insurance against death. Why, it may be asked, should such investments be treated more tenderly than others. But, secondly, there is a broader ground for dissent from the claim for great leniency. The demand that the amount of the tax should be put in some relation to the cost of supervision is untenable because the modern basis of taxation, as we know, is not benefits received or the cost of the advantage conferred, but ability to pay. While it is indeed true that public-service corporations which enjoy special privileges may reasonably be asked to pay a special tax because these privileges enhance 1 The fullest statement of this position will be found in Willard Morrill, Taxation of Life Insurance Companies. Argument before the Wisconsin Tax Commission at Madison, Oct. 2, 1900, esp. pp. 3-11, 41. See also a mono- graph bearing the same title by Charles E. Dyer, giving the argument sub- mitted on Oct. 23d, 1900. For a more recent statement see Robert Lynn Cox, The Impropriety of taxing Returns to Life Insurance Policy Holders, Boston, 1909, pp. 5-6. Cf. the addresses at the Tax Conference held in New York in Dec, 1908, under the auspices of the Association of Life In- surance Presidents; and the Proceedings of the Annual Meetings of the Association [six to 1912]. 2 This view is emphasized in the "Report of the Committee on Uniform Insurance Taxation" in the Addresses and Proceedings of the Fourth Confer- ence of the International Tax Association, Columbus, 1911, pp. 291-294. A plea for leniency is also made by S. S. Huebner, "The Taxation of Life and Fire Insurance Companies" in ibid.. First Conference, New York, 1908, p. 595. Cf. also Injustice and Inequality of Life Insurance Taxation. Re- port of Committee adopted by National Convention of Insurance Commis- sioners at Detroit on August S4, 1908; E. E. Rittenhouse, Taxation of Insurance Premiums, An Address, Atlantic City, 1908; J. A. De Boer, Tax- ation of Level Premium Life Insurance, 1909; and the chapters devoted to taxation in F. L. Hoffmann, Insurance Science and Economics, New York, 1911. 168 ESSAYS IN TAXATION their ability to contribute to the common burdens, the absence of special privilege does not justify exemption or remission from ordinary taxation, whether in the case of corporations or in that of individuals. Moreover, the mere fact that the property or the income on which the tax is imposed is the result of thrift or foresight carmot be regarded as constituting a valid objec- tion. As long as the general test of ability to pay is found in property, as in the United States, or in income, as in Europe, it is impracticable to avoid the taxation of thrift or of any of the other qualities which are responsible for the accumulation of capital or the enjoyment of income. For all capital is the result of saving. To abandon the taxation of life insurance savings would logically lead to the abandonment of all taxes on savings in general, and that would be tantamount to the taxa- tion of expenditure which, as we know,^ represents a bygone stage in the evolution of fiscal policy. As it has been well put: "This system of taxing savings and accumulated wealth has been dehberately adopted and will not be abandoned. The civilized nations of the world have committed themselves to the general poMcy of levy- ing taxes, so far as possible, in proportion to ability, not disability; according to strength, not weakness; and as the thrifty man is usually the able and the strong man, he will continue to pay most of the taxes. One of the incidental disadvantages of this abiUty principle is the fact that it does to a degree tend to discourage thrift. But you cannot build a system on incidentals. The proposal to build a system of taxation on sumptuary principles — penaUzing waste and thriftlessness, reward- ing thrift and industry — has been repeatedly made in the past and deliberately rejected. It is impracticable, for one thing, because the more it succeeds, the less revenue it yields." ^ On the other hand, it is equally true that life insurance com- panies should not be subjected to an exceptionally high rate of taxation. Owing to the ease with which they can be reached, it has become customary in the United States to put them almost on a plane with public-service corporations, and vir- tually to tax the capital invested in insurance policies at a 1 Cf. supra, pp. 8-10. 2 T. S. Adams, Some Obstacles which delay the Reform of Ldfe Insurance Taxation. An Address delivered at the Fourth Annual Meeting of the Associa- tion of Life Insurance Presidents, Chicago, 1910, pp. 6-7 of reprint. Cf. also Lester F. Zartman, Investments of Life Insurance Companies, New York, 1906, and the same author's Necessity for Reform in Life Insurance Taxation, An Address delivered at the second Annual Meeting of the Associa- tion of Life Insurance Presidents, New York 1908, pp. 3-5 of reprint. THE TAXATION OF CORPORATIONS 169 considerably higher rate than other intangible property, most of which in fact practically escapes taxation. Not only are life insurance investments taxed more severely than others, but' hfe insurance companies in the United States are taxed at a higher rate than anywhere else in the civilized world.^ Moreover, the life insurance companies have undoubtedly a just ground of complaint in the heterogeneity of burdens to which they are subjected.^ The evils of unequal and double taxation, which as we have seen above ^ are great enough in general in the United States, are accentuated in this case by the remarkable decision of the Supreme Court that the busi- ness of life insurance does not constitute commerce and is therefore not subject to the restrictions governing the state taxation of inter-state commerce. When we come to the question as to the basis on which life insurance companies should be taxed, it is not altogether easy to reach a decision. Some authorities recommend the taxation of assets or of the income from assets.* This is, however, im- practicable in most of the commonwealths because a large part of the insurance is written by foreign companies whose assets it is impossible to reach. It is largely for this reason that most of the states have had recourse to the taxation of gross premium receipts within the state. In principle, how- ever, this is open to serious objection, for very much the same reason that taxes on gross receipts in general are lacking in equity.^ In addition to this general objection it may be observed that a system of taxation of premium receipts is not especially well suited, in theory at least, to a community which still con- tinues to tax property as such. For premium receipts bear comparatively little relation to assets. Companies carrying ' In Germany, for instance, with an annual premium income of over 120 million dollars, life insurance companies paid in taxes of all kinds in 1907 only about 1300,000, or less than one-quarter of one per cent of the premium income as over against the two per cent and more, which is the average in America. Cf. J. F. Dryden, Taxation of Life Insurance Com- panies in the United States, 1908, p. 10. ^ Cf. W. J. Graham, Life Insurance Taxation. An Address before the North Dakota Tax Association. Grand Forks [1910]. ' Supra, chap. iv. ' This is the view of the Wisconsin Tax Commission in its Report for 1911, and is also upheld by G. H. Noyes, Life Insurance Taxation. Report and Bill of the Wisconsin Tax Commission, with other Facts (1911). '' Infra, chap, vii, sec. ii. 170 ESSAYS IN TAXATION large amounts of so-called industrial insurance collect much larger amounts in premiums in proportion to reserve assets required to meet the obligation of those contracts than in the case of the usual type of policy. The same disproportion is to be found in companies which have a large amount of paid-up and well-matured policies in force as compared with other companies.^ If premium receipts at all are nevertheless utilized, it should be as far as possible net, rather than gross, premiums on which the tax is imposed. That is to say, the companies should be permitted to deduct from the gross premium receipts all moneys paid back during the year by way of death losses, surrender values, endowments, etc., as well as for expenses of the local agency organizations.^ In this way we should at least get a little closer to the relative taxable abiUty of the various companies. It is, however, not likely that any im- mediate change will be made in the policy of the American commonwealths, which are predisposed to the simpler ad- ministrative methods and which naturally prefer ease and certainty of assessment to the more ideal ends of abstract justice. As long as this feeling prevails, perhaps the most prac- ticable plan still remains that of a fairly low, but uniform tax on gross receipts. But this, it must not be forgotten, is only a relatively satisfactory solution. 3. Railroads (a) History A complete history of the development of railway taxation would occupy an entire book. It will be possible here to say only a few words about some of the typical commonwealths.^ ' Cf. George Curtis, Jr., Life Insurance Taxation, An Address, 1911. This is incorporated with a few changes, in the Report of the Wisconsin Tax Commission for 1910, chap. 5. 2 This suggestion is forcibly urged by Robert Lynn Cox, Taxation of Life Insurance in the United States, A Reprint from the Addresses and Proceedings of the Second International Conference on State and Local Taxation. Colum- bus, 1908, pp. 14-15. ' There is no general history of railway taxation in the United States. For the period from 1890 to 1902, however, we now have the admirable compilation by the Interstate Commerce Commission entitled Railways in the United States in 1902. A Twenty-two Year Review of Railway Operations; a Forty-Year Review of Changes in Freight Tariffs; a Fifteen-Year Review of THE TAXATION OF CORPORATIONS 171 In Pennsylvania, railroads were included in the general tax law of 1840, and were assessed on their personalty and on their dividends. In 1844 the tax on personalty was abandoned, but the general corpora,tion tax on capital and dividends continued with some modifications. In 1861 a special tonnage tax was levied on transportation companies at the rate of two, three and five cents per ton of freight carried, and an additional tax of three-quarters of one per cent was laid on their gross receipts. The former was declared imconstitutional by the federal courts, and as a result, by the act of 1874, both the tonnage tax and the gross receipts tax were abandoned. For the old tonnage tax there was now substituted a tax of three cents a ton on the number of tons of coal mined or purchased by the companies engaged in mining, purchasing or selling coal. This tax, however, ceased in 1881, after having been declared unconstitutional, because it applied to interstate tonnage, notwithstanding the fact that it was a tax on franchise, and not on business. In 1877 the gross earnings tax was reimposed at the rate of eight- tenths of one per cent and with slight amendments in 1879 and 1889 is still in force. In 1879 a law was passed imposing a tax on the capital stock of corporations in general, which with some amendments is in force to-day.^ In the meantime railroads were subjected to the tax on loans which was first imposed in 1864. In 1868 an attempt was made to extend this tax: to securities held by non-residents, but the act was declared unconstitutional, as was a later act of a similar nature in 1881. It was not until 1885 that an effective tax on corporate loans, now in force, was introduced. In New York, railroads were subject to the general property tax imtil 1880, when a law was enacted substituting for state pmrposes a tax on the capital stock of corporations in general, which will be discussed later in detail ^ and which with some modifications is still in force. In 1881 an additional annual "franchise tax" was imposed at the rate of one-half of one per cent on the gross earnings of all transportation and transmission companies. In 1886 the organization tax was imposed on all Federal Railway Regulation; a Twelve-Year Review of State Railway Regula- tion; and a Twelve-Year Review of State Railway Taxation. Part V. State Taxation of Railways and other Transportation Agencies. Prepared by the Statistician to the Commission. WasMngton, 1903. This is a folio volume of 462 pages. ' Cf. infra, p. 197. 2 Infra, pp. 200 et seq. 172 ESSAYS IN TAXATION corporations in general and in 1895 the license tax on foreign corporations. Finally in 1899 the special franchise tax, to be explained later, was introduced. All these laws are, with some modifications still in force. In Coimecticut, the law requiring certain stock companies to make returns of the stock owned by individuals was extended in 1846 to railroads. Three years later every railroad that had paid a dividend in the preceding year was required to pay one- half of one per cent on the market value of the shares held by non-residents; but if the railroad was partly out of the state, the tax was to be proportioned to the mileage in the state. This system worked so well that in 1850 it was extended to resident stockholders, and was made one-third of one per cent in lieu of all other taxes. In 1862 the rate was increased, but the provision was inserted that the stock should not be assessed at less than ten per cent of the par value. In 1864 the outlines of the present system were drawn by requiring the companies to add to the valuation of the stock the market value of the funded and floating indebtedness less the cash on hand, and to pay one per cent on this valuation in proportion to the mile- age in the state. In 1871 it was provided that if the railroad paid any local tax this might be deducted from the state tax. In 1881 a deduction was made from the taxable valuation for such portion of its debt as was contracted for stock taken in other roads. In 1882 the funded and floating debts and bonds were to be valued at par unless the market value was below par. And in 1887 the present law, with substantially the same pro- visions, was enacted. In Vermont the attempt to break away from the older meth- ods came in 1882, when a graded gross receipts tax was imposed. On gross receipts up to $2,000 a mile the rate was 2%; on the first $1,000, or part thereof, above $2,000 the rate was 3%; on the first $1,000, or part thereof, above $3,000 the rate was 4%; and above $4,000 the rate was 5%. This law, however, was declared unconstitutional in 1890 by the state court as an in- terference with interstate commerce and was supplanted by the law of the same year, which, with a few modifications, is still in force and which provided for an alternative system — either a tax on gross receipts or a tax on the so-called appraisal, which is nothing but an ad valorem tax, including the value of the franchise, although at a fixed rate. The tax on appraisal was fixed at Vio of 1% in 1890, was increased to 1% in 1902, THE TAXATION OF CORPORATIONS 173 and to 13^% in 1908. The gross receipts tax was fixed at 2H% in 1890, but in 1906 the present graded tax was intro- duced. In Maine, a graded gross earnings tax was imposed in 1881. The rates were }4 of 1% on gross earnings up to 12,250 a mile; J^ of 1% on earnings from $2,250 to $3,000; and then increasing by }i of 1% for every $750 until the rate reached S}4%. In 1893 the rates were altered by providing that on earnings of $1,500, or under, the rate should be M of 1%, thence increasing by >2 of 1% for every $750 until the rate reached 3J^%. In 1907, the rates were further increased and the scale now in force was instituted. In Maryland the gross receipts tax was first imposed in 1888 at the rate of 3^ of 1%. In 1890, the rate was increased to 1%, and the tax was made applicable to foreign as well as domestic railways. In 1896 the tax was graduated, being 7io of 1% on the first $1,000 per mile of gross earnings; 1M% on earnings from $1,000 to $2,000 per mile; and 2% on all earnings over $2,000 per mile. In 1906 the rates were increased and the scale now in force was adopted. Of the other Eastern states to break away from the primitive system New Jersey has had an especially interesting history partly because it still favors a variation of the ad valorem system, partly because its peculiar situation has enabled it to grapple more successfully with the problem of the adjustment of state and local taxation. For New Jersey is economically only an adjunct to the city of New York. A small state, with a popula- tion far inferior to that of the neighboring metropolis across the river, and with correspondingly insignificant state expenses, New Jersey is traversed by some of the most important railway lines in the country and contains what are practically the New York city terminals. From an early period, therefore, the rail- way tax question assumed an importance which was not realized until much later in other states. In New Jersey railroads were at first subject to special taxes as fixed in their separate charters. In 1851, however, they were subjected to the general property tax system. In 1873 came the break. A tax was now imposed at the rate of one-half of one per cent on a valuation equal to their cost, equipment and appendages, and the assessment was put into the hands of a state official known as the state com- missioner of railroad taxation. Three years later, as the result of a constitutional amendment of 1875 the cost tax was aban- 174 ESSAYS IN TAXATION doned and a tax at the same rate was imposed on the "true value" of the road and equipment, which was now to be esti- mated by a board of railway commissioners. In 1884 a new and more elaborate system was adopted. A state board of assessors was created to value all railway property used for railway pur- poses, the non-operative real estate being still assessed locally like other ordinary realty. The property was divided into four parts, viz.: (1) the so-called main stem, consisting of the road- bed, not exceeding one hundred feet in width, and the railroad stations; (2) the rest of the real estate used for operation, ordi- narily described as the second-class property; (3) the tangible personalty of the railway; and (4) the franchise. It was this last category which, as we shall see later, was the impor- tant innovation, and which constituted the real departure from the system of property taxation. On the entire valuation, as fixed by the board, a tax of one-half of one per cent was imposed for state purposes. In addition to this tax, the so-called second- class property was to be taxed at the general local rate (not to exceed one per cent), and the revenue from this additional tax was to go to the localities. This remained the system until 1897 when the state relinquished to the localities the entire tax on second-class property, reserving to itself only the tax on the main stem, the personal property and the franchise. In 1906, however, the tax rate on these three categories was con- siderably increased, railroad stations which had hitherto been included in the main stem were now placed in the second class property subject to local taxation, and the present system was put into force. Leaving the states of the Atlantic seaboard we come next to Ohio. Ohio retained the old system as the exclusive method until 1896. In that year, however, Ohio added a so-called excise tax of 3^ of 1% on gross receipts for state purposes, which was increased in 1902 to 1%. The ad valorem system, however, was also continued. The same double system has been perpetuated by the law of 1910, still in force, which increased the tax on gross earnings (now limited strictly to intra-state earnings) and which at the same time confided the assessment of railway prop- erty to a state board. Of the states further west the break with the old methods had come earlier. In Michigan a tax on gross receipts was first imposed in 1873 at the rate of 4% or 2%, according as re- ceipts were over $4,000 or not, although a few of the most im- THE TAXATION OF CORPORATIONS 175 portant railroads in the state were subject to special taxation as fixed in the original charter provisions. In 1891 the general tax on gross receipts was graded according to the following scale : for the first $2,000 gross receipts per mile the rate was 2%; from $2,000 to $4,000, 23^%; from $4,000 to $6,000, 3%; from $6,000 to $8,000 B^%; over $8,000, 4%. In 1897 the scale was increased, the stages remaining the same, but the rates being respectively 2y2%, 3M%, 4% and 5%, with the further addition that the gross income of all union railroad station and depot companies whose earnings were over $20,000 a mile should pay 10% on the excess gross incomes over that amount. In 1899, however, for reasons to be discussed later, the gross re- ceipts tax was abolished and the ad valorem system reintro- duced. This law was declared unconstitutional, whereupon the constitution was amended in 1900; and in 1901 the ad va- lorem system was reinstituted by a law still in force, the valua- tion to be entrusted to a state tax commission. What happened in Michigan took place also in Wisconsin. Wisconsin's experiment with the taxation of gross receipts began considerably earlier — namely, as far back as 1854, when a tax at the rate of 1% was imposed. After some trouble with this, the tax was changed to a license fee on gross earnings, at the same rate, and in 1862 the rate was increased to 3%. In 1871 a special rate of 5% was imposed on railways in- debted to municipalities, etc. In 1874, the general rate was increased to 4%, and in 1876 a graduated scale was intro- duced. The so-called license fees were now fixed as follows: for receipts of less than $1,500 per mile the tax was $5 per mile; from $1,500 to $3,000, $5 per mile plus 2% on earnings in excess of $1,500; for receipts of $3,000 and over, 4%. But all railroads upon pile or pontoon bridges were taxed uniformly at the rate of 2%. In 1897 the scale was revised as follows: for re- ceipts of less than $1,500 per mile, the tax remained at $5 per mile; from $1,500 to $2,000, the tax was $5 per mile plus 2^% on the excess earnings over $1,500; from $2,000 to $2,500, the rate was 3%; from $2,500 to $3,000, 33/2%; above $3,000, 4%. The same provision as before governed pile and pontoon railroads. In 1903, however, largely for the same reasons as in Michigan, the gross receipts system was abandoned and was replaced by the ad valorem method, under strict state assessment. While Michigan and Wisconsin have abandoned the gross receipts method, Minnesota has retained it and California, 176 ESSAYS IN TAXATION after a careful study of the problem has recently introduced it. In Minnesota the system until 1873 was that of the old general property tax. In that year it was provided that railways might commute for the property tax by the payment of a tax on gross earnings. In 1887 the gross earnings tax was made obligatory, according to the following scale: for the first three years of operation, the rate was 1%, for the next seven years, 2%, thereafter, 3%. In 1903, however, the present flat rate of 4% was introduced. When California adopted a similar system in 1910, the same rate was applied. The only other Western, state to employ the gross receipts method was North Dakota. North Dakota introduced the system in 1883 the rates being graded according to the age of the road. In 1889, however, an alterna- tive system was introduced, the roads being given the alternative of paying a tax on property in general, or on gross earnings, with a rate of 3% for the first five years after the date of the act, and of 2% thereafter. But in 1891 the gross earnings law was declared unconstitutional, and since then North Dakota taxes railroads according to the ad valorem system. There remain the Southern states. North Carolina intro- duced the change in 1889, when a law was enacted providing that in case for any reason the general property tax should not be imposed on a railway, it should be subject to a tax of 1% on its gross earnings. In 1899 this alternative provision seems to have been dropped, but in 1901 a so-called privilege tax on gross earnings, with a graded scale, was introduced which is still in force as a supplement to the general property tax. In Virginia the law of 1842 imposed a tax of 1/4% on dividends. In 1855, as amended in 1859, this was changed to a tax of 1 mill per passenger mile plus 3^ of 1% on gross earnings from freight. In 1869 the tax was again changed to 3^ of 1% on tangible prop- erty and on dividends. In 1881 the property tax continued to be levied although now assessed by a state board, but was sup- plemented by a so-called occupation tax, levied according to net earnings. No machinery, however, was provided to enforce the law which remained a dead letter. In 1890 the requisite machinery was instituted and the law was enforced. The net earnings or income tax was at the rate of 1%, and it was pro- vided that income should be ascertained by deducting the costs of operations, repairs and interest on indebtedness from the gross receipts. In 1902, however, the income tax was changed to a privilege or license tax of 1% on gross receipts, which is THE TAXATION OF CORPORATIONS 177 still in force and which is levied in addition to the property tax. In Texas, also, a tax on gross receipts was added to the property tax in 1895, but limited to the receipts from passenger traffic. In 1905, however, it was extended to receipts from all sources, at the rate of 1%. Finally in Mississippi a law of 1880 provided that if a railroad would pay a privilege tax of from $20 to $70 per mile it should be exempted from the general prop- erty tax for state and county purposes. The law of 1890 in- creased the rates in this alternative system to $50-$150 per mile. In 1892, however, a privilege tax on railroads was imposed, not as an alternative, but as an addition, to the property tax. The law divided railroads into four classes, with a tax of $2 to $20 per mile according to the class. This law, with some amendments, is still in force; as is the law of 1896 which imposed an additional privilege tax of $10 per mile on railroads claiming exemption from state supervision under the maximum and minimum provisions in the charter. After this hasty glimpse at some of the typical forms of de- velopment, let us now study the actually existing chaos. Chaos we say, because the remark of the railroad tax committee of 1879 still holds good to-day, that " there is no method of taxa- tion possible to be devised which is not at this time applied to railroad property in some part of this country. A more dis- couraging example of general confusion could hardly be im- agined." ^ Q)) Actual Conditions As stated above ^ ten commonwealths have abandoned prop- erty, in the sense of the summation of the actual tangible and intangible assets, as the basis of the tax, and six others have abandoned property as the sole basis. Of these the majority now assess railways on earnings. Four states — California, Maine, Maryland and Minnesota — levy a tax on gross earnings only. In two of these four the tax is graded. In Maine the so-called excise tax is levied at the following rates : on gross re- ceipts less than $1,500 per mile, 3^ of 1%; from $1,500 to $2,000 per mile, % of 1%; and for each additional $500 per mile or part thereof, 34 of 1% additional until the rate equals 4J^%. Gross receipts are defined as the average receipts per mile for the entire system multiplied by the number of miles in the state. • Taxation of Railroads and Railroad Securities, p. 1. 'Supra, p. 151. 178 ESSAYS IN TAXATION The cost of maintaining the railroad commission is also appor- tioned to the railways in proportion to their gross receipts. In Maryland the so-called franchise tax is imposed at the rate of 1M% on the first $1,000 earnings per mile; 2% on earnings from $1,000 to $2,000; and 2^% on earnings above $2,000 per mile. In the two other states — California and Minnesota — ^the gross earnings taxes are not graded, being levied at the fixed rate of four per cent. In addition to these four states, one commonwealth, Vermont, levies a graded gross receipts tax as an alternative to a property tax. The latter is called the tax on appraisal, and is a tax at the rate of 1M% on an appraisal made by the commissioner of state taxes, consideration being taken in each case of the value of the franchise. If the corporation does an interstate business, the total valuation is divided by the number of miles of the entire main line in order to get at the average value per mile, and this is then multiplied by the mileage within the state. If, however, the railroad does not accept this, it may pay a tax on gross earnings, the rates of which are graded as follows: If the gross earnings do not exceed $2,000 per mile, the rate is 23^%; from $2,000 to $2,500, the rate is 2M%; from $2,500 to $3,000, 3%; from $3,000 to $3,500, 3^%; from $3,500 to $4,000, 33^%; from $4,000 to $4,500, 3M%; and for receipts over $4,500 the rate is 4%. In practice virtually all the railroads pay the gross earnings tax. Three commonwealths — Massachusetts, New York and Penn- sylvania — include railroads in the general corporation tax. New York and Pennsylvania, however, levy an additional tax on intra-state gross earnings (one-half and eight-tenths of one per cent respectively) ; while Massachusetts also levies a commission tax on gross earnings in proportion to mileage, and in the case of corporations to construct railroads in foreign countries sub- stitutes a tax of one-twentieth of one per cent on capital stock, while foreign corporations engaged in constructing railroads pay a tax of one-fiftieth of one per cent on capital stock. In Penn- sylvania railroads are therefore now subject to the general cor- poration tax on capital stock as measured by dividends, to the tax on corporate loans at the rate of four mills, and to the tax on gross receipts at the rate of 7io of 1%. They are also sub- ject to the payment of the so-called bonus on charters.^ In Connecticut, railroads are required to pay a tax of one 1 Cf. infra, p. 215. THE TAXATION OF CORPORATIONS 179 per cent on the valuation of their capital stock and on the par value (or on the market value, if below par) of their funded and floating debt above the amount in the sinking fund. If only part of a railway is in the state, the company pays on such proportion of the above valuation as the mileage in the state bears to the total mileage, omitting the value and length of such branch lines as are of less than one-quarter the average mileage value of the trunk hne. There remains one commonwealth — Delaware — ^which levies six separate taxes, viz., on capital stock (one per cent), net earnings (ten per cent), locomotives ($100 each), passenger cars ($25), freight cars ($10) and passengers (ten cents each). The companies may, however, pay a gross sum in commutation of the passenger tax. In addition to the conunonwealths which have broken en- tirely with the attempt to tax railways on tangible and in- tangible property, six states which retain the property tax as the main feature add other taxes not based on property. In North Carohna the privilege tax on gross earnings, levied in addition to the general property tax, is fixed as follows: for gross earnings of $1,000 or less per mile, $2 per mile; $1,000 to $2,000 earnings per mile, $3 per mile; $2,000 to $3,000 earnings per mile, $4 per mile; for earnings over $3,000 per mile, $5 per mile. Mississippi imposes additional privilege taxes at a fixed sum per mile, according to the reputed wealth or earning ca- pacity of each road. There are five classes: first, second, third, narrow gauge and levee district roads, the tax varying from $2 to $22.50 per mile. Ohio levies, in addition to the property tax, four per cent on the gross eariungs from intra-state busi- ness only. Rhode Island levies, in addition to the tax on tan- gible property, a tax of one per cent on the proportionate part of the gross earnings within the state, as fixed by relative mileage. Texas levies a tax of one per cent on the gross receipts from passenger earnings. Virginia imposes a state franchise tax of one per cent on gross receipts within the state. Virginia also, Uke Alabama and a number of other states, levies a tax to defray the expenses of the railroad commissioner, apportioned to the railways according to gross receipts. Again, in some of the Southern states we find special licenses levied on railroads, as in Florida where a hcense tax of $10 per mile is imposed, the pro- ceeds being divided between the state and the counties, with additional local flat hcenses of from $10 to $250 according to 180 ESSAYS IN TAXATION population; or in South Carolina where a "license fee" of three mills is imposed on the " gross income " of railroads. Finally we find in a few commonwealths, like Delaware, Illinois, Maryland, New Jersey, North Carolina and Pennsylvania special taxes levied on special railways. In considering the newer methods of railway taxation we should in reality add many states which, although included under the head of the ad valorem system, yet attempt to assess the value of the franchise. The term ad valorem system is in fact deplorably inexact. As commonly understood it means a system of ascertaining the value of the railway as a piece of property, so that it may be put on a par with other property. A valuation reached by adding together the real and the per- sonal property of the railway is without doubt an ad valorem method. A valuation reached by taking into account also the value of the stock and bonds would likewise generally be considered an ad valorem method. Yet a tax like that of Con- necticut where only the value of the stocks and bonds is admitted is called a specific and not an ad valorem tax. So again the tax on receipts is termed a specific tax; yet when an attempt is made to ascertain the value of the franchise and to estimate it on the basis of gross receipts, it is sometimes included in the ad valorem system simply because the franchise is treated as property. The whole subject of franchise taxation will be discussed later; but it may be affirmed here that when the value of the franchise is reached by considering only or chiefly the earnings, as is the case in New Jersey, Michigan, Wisconsin and several other states, we are really departing from the ad valorem tax considered as a tax on property. For a tax upon property, as based upon or measured by earnings, is really a tax on, or according to, earnings. For instance, in New Jersey the assessors at one time endeavored to estimate the franchise by taking sometimes an arbitrary proportion (sixty per cent) of the surplus of the value of the capital stock and total in- debtedness over the value of the tangible property, sometimes a percentage (twenty per cent) of the gross earnings. In Michigan, as we shall see later, after the tangible property had been assessed, the so-called Cooley-Adams method sought to reach the value of the franchise by a laborious computation designed to ascertain the actual net earnings, which were then capitalized at various rates for the different railways. It is evident that a tax on franchise reached by capitalizing earnings THE TAXATION OF CORPORATIONS 181 is nothing but a tax on earnings. We are not here discussing which system is preferable. We desire simply to point out that a tax on the property value of the franchise, measured by earn- ings, is really an indirect tax on earnings; and that a so-called ad valorem tax based on earnings is therefore scarcely distin- guishable in theory from a specific tax on earnings. An important point in the treatment of railroads is the extent to which these new methods of state taxation have superseded local taxation. In North Carolina, the special railroad tax is declared to be in heu of all other taxation, state or local. This is virtually, though not technically, true in Cormecticut; for if the real estate not used for railroad purposes is taxable locally, the valuation on which the state tax is based is reduced by the amount of local taxes. It was also true of Washington, when it had a gross earnings tax, and until 1895 of Minnesota. In five cases — Delaware, Maine, Maryland, Massachusetts and New York — the local bodies may also tax railroad property, but in some cases with restrictions. In Maine, only the buildings of the railroad and the lands and fixtures outside the located right of way are taxable locally. Each city or town, however, in which any stock of the railroad is held is entitled to an amount equal to one per cent of the value of such stock as determined by the state board. In Massachusetts, the railroads are taxable locally only on their real estate (except a belt of land adjoining the roadbed with the structures connected with it) and machin- ery. But as the value of this .property is deducted from the total valuation for the commonwealth tax, Massachusetts be- longs, strictly speaking, in the preceding category. In Missis- sippi, only cities and towns have the privilege of taxing railroad property in general, but all local divisions may tax that part which is not used for railroad purposes. In New York, under the general corporation tax law, the real estate of railroads is tax- able for state purposes; and both realty and personalty are taxable for local purposes according to the primitive methods of the locally assessed property tax. Railways are also subject to the special franchise tax,^ which, although assessed by a state board, accrues to the locality. Finally, in California, Minnesota, Peimsylvania and Vermont — the railroads are sub- ject to a local tax only on that part of their property not used for railroad purposes. In California the operative property which is not subject to local taxation is expressly defined in the I Infra, p. 225. 182 ESSAYS IN TAXATION law of 1910.^ In Pennsylvania, all property necessary to the successful operation of the railroad including stations, water tanks, etc., but not city offices, has been held to be a part of the franchise, and therefore not locally taxable. But in Pittsburgh all real estate, and in Philadelphia all real estate except the superstructure of the roads and the water stations, are locally taxable. Attention has also been called above to the New Jersey system whereby all operative real estate except the main stem, and all non-operative realty pay the full local rate. Summing up the American system of railroad taxation we see that there are five principal methods: 1. The primitive system of the general property tax, with local assessment. Although this has well-nigh disappeared for state taxation in general, at least as the exclusive system, it is still found for purposes of local taxation in many states, in- cluding New York. 2. The ad valorem system, including at least a valuation of the tangible property, but involving assessment by a state board. This is the system in a majority of the states. 3. The ad valorem system, including a valuation of the fran- chise based in whole or in part on one of the two following methods. This is becoming the rule in a large number of states. 4. The system of specific valuation through the stock-and- bond method or some modification of the same. This is found in only a few states. 5. The taxation of earnings — either gross earnings or net earnings or income. This is found in about a third of the states. This survey will suffice for a picture of the existing chaos. The theory and criticism must be left to a subsequent section. 4. Other Public-Service Corporations Next in order after the railroads to break away from the gen- eral property tax were the corporations which it has become the ' The operative property in the case of railroad companies includes: the franchises, roadway, roadbed, rails, rolling stock, rights of way, sidings, spur tracks, switches, signal systems, cranes and structures used in loading and unloading cars, fences along the right of way, poles, wires, conduits, power lines, piers used exclusively in the operation of the railroad business, depot grounds and buildings, ferry boats, tugs and car-fioats used exclu- sively in the operation of the railroad business; machine shops, repair shops, round houses, car bams, power houses, substations, and other buildings used in the operation of the railroad business, and so much of the land on which said shops, houses, barns, and other buildings are situate as may be required for the convenient use and occupation of said buildings. THE TAXATION OF CORPORATIONS 183 custom in recent years to call the public utilities or the pubUc- service corporations. Sometimes the term transportation and transmission corhpanieS is apphed to them. In the broadest sense this term is defensible, as including all corporations en- gaged in the transportation of passengers and freight and in the transmission of light, heat, power, sound, or intelligence. In some states, however, transportation and transmission com- panies are considered only a part of the broader category of public-service corporations. For "instance in New York the "additional franchise tax" on transportation and transmission companies applies only to " railroad, canal, steamboat, ferry, express, navigation, pipe line, transfer, baggage express, tele- graph, telephone, palace car or sleeping car " and " other trans- portation " companies, while a separate tax is imposed on the other public-service corporations which are specifically desig- nated as " elevated railroads, surface railroads not operated by steam, corporations for supplying water or gas, or for electric or steam heating, lighting or power purposes." The latest defini- tion of public-service corporations is contained in the Rhode Island law of 1912, which taxes " express, steamboat or ferryboat companies; steam and electric railroads; street railways; dining, sleeping, chair or parlor car companies; telegraph, cable and telephone companies; companies for selling gas, water or elec- tricity for light, heat or power purposes." A slightly different definition is that of the Nebraska law, which includes among the public-utility corporations^ "street railway corporations, street railways, water works, electric light and gas works, natural gas, mining and all other like corporations." Another definition of pubhc-utility companies, apart from transporta- tion companies is afforded by the Wisconsin law of 1911. They are defined as companies: (a) generating and furnishing gas for lighting or fuel or both; (b) supplying water for domes- tic or public use or for power or manufacturing purposes; (c) generating, transforming, transmitting or furnishing electric current for light, heat or power; (d) generating or furnishing steam or supplying hot water for heat, power or manufacturing purposes; (e) improving the navigation of pubhc streams or other public waters; (f) conserving and regulating the height and flow of water in public reservoirs. South Carolina also has a definition of pubhc-service corpora- tions which includes in addition to some of those mentioned above "navigation companies." In some of the other states, with 184 ESSAYS IN TAXATION less inclusive lists, other public-service corporations are occasion- ally mentioned, like oil pipe lines, bridge companies, toll road companies, messenger companies, press despatch companies, sewer companies, elevator companies, signal companies, dockage or cranage companies, heating and cooling companies, freight line and equipment companies, and terminal companies. All these corporations are deemed to differ from ordinary business corpo- rations in the possession of some special privilege in the use of the land, or in the right of constructing pipes beneath the land or laying wires above the land. In many of the states these corporations are still taxed ac- cording to the ineffective methods of the general property tax with local assessment. In several states they are now taxed ac- cording to the ad valorem system by a state board and not infre- quently according to the so-called unit r ule. ^ In not a few states, however, specific taxes are imposed on such companies. In a few states, like South Carolina, all these public-service corpo- rations are subject to a special tax of the same kind and amount. In other states, like California, the method is the same but the rates differ. In most of the states, however, both rates and methods vary. On the whole, more progress has been made here than in the case of the railroads which were the first of the public-service corporations to break away from the old system. We shall mention them in the order in which they have begun to assume importance from the fiscal point of view. The taxation of telegraph companies has undergone an evolu- tion similar to that of railroads, but in some respects more compli- cated. In a large number of commonwealths telegraph property is still included by the local assessors in the general tax list, and pays the regular rate of the property tax. In a smaller number of states, like Indiana, Illinois, Iowa, Kansas, Kentucky, New Hampshire, Tennessee and Wisconsin, the ad valorem system, administered by a state board, is employed, frequently accord- ing to the unit rule. In a few cases again, like Nebraska, where the value of the franchise is separately assessed, the calculation is made on the basis of gross receipts, so that the system ought really to be likened to that now to be men- tioned. About one-half of the states, however, have broken away from the ad valorem or property system and have sub- stituted^ one based on gross receipts or on mileage. The gross receipts system is found in nineteen states, in two ' Cf. supra, p. 150. THE TAXATION OF CORPORATIONS 185 of which the tax is graded. The rate of the gross receipts tax is 3 mills in South Carohna, 5 mills in New York, 8 mills in Pennsylvania, one per cent in Arizona and New Mexico, two per cent in Maryland, New Jersey, Ohio, Oklahoma, Oregon, Rhode Island and Virginia; two and a half per cent in North Carolina; two and three-fourths per cent in Texas; three per cent in Louisiana, Michigan and Vermont; and three and one- half per cent in California. In Louisiana the tax applies only to foreign companies, domestic companies, if any, being taxable on their property. In Maine the rates are one and one-fourth per cent if gross receipts are between $1,000 and $5,000; one and one-half per cent between $5,000 and 110,000; one and three- fourths per cent between $10,000 and $20,000; two per cent be- tween $20,000 and $40,000; with an increase of one-fourth of one per cent for each additional $20,000 of receipts until the rate reaches six per cent. The Maine tax is in lieu of all taxes on property except the local tax on real estate. Moreover, in Maine it is provided that the state should apportion to the respective locahties a sum equivalent to one per cent on the value of the corporate stock held by resident owners. In the above list, eight states — Louisiana, Ohio, Oregon, New Jersey, New York, North Carolina, South Carolina and Virginia — add to the gross receipts tax a tax on property; and two — New York and Pennsylvania — add the general corporation taxes on capital stock or on stock and bonds. In Vermont the tax on receipts is alternative — at the option of the corporation — ^^vith the tax on mileage, to be mentioned in the next paragraph. As contrasted with the states that levy a gross receipts tax, nine states impose a tax proportioned to mileage. In five of these the tax is a fixed amount: in Connecticut 25 cents per mile; in Florida 50 cents; in Vermont 60 cents per mile of poles and one line of wire, and 40 cents per mile of each additional wire; in Virginia $2 per mile of poles and conduits and in West Virginia (for foreign companies) $1 per mile. In the other four states the tax is graded: in Alabama the tax is $1 per mile if the line is not over 150 miles, and $500 plus $1 per mile if over 150 miles. In Delaware the tax is 60 cents per mile for the longest wire, 30 cents for the next longest, and 20 cents for any other. In Mississippi the tax is 25 cents per mile if the line is under 1,000 miles, but $250 if over that length. In Tennessee the tax is $20 for 20-100 miles of wire, $200 for 100-300 miles, $700 for 300-1,000 miles; $20 for each 100 miles over 1,000, 186 ESSAYS IN TAXATION for a mileage from 1,000 to 6,000; and $10 for each 100 miles over 6,000. Of these eight states three — Alabama, Tennessee and West Virginia — also levy a tax on property; Delaware, as stated above, also levies a tax on gross receipts; while Virginia imposes all three taxes — a property tax, a gross receipts tax and a mile- age tax. Vermont, as stated above, has an alternative system — a tax on gross receipts or on mileage. In addition to the gross receipts and the mileage systems we find in a few cases other methods. Thus in Montana there is a tax of 75 cents for each instrument used. In a few of the Southern states we find a flat license, as in Florida where it is fixed at $500. Finally, in Massachusetts telegraph com- panies are included in the general corporation tax. In a very few cases only has any state abandoned the gross receipts tax. In Minnesota a mileage tax was first imposed in 1867, but was replaced in 1887 by a gross receipts tax. In 1891, however, the ad valorem system was introduced. So Wisconsin replaced the gross receipts tax by the ad valorem system in 1905. In Ohio there was a net receipts tax in 1862, changed to a gross receipts tax in 1865. In 1893 this was aban- doned and the ad valorem system was introduced; but in 1902 this was supplemented by the excise tax on gross receipts. In Georgia there was formerly a gross receipts tax, imposed when- ever the property tax did not amount to two and one-half per cent of gross receipts. This method was, however, declared unconstitutional. On the other hand, Alabama and Connecticut, which formerly imposed a gross receipts tax, substituted, as we know, a mileage tax. The general tendency on the whole has been toward the gross receipts tax. Telephone companies have naturally been subjected to special taxation only much more recently. With the passage of time the tendency has been for the rate of the tax to increase. For instance, in Wisconsin the gross receipts tax was one per cent in 1883, one and one-half per cent in 1885, two and one-fourth per cent in 1891, two and one-fourth to three per cent in 1897 and two and one-half to four per cent in 1905. In Minnesota a two per cent gross receipts tax was imposed in 1887; in 1891 this was abandoned for an ad valorem tax; but in 1897 the gross receipts tax was restored at a higher rate — three per cent. In Ohio telephone companies were, like telegraph companies, THE TAXATION OF CORPORATIONS 187 subjected to a net receipts tax in 1862 which underwent the same changes as those mentioned in the last paragraph, except that the supplemental gross receipts tax which was imposed at the rate of 1% in 1902 was increased to 1.2% in 1910. At present, the tax on telephone compahies is the same as that on telegraph companies in a few states; but in many com- monwealths either the rate or the method is different. The gross receipts tax is found in twenty states. The rate of the tax is as follows: 3 mills in South Carolina; 5 mills in Louisiana, New York and Oklahoma; 8 mills in Pennsylvania; 1% in Arizona; 1.2% in Ohio; 13^% in Texas; 2% in Maryland, New Jersey, Oregon, and Rhode Island; 2H% in North Car- olina; 3% in Michigan, Miimesota and Vermont; and 3^% in California. In three states the tax is graded: in Maine the grades and rates are the same as in the case of telegraph com- panies, explained above. In Virginia the rate is 1% when (a) gross receipts do not exceed S.50,000 a year, and (b) when the pole-mileage is not above 400; otherwise (c) the rate is 1% on gross receipts to $50,000 and 2% on receipts in excess of that smn. In Wisconsin the so-called hcense fee is 23^% if gross earnings are under one milhon dollars and 4% if over that sum; and it is provided that 15% of the revenue should accrue to the localities. In North Carolina the rate of tax is reduced if a certain proportion of the assets of the corporation is invested in state or local bonds of North Carolina: if the proportion is one-quarter, the rate is reduced to 1H%; if one-half, the rate is 1%; and if three-quarters of the total assets are so in- vested, the rate is only 3^ of 1%. This reduction does not apply to the similar tax on telegraph companies. Of the above states, four — New Jersey, Ohio, Oregon and South Carohna — add to the receipts tax a tax on property; and Virginia adds a tax on property and a tax on mileage. Two states — New York and Pennsylvania — add the general corpora- tion taxes on capital stock or on stock and bonds; while Ver- mont permits as an alternative tax the tax on mileage. As contrasted with these twenty states, seven common- wealths impose a tax on mileage, several of them combining with the mileage tax other taxes. Alabama levies a privilege tax of 50 cents a mile if the length of the wires is less than 200 miles; but otherwise imposes in addition a fiat rate of $250; and in each case also levies the property tax and local licenses from .|5-25. Connecticut imposes a tax of 25 cents per mile. 188 ESSAYS IN TAXATION in addition to a tax of $1.10 per transmitter. Delaware levies a tax of 60 cents per mile of wire, for the longest wire, 30 cents per mile for that next in length, and 20 cents per mile for all others; together with a tax of 25 cents per transmitter. Mis- sissippi levies a flat'tax of from $2.50 to $250 on each telephone exchange, graded according to the number of subscribers and to the number of miles of poles. Virginia imposes a tax of $2 per mile, in addition to the property tax and to the receipts tax. Vermont levies a tax of 30 cents per mile upon the average mileage of all telephone wires owned or operated within the state, in addition to a tax of 40 cents per transmitter, and permits in lieu of this the gross receipts tax mentioned above. West Vir- ginia levies a tax of $1 per mile in addition to the property tax. In a few states we find taxes apportioned to the instruments used. Thus Florida imposes a tax of 12^ cents per transmit- ter; Montana a tax of 75 cents per transmitter; and Tennessee a tax of from 20 to 50 cents per transmitter, graded according to the population in each case in addition to the property tax. Moreover, as intimated above, Connecticut and Delaware also employ this method in part. In the case of express companies the states have as a rule departed from the property tax system to an even greater ex- tent than in the preceding cases. Only a few states have re- verted to the ad valorem system, and there frequently because of a constitutional defect in the particular method employed. For instance, Iowa started in 1868 with a tax on the personal property of express companies which was declared to be equal to 40% of their gross receipts. In 1870 Iowa reverted to the general property tax, but in 1896 again imposed a gross re- ceipts tax at the rate of 1%, which was increased in 1898 to 2%. In 1900, however, this tax was overturned by the Supreme Court, and Iowa now adopted the ad valorem system with the unit rule. In Georgia also the alternative gross receipts tax, first levied in 1901, was abandoned in 1908 owing to a court decision. In Michigan the gross receipts tax was replaced by the ad valorem system in 1901 and in Wisconsin this occurred in 1899. Ohio levied a net receipts tax In 1862, and changed in 1865 to a gross receipts tax. But in 1893 the ad valorem system was established, coupled, however, with a gross receipts tax at 2%, changed in 1902 to 1%, and again raised to 2% in 1910. THE TAXATION OF CORPORATIONS 189 Many more states, however, have on the contrary during recent years abandoned the older methods for the gross re- ceipts tax. No less than twenty-four states now tax express companies according to gross receipts. The rate is as follows: 3 mills in South Carolina; 5 mills in New York and Virginia; 8 mills in Pennsylvania; 1% in Arizona, Louisiana and Ohio; 1M% in Missouri; 1K% in West Virginia; 2% in Cahfornia, New Jersey and New Mexico; 23/^% in Maryland and Texas; 3% in Maine, North Carolina, Oregon and Rhode Island; 4% in Kansas; 5% in Connecticut (except that companies trans- acting business on electric lines and street railways are taxed only 2%) Delaware, Washington, and Wyoming; and 6% in Minnesota. Where the high rates are levied, the gross receipts tax is sometimes in lieu of all taxes on property, as in the case of Connecticut and Minnesota. In Kansas, Rhode Island and Washington, however, the corporations are taxable also on their tangible property. In California they are taxable only on their local real estate. In most of the other states they are subject also to the property tax, either for local purposes, or for both local and state purposes, as in Missouri, Ohio, South Carolina and West Virginia; or on the property excluding the franchise, the franchise being deemed to be taxed through the receipts tax. In New York and Pennsylvania express companies are also subject to the general corporation taxes. In Wyoming the tax is divided in equal proportions between the state and the several counties in which the company oper- ates. In Louisiana the tax seems to apply only to domestic companies.^ As compared with the states employing the gross receipts tax only six states utihze the mileage tax for express companies. Alabama levies a tax of II per mile where the express lines do not exceed 500 miles, but thereupon imposes a flat tax arranged in classes, the maximum tax of $5,000 being paid when the mileage is over 4,000 miles. Mississippi levies a tax of $250 plus $4 a mile in the case of first class railroad track, or $2 a mile in the case of second or third class railroad track ^ over which the business is operated. Tennessee imposes a tax of $1,000 on all companies with lines less than 100 miles long, but $2,500 where the length is over 100 miles. Virginia levies a tax 1 See State vs. Pacific Express Co., 121 La. 151. But see State vs. Ham- mond Packing Co., 110 La. 180. Tor an explanation of these terms cf. supra, p. 17P. 190 ESSAYS IN TAXATION of $6 per mile in addition to both the gross receipts and the property tax. West Virginia imposes a tax of $1.50 per mile in addition to the property tax. Vermont which from 1880 to 1904 imposed a gross earnings tax now levies a tax at the flat rate of $8 per mile, in lieu of all taxes on property. This arbi- trary tax was due to the refusal of the companies to furnish adequate details of their business. In addition to these receipts and mileage taxes we find sporadic instances of other methods. Thus North Dakota taxes express companies according to the size of the station, the tax being graded from $5 to $50. This is, however, really a fee, being called a license fee, and paid in addition to the ad valorem tax. Florida levies a flat tax of $7,500 per annum in lieu of all state and county licenses, but permits in addition city or town licenses, with rates from $6 to $200. In Massachu- setts express companies are subject to an excise tax, like the general corporation tax on corporate excess, except that the tax instead of being computed on the basis of capital stock alone, is computed on the basis of the shares, bonds, and un- funded debt, and with the further exception that only so much of that valuation is taken as the gross receipts within the state bear to the total gross receipts. Finally in Delaware express companies pay an annual license fee of $250 in addition to the gross receipts tax. In some states, as in Maryland and West Virginia, the gross receipts tax applies only to foreign companies, the domestic companies being subject to the general property tax. As a matter of fact, however, almost all the express companies are foreign companies. From the fact that the large express companies are generally unincorporated, the question has recently arisen whether they are liable to the corporation tax. In Vermont and Pennsylvania joint-stock companies are expressly included. In New Jersey the tax law applies only to corporations. In New York express companies have been declared liable to the state corporation tax because the statute expressly apphes to joint-stock com- panies; ^ but under the provisions of the revised statutes im- posing a tax on "all monied or stock corporations," which still governs local taxation in New York, it has been held that the unincorporated joint-stock express companies are not liable to local taxation.^ There is, of course, no good economic reason 1 117 N. Y. 136. 2 133 j^ y 379. THE TAXATION OF CORPORATIONS 191 for their exemption. The resident shareholders, howevet, are nominally taxable on their respective interests in the same way that members of a copartnership are taxable. Parlor and sleeping car companies have been separately taxed in a smaller number of states. In some states like Georgia the ad valorem unit rule system is employed, whereby the ordinary rate of the property tax is levied on that proportion of the entire value of all the cars of the company which the state mileage over which the cars are run bears to the entire mileage. In fifteen commonwealths we find the gross receipts tax, in many of them drawing room, dining, chair and buffet cars being expressly designated as included in the general category. The rates are as follows: 3 mills in South Carolina; 5 mills in New York; 8 mills in Pennsylvania; 1% in Rhode Island; 13^% in Delaware and Florida; 2% in New Jersey; 23/^% in Maryland; 3% in California, Oklahoma and Oregon; 4% in Minnesota; 4H% in Maine; 5% in Texas; and 7% in Washington. In several of these states an additional tax on property is levied, as in Rhode Island and South Carolina. In Minnesota the tax is alternative with a property tax. In Maryland an additional tax is levied on the capital stock of domestic companies only. In Texas an additional tax of J^ of 1% on capital stock is levied on all such companies, but they are then exempt from all other taxes. As contrasted with these taxes on receipts, several states, principally in the South, impose so-called Ucense fees or priv- ilege taxes in addition to the property tax. In Alabama the tax is $1,250; in Florida it is graded from $26 to $40 per car, with additional local licenses from $12.50 to $20, all of which are paid in addition to the gross receipts tax; in Mississippi the tax is from $1.50 to $2.50 per car; in North Dakota the tax is at the fiat rate of $100; in Tennessee the taxis $3,000 in lieu of all other taxes except on property. The mileage tax is found only in Virginia, which levies a tax of $2 per mile together with an annual registration fee. Finally there may be mentioned Ohio which imposes a tax of 1% on the excess of the value of the capital stock, as propor- tioned to Ohio, above the value of the real estate; and Vermont which imposes a tax of 7-10 of 1% on the proportion of the capital stock invested or used in the state. In addition to the palace and sleeping car companies tax we 192 ESSAYS IN TAXATION find Separate mention made of other car companies in eight states which impose a special tax. Arkansas imposes an excise or privilege tax of 5% on the gross receipts of all private car companies. California taxes refrigerator, oil, stock, fruit and other car-loaning companies at the rate of 3% on their gross receipts. Minnesota imposes a tax of 4% on the gross receipts of freight line companies, which are defined as companies engaged in operating box, flat, coal, ore, bank, stock, gondola, furniture, refrigerator or other cars over any railroad Une. Mississippi taxes car equipment companies 3% on gross re- ceipts in lieu of the property tax. Oklahoma taxes stock car, refrigerator car, and other private car companies, car trusts and car associations at the rate of 3% on gross receipts; Oregon taxes refrigerator cars 3%; Texas taxes stock, refrigerator, fruit and other car companies 3%. Vermont imposes a tax of 2}^% on the gross earnings of car, steamboat and transportation com- panies as an alternative to the tax of 13^% on appraisal.-' Wash- ington levies a tax of 7% on the gross receipts of car companies in addition to a tax on their tangible property. The next class of public-service corporations which are sometimes taxed in a special way, is composed of street rail- ways. These are specifically mentioned in twelve states. In Connectircut they are taxed like railways by the stock and bond method. In Tennessee they are taxed on mileage, the privilege tax being graded from 13 to $10 per mile of track according to the population. In the other states the tax is levied on gross receipts. The rates are as follows: 3-20 of 1% in Maine, 3-10 of 1% in South Carolina; 1% in New York, North Dakota and Rhode Island; 1.2% in Ohio; 4% in California; and 6% in New Jersey. In New York, however, they pay in addition 3% upon the dividends in excess of 4%; but where the property of such a corporation is leased to another, the gross receipts tax is omitted. In Rhode Island street railways pay in addition to the 1% tax imposed in 1912, which is deemed to be in lieu of all taxes on the security holders, a so-called franchise tax imposed in 1909, which consists of a second tax of 1 % on gross receipts, together with all net earnings over 8%. Moreover street railways in Rhode Island are also liable to the general property tax, and to any other taxes that are or may be imposed on all persons or corporations. At present this means an addi- tional tax on tangible property. In two states the gross re- ' As to this cf. supra, p. 172. THE TAXATION OF CORPORATIONS 193 ceipts tax is graded. In Massachusetts the rate of the so- called commutation tax on street and electric railroads is 1% when gross receipts are less than $4,000 per mile; 2% between $4,000 and $7,000; 23^% between $7,000 and $14,000; 2^^% between $14,000 and $21,000; 2M% between $21,000 and $28,000; and 3% if gross receipts are $28,000 per mile or over. This tax is supplemental to the general corporation tax and also to the so-called additional corporate franchise tax which takes for the state any excess of dividends over 8% on the capital stock in the case of corporations that have paid an average dividend of 6% since their formation. In Texas interurban roads connecting cities of 10,000 inhabitants or over pay from H or ?i of 1% of gross receipts, according as the population is under or over 20,000. In almost all the above cases the tax applies to interurban as well as city or town street railways. The street railway tax is generally reserved for state purposes, but in some cases it is handed over in part or whole to the lo- cahties. In New York, e. g., the tax is imposed on such propor- tion of gross receipts as the mileage on the highways bears to the total noileage, and is distributed in the local districts in proportion to the value of taxable property of the street railways therein. In Wisconsin the gross receipts tax on street railways was replaced by the ad valorem system in 1905. Another class of pubhc-service corporations is composed of gas or electric light, heat or power companies. We find them specifically mentioned in twelve states. The usual tax again is on gross receipts. The rates are as follows : 3 mills in South Carolina (light and power companies) ; 3^ to 3^ of 1% in Texas (gas, electric light, power and water companies); 3^ of 1% in Maryland, New Jersey (unless subject to the special franchise tax of 2%) and Virginia; 1% in North Dakota and Rhode Island (gas, electric and power companies); 1.2% in Ohio (gas, electric and natural gas companies); and 4% in Califor- nia (transmission or sale of gas or electricity). In Delaware the tax is 2-5 of 1% of gross earnings plus 4% on dividends over 4%. In New Jersey the tax (except when the companies are subject to the special franchise tax of 2%) is 3^ of 1% on gross receipts together with 5% on dividends over 4%. In New York the tax, which applies to gas, electric or steam heating, lighting and power companies and water works companies, amounts to 3^ of 1% on gross earnings together with a tax of 3% on dividends in excess of 4%. Such companies are then 194 ESSAYS IN TAXATION exempt from the general corporation tax. In Pennsylvania, on the other hand, similar companies are subject to the general corporation tax. Finally in some of the Southern states gas and electric companies are subject to privilege or license taxes. In Florida this is graded from $10 to $250, with 50% additional for the use of meters. In Mississippi it is graded from $30 to $300, and in Tennessee from $50 to $700 according to popula- tion. In Alabama gas and electric light and power and water works companies are subject to local licenses of from $5 to $100 per city or town according to population. There still remain a few classes of public-service corporations in which we find an occasional example of specific taxation. Among them may be mentioned the following: Water companies are taxed separately in Florida (state licenses of from $50 to $150 and local hcenses of from $25 to $50 according to population); Ohio (1.2% on gross receipts); North Dakota (1% on gross receipts); New York (J^ of 1% on gross receipts together with 3% on dividends over 4%); Rhode Island (1% on gross receipts in addition to the property tax); South Carolina (3 mills on capital stock in addition to the property tax) ; Tennessee (hcense tax) and Virginia (3^ of 1% on gross receipts in addition to other taxes). Oil pipe lines, or as they are sometimes called simply pipe lines, are taxed separately in Delaware (1-50 of 1% on gross earnings) ; Maryland (2% on gross receipts) ; New Jersey (8-10 of 1% on gross receipts); New York (J^ of 1% on gross re- ceipts together with 3% on dividends over 4%) ; North Dakota (1% on gross receipts) ; Ohio (4% on gross receipts) ; and Texas (2% on gross receipts). Navigation companies are taxed in Florida (3 cents per net ton of registered tonnage); Michigan (river improvement companies, 1% on paid up capital); New York (J^ of 1% on gross receipts and 3% on dividends over 4%) ; South Carolina (3 mills on the dollar of capital stock). Steamboat or navigation companies are occasionally taxed separately, as in Indiana (33^ cents per net ton of registered tonnage); New York (J^ of 1% on gross receipts in addition to the general corporation tax); Rhode Island (1% on gross receipts in addition to the property tax) ; and Virginia (i^ of 1% on gross receipts in addition to the property tax. Terminal companies or union depot companies are taxed separately in North Dakota (1% of gross receipts); Ohio (1.2% THE TAXATION OF CORPORATIONS 195 of gross receipts); Tennessee (license tax) and Texas (1% of gross receipts). Heating and cooling companies are taxed in North Dakota (1% of gross receipts) ; New York {}4 of 1% of gross earnings) ; and Ohio (1.2% of gross earnings). Messenger or messenger and signal companies are taxed sep- arately in New Jersey (2% of gross receipts); Ohio (1.2% of gross receipts); and North Dakota (1% of gross receipts). Road companies are specifically mentioned in Michigan and taxed 2J4% on gross earnings. Grain elevators are taxed in North Dakota through an annual license of from $8 to $25. Foreign bridge companies are taxed in Indiana on earnings, but the earnings are treated as personal property and put into the regular tax list. Toll bridges and ferries, canal ditches, tramroads and pole- roads used for transporting timber or other valuable articles of commerce are taxed in Alabama on their gross receipts at the general property tax rate. Outside of the public-service corporations mentioned above we also find a special tax on building and loan associations in Alabama (1 per mill on the capital stock up to $100,000 and J^ of 1 per mill on sums above that figure) ; Kentucky (2% on gross receipts of foreign companies); Maine "capital dues" of }4 of 1%); and Vermont (building investment companies, 1% on sums loaned). This completes the list of the special taxes levied on particular classes of corporations. We thus come to the third movement, away from the property tax which, as noted above, has been the introduction of a tax applicable to all corporations in gen- eral. In other words we have now to deal with 5. The General Corporation Tax Here again Permsylvania took the lead, for in that state the tax is far older than might be imagined from its recent 'intro- duction into other commonwealths. We have already seen that in 1824 Pennsylvania imposed a tax on the net dividends of banks. In 1836 the tax was extended to iron companies, at the rate of eight per cent on all dividends exceeding six per cent. In this provision can be found the germ of the later laws. The first general corporation tax, imposed in 1840, provided 196 ESSAYS IN TAXATION that "banks and all corporations whatever" which declared a dividend of one per cent should pay "in addition to all present taxes" one-half mill for each dollar of the dividend or profit, and an additional one-half mill for every additional one per cent of dividend. In 1844, however, an act was passed which sketched in broad outline the path of future development. According to this law all domestic corporations which made or declared a dividend or profit of at least six per cent paid a tax on capital stock of one-half mill for each one per cent of dividend; but if the dividend was less than six per cent, the tax was three mills on the dollar. This law continued until the act of 1859 provided that the three mills tax should be paid only if no dividend was declared; but that in case of any divi- dend (not, as before, a six per cent dividend) the tax should be one-half mill on the capital stock for each one per cent of divi- dend. In 1864 it was provided that corporations not paying to the state a tax upon dividends should pay three per cent on net earnings. The consolidated act of 1868 excepted from the general corporation tax only banks, savings institutions and foreign insurance companies (all of which were separately taxed), but imposed a tax of three per cent on the net earnings or income of all corporations, except those liable to the ton- nage tax, i.e. the transportation companies. The important feature of this law, however, was that the capital stock tax was now made applicable- to all companies incorporated or doing business in the state, i.e. to foreign as well as to domestic corporations. Only from 1868, therefore, was the Pennsylvania tax a general corporation tax. -The general law of 1874 made no change except in respect to trans- portation companies as mentioned above, and with the further exception that coal companies were to pay a franchise tax of three cents per ton transported. In 1879 the line of division in the tax was again drawn at dividends of six per cent — ^that is, the principle of the law of 1859 was abandoned and that of 1844 reinstated. Limited partnerships, except those organized for manufacturing or mercantile purposes, were put on the same footing as corporations; and the tonnage tax on coal companies was hmited to 1881, after which it was to cease. Manufacturing corporations with certain exceptions were exempted from taxation for state purposes, and a loan tax of four per cent was imposed, applicable also to the bonds of corporations. In 1885 the latter was reduced to three per THE TAXATION OF CORPORATIONS 197 cent. In 1889 the rate of the capital stock tax was fixed at one- half mill for each one per cent of dividend, if dividends amounted to six per cent, and at three mills when dividends were less than six per cent. Finally, in 1891 this plan was abandoned and the amendments adopted which, as still further altered in/ 1893, are now in force. Under the law as it now stands in Pennsylvania, the "tax on corporation stock" applies to all corporations, joint-stock associations and limited partnerships doing business in the state or having any portion of their capital invested therein, except banks and savings institutions, foreign insurance com- panies, building and loan associations and manufacturing com- panies to the extent of the capital stock invested in, and actually and exclusively employed in carrying on manufacturing within, the state. Corporations engaged in the brewing or distilHng of malt or spirituous liquors, and such as enjoy and exercise the right of eminent domain, are not included in this exception. Bourse companies are exempt as to a certain proportion of their capital stock. Banks and insurance companies, how- ever, are, as we know, taxed separately, while building and loan associations pay on their matured stock a tax equal to the state tax on moneys at interest, and distilling companies pay a separate tax on capital stock at the rate of one per cent. The rate of the general capital stock tax is now uniform — namely, five mills on each dollar of the actual value of the whole capital stock of all kinds. This value, ascertained by appraise- ment, must not be less than the average price for which the stock has been sold during the year, nor less than the value indicated by the net earnings or by the profit in dividends or by what has been carried to the surplus or sinking fund. If any profit has been added to the sinking fund, it is treated as if it had been devoted to dividends, unless it is set apart ex- pressly for the payment of debts. In the case of fire and marine insurance companies the rate is three mills on each dollar of capital stock. In addition to this tax on corporation stock, there is a tax of three per cent on the net earnings of unincorporated banks and all corporations except those hable to the previous tax or to the tax on gross receipts. The only corporations which would be liable under this provision are banks and manufac- turing corporations; but the latter, with the exceptions just noted as liable to the tax on corporation stock, are now ex- 198 ESSAYS IN TAXATION pressly exempt from all taxation; and the former, by electing to pay ten mills on the par value of their capital stock, secure exemption from all other taxation except on their real estate. Thus the net earnings tax does not apply to corporations at all. It is levied chiefly on unincorporated savings banks and on trust companies without capital stock. If the banks do not elect this ten mills tax, the market value of the stock is assessed to the stockholders and taxed four mills, and the banks are further subject to local taxation. It has already been noted above in the proper connection that transportation, trans- mission, electric light and insurance companies pay a tax on gross receipts or premiums in addition to the general corpora^ tion tax. In addition to the tax on capital stock, Pennsylvania im- poses a "tax on loans," which exacts four mills on the dollar of all interest paid on any scrip, bond or certificate of indebted- ness issued by any private corporation, and on all public loans (except those of Pennsylvania and of the United States). The tax was first imposed in 1864 in the shape of a tax on the loans themselves. In 1868 this was altered, so far as corporate loans are concerned, to a tax of 5% on the interest paid. In 1873 the law was modified and in 1874 the tax was abolished. In 1879, however, it was restored in the shape of a tax on the corporation. But this law, like its successor of 1881, was de- clared unconstitutional; and it was not until 1885 that the tax was re-established at the rate of three mills on the dollar, changed in 1891 to four mills, at which it now stands. This tax must not be confused with the tax on loans or mortgages in the hands of corporations, which is a part of the general state tax on personal property. For it has been held that corporations and associations liable to the capital stock tax shall not be required to pay any further tax on mortgages, bonds or other securities belonging to them, and which con- stitute any part of their assets included within the appraised value of their capital stock. But if they hold these bonds in a fiduciary capacity, they are liable. On the other hand, the tax on the loans made by corporations, i.e. on corporate obli- gations, has been upheld as a proper exercise of the legislative authority and as not in conflict with any provision of the fed- eral constitution. It is deemed to be in effect a tax on the bond- holder, not on the corporation, although the corporation is required to advance the tax and to deduct it from the interest. THE TAXATION OF CORPORATIONS 199 The treasurers of corporations, therefore, pay the tax on all their bonds or obligations unless affirmative proof is offered that the owners reside out of the state, and then deduct the tax from the interest due. The tax is, however, not payable on bonds owned by non-residents. If the bonds are sold "free of tax," that is, without recoxirse to the bondholder, the right of the state to collect from the corporation is no wise affected. Certain classes of loans have been declared non-taxable, either by special enactment or by judicial construction. These are as follows: (1) Obligations held in their own right by corporations paying the capital stock tax; for such obligations enter into the value of the capital stock which is taxed; (2) obligations held, or notes discounted or negotiated, by trust companies, national, state and savings banks; (3) obhgations held by non-residents in their own right, and by persons whose residence is unknown; (4) obligations held by institutions organized for purely charitable or religious purposes; (5) obligations of their members held and owned by building and loan associations; (6) obligations on which no interest has been paid or earned during the tax year, from which the tax could have been deducted. This general corporation tax, it is important to note, is in lieu of all local taxation on personalty. In Pennsylvania, there- fore, corporations subject to the capital stock tax are, with some exceptions noted below, locally taxable only on real estate; while public-service corporations, which are subject to the gross earnings tax, are not taxable locally even on their real estate. The law of 1885 exempted manufacturing corporations (with certain exceptions) from all taxation for state purposes; but it was held that only that part of the capital of a manu- facturing company which was invested in the plant actually necessary for the manufacture of its products could be exempted, and that the capital of such companies invested in mines for the production of coal to be used in the process of manufac- turiag, or any other capital similarly invested, was taxable. The laws of 1889 and 1891, however, provide for the exemption of those companies only which are organized exclusively for manufacturing purposes, and the law of 1893 specifically limits the exemption to that part of the stock which is exclusively employed in carrying on manufacturing within the state. If the capital is invested in property which it is merely con- 200 ESSAYS IN TAXATION venient to use in connection with manufacturing operations, it is not exempt.' Manufacturing companies are tield to be limited to ttiose that produce material substances. Laundry companies and steam heat companies, e.g. are not considered manufacturing companies. In the case, however, of the tax on loans, since, as we have just seen, it is held to be not upon the corporation but upon the moneys of the bondholder, manufac- turing corporations are liable equally with others. In New York the general corporation tax came later; for not until 1880 was a law passed which was based on the Penn- sylvania act. This act levied a tax on the par value of the capital stock as fixed by the state board, making the rate 13^ mills on the dollar if the dividends were less than six per cent or if there were no dividends at all, and J^ mill for each 1% of dividends if the dividends were 6% or more. The law has been repeatedly amended in important details, especially bj' the laws of 1885, 1889, 1890, 1896, 1901, 1906 and 1910; but the main outlines remained unaltered. Among the more important recent changes are the following: In 1896 only that part of the capital employed within the state was declared taxable, although the practice had been to that effect for some time. In 1901 manufacturing companies, which had hitherto been exempt only when their capital had been exclusively and wholly engaged in manufac- turing within the state were declared exempt if 40% of their capital was so invested. In 1906 several alterations were made. The rates were now further differentiated according to the amount of business and the character of the enterprise, so that they were fixed at 34, M or 1}^ per mill, respectively, as will be explained below. The other important change affected foreign corporations which invest their capital in the stock of another corporation doing business in the state. These foreign companies had not been considered engaged in business in the state. In 1906 they were made taxable by the provision that the capital of a corporation invested in the stock of another corporation should be deemed to be assets located where the property represented by the stock is located. This of course also changed the reverse rule according to which a domestic corporation whose capital was invested in the stock of a foreign corporation had been taxable, but was now exempt. At present, the tax, known as the franchise tax or the capital ' For a discussion of these points see Eastman, The Law of Taxation in Pennsylvania, 1909, p. 671 et seq. THE TAXATION OF CORPORATIONS 201 stock tax, applies to all corporations except the following: banks, trust companies and savings institutions; insurance, title guaranty and surety companies; elevated railroads and sur- face railroads not operated by steam; water, light, heat and power companies; agricultural and horticultural associations; and manufacturing, mining and laundering companies, to the extent only of the capital actually employed in manufacturing, mining or laundering, provided that at least 40% of the capital is invested in the state and used by them in manufacturing, mining or laundering. All of these exempt corporations, how- ever, except the two last categories (agricultural and manufac- turing) are reached by separate specific taxes, as we have learned above. The tax is assessed according to the capital stock. Originally the rate was just one-half of that of the original Pennsylvania prototype. At present, however, the rate of tax is determined according to very complicated rules. In reality there are in New York no less than six different classes, although the rather confused law does not clearly differentiate them. They are as follows: 1. Corporations paying dividends of six per cent or more are subject to a tax of J^ of a mill for each 1% of dividends, the tax to be computed on the par value of the capital stock. This it will be observed is equivalent to an income tax of 2J^%. 2. If the corporation pays no dividends, the rate is ^ of a mill, the tax being computed on the appraised value of the is- sued capital stock employed within the state.^ • The measure of the amount of capital stock employed within the state is de- clared to be such a portion of the issued capital stock as the gross assets employed in any business within the state bear to the gross assets wherever employed in business. For purposes of taxation the capital of a corporation invested in the stock of another corporation is deemed to be assets located where the physical property represented by such stock is located. 3. Corporations paying less than 6% dividends, whose lia- bihties equal or exceed their assets (i.e. which are insolvent), or the average selling price of whose stock has been below par during the year, are subject to a tax of M of a mill, computed on the appraised value of the stock employed within the state. 4. Corporations paying less than 6% dividends whose assets exceed their liabilities by an amount equal to, or greater than, ' Soe 198 N. Y., 246. 202 ESSAYS IN TAXATION their capital stock, or the market price of whose stock equals or exceeds par, pay 114 mills on the capital stock employed within the state; and it is further provided that in this case the value of the capital stock shall not be less than par, or less than the difference between the assets and the liabilities, or (if the stock was sold) not less than the average market price at which the stock was sold. Whichever of such valuations is the highest is to be taken as the value of the stock, on which the tax is computed. 5. All other corporations, that is, corporations paying divi- dends of less than 6% and whose assets exceed their liabilities, but not by an amount equal to, or greater than, the capital stock, and whose stock has no market price, pay a tax of not less than 13^ mills on the actual value of the capital stock employed within the state, or 13^ mills on the average market price of the capital stock. 6. Corporations having two or more kinds of capital stock upon which the rates of dividends vary pay a tax on each kind of stock according to the respective class in which they fall, as explained in the preceding five categories. The provisions of the law are so compHcated that they have led to much litigation, which has gradually settled the principles involved. It has been decided, e.g. that when the law requires intrinsic or actual value of the stock to be ascertained, book value cannot be taken, ^ but that the liabilities must be de- ducted from the assets.^ Moreover, if the good will of the business has any value, that is to be added to the net assets.' Corporations subject to the capital stock tax are exempted from all state taxation on their personal property; but they are liable to local taxation on their whole property, both real and personal, according to the primitive methods. The additional taxes on other corporations have already been described under the appropriate heading. In Massachusetts, the general corporation tax dates from 1864. In 1863 indeed, a law was enacted which taxed dividends paid by corporations to non-resident stockholders; but this was pronounced unconstitutional, and was replaced by the 'People ex rel. National Enameling Co. vs. Miller, 112 App. Div. 880. 2 People ex rel. Lorena Co. vs. Morgan, 55 App. Div. 265 (1900). ' People ex rel. Wiebusch & Hilger'Co. vs. Roberts, 154 N. Y. 101. For a more detailed account see H. M. Powell, Manual of Corporate Taxaiionin New York for State Purposes, 1907. THE TAXATION OF CORPORATIONS 203 law of the following year. This was an extension to corpo- rations in general of the law of 1832, which as we remember ^ was applied to manufacturing corporations only. The tax was levied on all corporations except banks and mining com- panies Banks were separately taxed as has been explained above. Domestic mining companies were also separately taxed by a law of 1864 at 7-12 of 1% on the value of the cap- ital stock; and in the following year foreign companies were taxed at the rate of 1-20 of 1% (reduced in 1883 to 1-40 of 1%). In 1879 corporations engaged in building railroads and telegraphs in foreign coimtries were also excepted, but were then taxed by a special law at the rate of 1-20 of 1% on the par value of the capital stock, together with 4% on dividends. The general law appUed only to domestic companies, and this has continued to be the case with a few exceptions. In 1865 foreign telegraph companies were included; in 1885, foreign telephone companies; in 1898 foreign street railways; and in 1906 foreign railroads. The act of 1864 laid down the general principle which is still followed to-day. The basis of the tax was the market value of the capital stock after deducting the value of the real estate and machinery, if any, which were locally taxable. The tax commissioner, on the basis of returns made by the corporations, was to estimate the fair cash value of the shares constituting the capital stock. This was to be regarded as the true value of the corporate franchise. The excess of this value over that of the corporate property locally taxed was termed the corporate excess, and on this excess the tax was assessed. In 1864 the rate was 1.6% — the average rate of the general property tax at that time. In 1865 the rate was made to fluc- tuate with the average rate on property in general from year to year. The tax was paid to the state treasurer, and was by him distributed to the localities in accordance with the resi- dence of the shareholders, to be offset against the sums due to the state from the localities for the property tax and the bank tax. The state, however, retained the amount of the tax cor- responding to the value of the shares held by non-residents. This remained the system without any changes of impor- tance for over three decades, with the single exception that in 1865 a law was passed providing that thereafter in the case of railroads, telegraph and telephone companies only that pro- portion of the capital stock should be taken that corresponded 1 Supra, p. 147. 204 ESSAYS IN TAXATION to the Massachusetts proportion of the total mileage. During the last decade of the nineteenth century, however, several criticisms began to be heard. The growing importance of the street and electric railways brought about a demand for a heavier tax on them, and at the same time for an increased revenue to the localities. Both of these objects were accom- plished in 1898. The distribution of the corporate excess to the localities was changed from the basis of the residence of the stockholder to that of the location of the line. This meant of course that the whole of the tax went back to the localities. Furthermore an additional franchise tax was imposed on street railways, amounting to the entire excess of dividends over 8%, provided the corporation had paid an average dividend of 6% since its formation. In 1906 electric roads, constructed partly on private property, partly on public highways, were made taxable like street railways, with the exception that only so much of the proceeds as correspond to the length of track on public highways was to be distributed to the localities, the re- mainder being distributed like the ordinary tax on corporate excess. A few years later there developed considerable dissatisfaction with the taxation of domestic business corporations, as distin- guished from the public-service and the financial corporations. Domestic business corporations were taxed more severely than their foreign competitors, that is, foreign corporations doing business in the state, as well as similar corporations in the neighboring states. As to the latter we have learned that in Nesv York and Pennsylvania manufacturing corporations are in large measure exempt; and in the other New England states there was no effective tax at all on such corporations. As to foreign corporations doing business in Massachusetts, these were liable only for their tangible property, taxed locally. The shares were indeed taxable to the shareholder if discovered; but this was an eventuality that almost never happened. This discrimination against domestic companies was removed by the law of 1903. Henceforth there were to be deducted from the value of the stock of ordinary business corporations: (1) the value of the real estate and machinery, whether located in or out of the state; (2) all other tangible property located out of the state and liable to taxation, whether taxed or not; and (3) securities which are exempt in the hands of a citizen of Massachusetts {i.e. stocks of state corporations and of other THE TAXATION OF CORPORATIONS 205 corporations taxed in the state on their franchises, mortgages or bonds exempt from taxation). Moreover, a limit — both maximum and minimum — was now set to the amount of the tax. The minimum tax payable is one corresponding to a rate of 1-10 of 1% of the market value of the stock. The maximum limit is reached as follows: an amount is taken equal to 120% of the tax commissioner's valuation of the real estate, machinery, tangible property and securities taxable to residents of Massachusetts. From this is deducted the value of all property taxed in the state or liable to taxation outside of the state. On the remainder the tax is assessed. . A second change made by another law of the same year was the imposition on foreign corporations of a slight excise tax, at the rate of 1-100 of 1% of the par value of the capital stock, with a deduction for taxes locally paid, and with a maximum limit of $2,000. During all these years the rate of the corporate-excess tax had been reached by dividing the taxes on property, exclusive of polls, levied in that year into the total valuation of property in the state for the preceding year. In 1906 the rule was now changed for all corporations except street and electric rail- ways, so that in future the rate was made the average of the annual rates thus determined for the three years preceding the assessment. In 1909 this new rule was made uniform on all corporations, without exception. During the first decade of the new century another difficulty presented itself. The distribution of the proceeds had led to much dissatisfaction on the part of places where the business enterprises were located; for the revenues went not to these localities, but to the places where the stockholders happened to reside. As the result of a long agitation the law was changed in 1910 so that in the case of ordinary business corporations, while the state still retained that part of the tax paid on account of the shares owned by non-residents, the remainder is dis- tributed to the city or town where the business is carried on; and if the business is carried on in more than one city or town, then in proportion to the value of the tangible property of the corporation in each city or town. If, however, the business is not carried on in the state and if the corporation does not own any tangible property in the state other than ordinary office furniture, the tax is retained by the state. The Massachusetts system of taxing the corporate excess 206 ESSAYS IN TAXATION at present may therefore may be summed up as follows. Cor- porations are divided into four classes: ordinary commercial and manufacturing companies; street railroads; other public- service corporations; and financial corporations. (1) Ordinary business companies may deduct from the ap- praised value of the capital stock : (a) the value of the real estate and machinery locally taxed within the state; (b) the value of the property situated and taxable in another state or country; (c) the value of securities which if owned by a natural person resident in Massachusetts would not be taxable. The tax com- missioner in practice takes the value of real estate, machinery, merchandise and taxable securities, adds 20%, and then deducts the three classes of property mentioned above. The tax is distributed to the localities in accordance with the ratio of the tangible property in the town or towns where the business is carried on, except that the state retains that part of the tax paid on account of shares owned by non-residents. (2) Street railways may deduct from the value of the capital stock: (a) the value- of the real estate and machinery taxable locally, and (b) the value of so much of the capital stock as is proportional to the line outside of the state. The proceeds are then distributed to the localities in accordance with relative trackage, the state retaining practically nothing. In the case of electric roads only so much as corresponds to trackage on public highways is so distributed. (3) Other public-service corporations in general, are allowed the same deductions as street railways, but the proceeds are dis- tributed according to the residence of the stockholders. In the case of domestic telephone companies, however, instead of deducting so much of the stock as is proportional to mileage outside of the state, the law prescribes a deduction of so much of the stock as is owned by the companies in other corpora- tions, when the tax is paid. In the case of foreign telephone companies, in lieu of this there is deducted so much of the capital stock as is proportionate to the number of telephones used or controlled outside of the state. (4) Financial corporations subject to the law include only trust companies and stock insurance companies. For banks, savings banks and mutual insurance companies are, as we know, taxable under different laws. Financial corporations pay the excise tax on all personal property held in trust. But as they are permitted to deduct the value of real estate and as mortgages THE TAXATION OF CORPORATIONS 207 are in Massachusetts considered an interest in real estate/ they may deduct all their loans on real estate and thus vir- tually escape taxation on this account. They are, however, further taxable on their deposits (except demand deposits) at a rate equal to three-quarters of the rate on the corporate excess. This means virtually a rate of about 1% on deposits, — double that on savings banks. The Massachusetts system is therefore a compUcated, but effective one.^ The chief criticism to be urged — namely, the failure to take account of corporate bonds in estimating the value of the capital — is somewhat attenuated by the fact that in Massachusetts, to a far greater extent than anywhere else, railroads as well as other corporations have been created on the proceeds of share capital alone. The other criticism, however, that the tax applies only to domestic companies cannot be so easily met. The corporate-excess method of taxation has recently been extended to California, but with improvements. In Califor- nia the law of 1910, which as we know ' was designed to bring about a separation of state and local revenues, divided corpora- tions into two classes — public-service and other corporations. All pubhc-service corporations (except water companies) are taxed on the basis of gross receipts, according to the rates ' Cf. supra, p. 104. ' Among the more important literature of the subject we may mention: James R. Carrett, "Taxation of Franchises in Massachusetts," in Munici- pal Affairs, vol. iv., p. 506; F. A. Wood, "The Massachusetts Franchise Tax and Local Distribution," ibid., p. 124; J. P. Procter, Additional Bur- dens upon Street Railway Companies, Boston, 1891 ; Whitney and Cummings, Additional Burdens upon Street Railway Companies, Boston, 1891; E. W. Burdett, Argument for the Massachusetts Street Railway Association, Boston, 1893; S. J. Elder, Special Taxation for the Use of the Streets, Boston, 1897; F. A. North, Business Corporations in Massachusetts, Boston, 1903; H. Winn, The Corporation Exemptions of 1903, Boston, 1905; A. E. Pillsbury, Argument for the Association of Massachusetts Gas Companies, Boston, 1903; J. M. Hallowell, The Corporation Franchise Tax, Boston, 1904; G. Calkins, "The Massachusetts Business Corporation Law," in Ripley's Trusts, Pools and Corporations, 1907; J. M. Hallowell, The Taxation of Domestic Manufac- turing Corporations in Massachusetts, 1908; C. A. Andrews, "Taxation of Corporate Franchises in Massachusetts," in the Yale Review, Feb., 1911, p. 353 et seq. Cf. the book by Friedman and the article by Bullock men- tioned supra on pp. 142 and 143. Much material will also be found in the numerous official reports on taxation and on corporation law, which are mentioned infra, at the close of chap. xxi. ' Cf. infra, chap. xi. 208 ESSAYS IX TAXATIOX mentioned in the preceding section, and the taxes are expr^ly declared to be taxes up)on the property and the franchise. All other corporations, including mercantile, manufacturing and mining companies (except insurance companies and banks which are separately taxed) pay a state tax on the so-called fran- chise. This is however virtually a tax on the corporate ex- cess. For the value of the franchise is held to be the aggr^ate value of the stock and bonds less the value of the tangible property locally taxable. On this franchise, so determined a rate of 1% is imposed- In this new system several points are to be noticed. In the first place, the definition of the franchise includes all the three varieties of franchises, which we shall discuss later.^ In the second place, a peculiar provision is inserted into the law, requiring in the case of ordinary corporations the deduction of the value of the good will in estimating the value of the franchise. Thirdly, bonds as well as stock are considered in ascertaining the value of the franchise. Fourthly, in the case of pubUc-service corporations the tax on gross receipts is in lieu of all other taxes except the local tax on real estate, the state corporation hcense tax and such municipal charges as may be imposed for any special privilege or franchise. Fifthly, in the case of other corporations in general the only difference theoretically is that the franchise is determined and taxed by the state instead of bj' the locality, the remainder of the prop- erty stiU being subject to local taxation. Practically, however, it means that the tax is now reallj' assessed, whereas formerly it was apt to be left in abeyance. It may also be mentioned that, evidently by some oversight, in addition to the franchise tax there is still left in California the old annual hcense tax of -S20 on aU corporations. In Xew Jersey, the tax on "miscellaneous corporations" dates from 1884, and is described as a "hcense for the corporate franchise." As amended in 1892, it apphes to all corporations except railroads and canals (both of which are taxed separately), banks, cemeteries, rehgious, charitable or educational associa- tions, and manufacturing or mining companies at least fifty per cent of whose outstanding capital is invested in business in the state. If the latter have less than fifty per cent of their capital so invested, thej' pay the tax on capital stock mentioned * Cf. infra, chap, vii, sec L THE TAXATION OF CORPORATIONS 209 below, but may deduct the assessed value of the property so used in manufacture or mining. Telegraph, telephone, cable, express, parlor car, gas, electric light, insurance, oil and pipe- line companies, as we have seen above, are taxed under this law in a special manner, i.e. on receipts, premiums and dividends. All other companies included under the head "miscellaneous corporations," pay a yearly "license fee" or "franchise tax" of one-tenth of one per cent on the capital stock issued and outstanding up to three million dollars; one-twentieth of one per cent on the capital between three and five millions; and fifty dollars additional for each one million dollars capital in excess of five millions. This tax applies, except in the case of insurance companies, only to domestic corporations. But it is to be borne in mind that railroad companies are not included in this tax on miscellaneous corporations. In Rhode Island corporations were not separately taxed until 1912. The new law also makes a distinction between public-service and other corporations. Public-service corpora- tions are taxed on gross receipts, as explained in the previous section; but the system differs from that of California in that the rate is low and in that not only real estate but also the tan- gible personalty continues to be liable for taxation to the general property tax. The gross earnings tax therefore simply takes the place of the tax on intangible personalty. Other corpora- tions — i.e. manufacturing, mercantile and miscellaneous cor- porations, wherever incorporated — pay a tax at the low rate of 40 cents on the dollar on the corporate excess, which is deter- mined as follows: The value of all bonds and of all other in- debtedness is added to the value of the stock. In the case of corporations doing a business outside of the state, only a por- tion of the value of the stock is taken: where they derive their profit chiefly from the sale or use of real estate or tangible personalty, the proportion taken is the ratio of the value of such property in the state to the value of all such property in and out of the state; if, on the other hand, the profits are de- rived chiefly from the holding or sale of intangible property, the criterion is the relative proportion of gross receipts in the state to total gross receipts. In any other case in which, as the law reads, "these proportions are not equitably applicable" the officials are to take "such proportion as is equitable." From the total value of stock and debts thus ascertained is deducted the assessed value of the realty and tangible person- 210 ESSAYS IN TAXATION alty located in the state. The remainder is pronounced to.be the value of the corporate excess. To these six states with general corporation taxes — Pennsyl- vania, New York, Massachusetts, CaUfornia, New Jersey and Rhode Island — there may be added Ohio and Maryland, al- though from another point of view these commonwealths might be included with those mentioned below.^ In Maryland, the "tax on incorporated institutions" dates in a certain sense from 1841, when all domestic corporations which declared divi- dends were required to return the stock owned by non-residents, and to pay the state general property tax thereon to the collec- tor of the place where the corporation or its chief ofSce was situated. In 1842 this obligation was extended to stock owned by residents; and in 1847 the corporations were required to pay the tax, whether or not they had earned dividends. The county tax was, moreover, still collected from the shareholder. Early in the seventies the system was slightly changed; in 1878 the present method was introduced, and the office of tax commissioner created. The tax is levied on the capital stock, or, if there be none, on the property and assets of all corpora- tions incorporated or doing business in the state, and of all joint-stock companies doing business in the state, except steam railroads and savings institutions, both of which are taxed separately. Deductions are made from this valuation for the assessed value of real property (separately taxed), for the capi- tal invested in property which already pays taxes, for the non- taxable securities held and, in the case of building associations, for mortgages on taxable property. The corporations pay at the rate of the general property tax, on only so much of the stock as is owned by residents of the state. They were also required to pay, under a law dating from 1847, the general property tax on all interest-bearing bonds, certificates, or evi- dences of debt, owned by residents, deducting the amount from the interest due the bondholders. This method of taxing bonds which continued until 1896 differed from the Pennsyl- vania system chiefly in the fact that the tax was leviable by the local officials. As a consequence it was really not enforced.^ The law of 1896, however, made all corporate bonds, certificates of indebtedness or other evidences of debt assessable to the owners at their place of residence and subject to a tax of 30 cents per ' Infra, p. 213. * Code of Public General Laws of 1888, art. 81, sec. 87. THE TAXATION OF CORPORATIONS 211 $100 of assessed value, in addition to the general state rate on property. The local tax must be apportioned equally between the town and county where the owner resides.' The state rate has been considerably increased of recent years and has been fixed for 1913-14 at 31 cents making the total tax 61 cents, which is much higher than the Pennsyh-ania tax, and which will therefore probably lead to much evasion. JMoreover, it is to be noted that the tax on bonds is payable by the owner, not the corporation, as was formerly the case. The corporation taxes in Maryland, therefore, now have only a very limited scope. In Kentucky, we find since 1892, in addition to the prop- erty tax, and the license tax to be mentioned below, a franchise tax on all corporations or associations "having or exercising any special or exclusive privilege or franchise not allowed to natural persons, or performing any public service." This is, however, interpreted to include only "public-service or car- rier" companies and can therefore not be called a general cor- poration tax. In Alabama, there was formerly a tax, dating from 1866, on the dividends of all corporations doing business in the state; but since the dividends were simply classed as personal property, the tax yielded almost nothing and was discontinued before long. There was formerly also a tax on the incomes of corpora- tions; but this seems to have been rarely assessed and was abolished in 1884. It may also be mentioned that Virginia had a general corpora- tion tax for a short period. In 1843 a tax of two and a half per cent was imposed on the dividends of all corporations, except as to the stock held outside of the state; but in 1846 the tax was reduced, and was then allowed to disappear. During the Civil War, again, a tax was imposed on steamboat companies and "companies of a similar character." The law defined capital as stock subscribed, money deposited, bonds, certificates and other evidences of debt, so that the tax was thus really laid on stock plus total indebtedness. In addition to these six — or including Maryland seven — states with a general corporation tax we find a number of common- wealths — nineteen in all — which impose a shght tax, almost in the nature of fees, on corporations in general. In a certain sense these may also be called general corporation taxes. They differ, however, from the corporation taxes hitherto discussed in three 1 Frederic Co. vs. Frederic City, 88 Neb. 654. 212 ESSAYS IN TAXATION respects. In the first place, they are in almost every case not substitutes for, but supplemental to, the general property tax. Secondly, with one or two exceptions, the charge is fixed or graduated at specific sums instead of being a percentage tax. In the third place the amount is so insignificant as scarcely to warrant the name of tax. In some cases the charge is even known as a fee, although the appellations are very varied. In ten of these states — Alabama, Arkansas, California, Colorado, Georgia, Kentucky, Oregon, Utah, Vermont and West Virginia — it is called a license tax or annual license tax. In eight states — Delaware, Kentucky, Maine, North Carohna, Ohio, Texas, Virginia and Washington — it is called a franchise tax. In Nebraska it is called an annual occupation fee. In Oklahoma it is called a "license tax or license fee." In Kentucky there is both a license tax and a franchise tax, the former being im- posed on all corporations, the latter being payable in addition by public-service corporations, as explained in the preceding paragraph. In California, as we noted above, the license tax is payable in addition to the new general franchise tax. In most of the above states the license tax is supplemental to the ordinary property tax; and in several of these states, as we learned in the last section, there are additional taxes on certain classes of corporations. The character and rate of these license, or so-called franchise, taxes are as follows. In Alabama the "license tax," imposed on all corporations, domestic and foreign, as a part of the general privilege tax system, varies from $10 if the capital is under $10,000 to $500 if the capital is over one million dollars. In Arkansas the " franchise tax " is at the rate of 1-20 of 1% upon the proportion of the subscribed or issued and outstanding capital stock em- ployed within the state. In California the "hcense tax" is at the flat rate of $20. In Colorado the " hcense tax " on domestic corporations is 2 cents for each $1,000 if the capital is $25,000 or over. In the case of foreign corporations the tax is imposed on only so much of the capital stock as is employed within the state. In Delaware, where as we know public-service corpora- tions as well as insurance companies and banks are separately taxed, all other corporations, i.e. all manufacturing, mining, mercantile and miscellaneous corporations with less than 50% of capital invested in business carried on in the state, or whose capital is invested wholly without the state, are subject to an " annual franchise tax " on capital stock, ranging from $5, where THE TAXATION OF CORPORATIONS 213 the capital is under $25,000, to $50 where it is a million dollars, with an additional $25 for every succeeding million dollars. In Georgia the " annual hcense tax " is graded from $5 to $100. In Kentuckj'- the " hcense tax " is at the rate of 30 cents on each $1,000 of capital. In Maine the " annual franchise tax " is graded from $5, if the capital does not exceed $50,000, to $50 where the capital exceeds a million dollars, with $25 additional for each succeeding million dollars. In Nebraska the "occupa- tion fee " varies from $5 to $200 according as the capital is not over $10,000 or exceeds two millions. In North Carolina the "franchise tax" is $5 where the capital stock is not more than $25,000 and rises to $500 where the capital is over one miUion dollars. In Ohio the tax is 1-10 of 1% on the capital. In Oklahoma the "license tax or fee," which does not apply to public-service, insurance, banking or building and loan associations, is in the case of domestic corpora- tions J^ of 1 per mill of authorized capital stock, and in the case of foreign corporations one per mill of the capital stock em- ployed in busiaess done within the state. The tax, however, is in no case payable on that part of the capital employed in any business subject to the "production, income or gross re- ceipts tax." In Oregon the "license tax" is graded from $10 where the capital is $5,000 or less, to $200 where the capital is over two millions. South Carolina imposes a 'license tax," of one-half per mill on all corporations except those public-service corporations which pay three mills. In Texas domestic com- panies pay from $10 where the capital is under $500,000 to $50 where the capital is over $200,000. Foreign companies pay $25 where the capital is not more than $25,000; $100 from $25,000 to $100,000; $100 plus $1 for every $10,000 where the capital is between $100,000 and a million dollars; and an additional tax of $1 per $10,000 on the excess over a million dollars. In Utah the "license tax" on all domestic corporations (except those not organized for profit, water companies for cuhnary purposes, canal and irrigation companies and insurance companies) and on all foreign corporations is graded from $5, for an authorized capital stock up to $10,000, to $50 when the capital stock is over $200,000. Virginia levies a small "license tax." In Ver- mont the "license tax" is $10 where the capital is not more than $50,000, with $5 additional for every succeeding $50,000 until the tax reaches $50. In Washington the " franchise tax " is fixed at $15. In West 214 ESSAYS IN TAXATION Virginia domestic companies pay a " license tax " graded as fol- lows: where the capital is $5,000 or less, $10; from |5-$10,000, $15; $10-$25,000, $20; and $5 additional on every $25,000 to $200,000; $15 on each additional $100,000 up to $500,000; $150 from $500,000 to a million dollars; and $40 on each million dol- lars additional. In the case of non-resident domestic companies the grades are slightly different. If the capital stock is not more than $10,000, the tax is here $15; if $10-$25,000, $20; if $25-150,000, $30; if $50-$75,000, $40; if $75-$100,000, $50; from $100,000 to a million dollars, 25 cents on each $1,000; from one to two millions, $275 and 20 cents on each additional $1,000; from two to four millions, $475 and 10 cents on each additional $1,000; over four millions, $675 and $50 on each additional $1,000. Outside of the few commonwealths which levy a general corporation tax at a special rate, almost all the states, including those mentioned in the preceding list, tax the property of cor- porations in general precisely like that of individuals through the general property tax. Of recent years, however, some states have declared the franchise to be taxable property, to be assessed like other property. This is true of corporations in general in Ilhnois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Montana, Tennessee and Wyoming, which states are to be added to those mentioned above where the hcense or other tax is called a payment for the franchise. Sometimes the corporate excess is specifically designated as property and is declared to be the excess of the value of the capital stock over that of the tangible realty and personalty. The corporate excess is specified in Alabama, Illinois, Indiana, Minnesota, Mississippi, Nebraska, North Carolina, North Dakota, South Dakota, Tennessee and Texas. In most of these cases, however, the corporate excess is taxable by the local assessors, which means in practice that it is generally not reached. In only a few of these cases, like lUinois, is the corporate excess appraised by a state board, and in that state the system does not apply to railroads, telegraph, telephone, banking and insurance com- panies which are separately reached, nor to companies for purely manufacturing purposes, for the mining or sale of coal, for printing, for publication of newspapers, or for the improving or breeding of stock. As we mentioned above,'^ this attempt to include the franchise in the value of the property really in- '^ Supra, pp. 150 and 180. THE TAXATlUiS OF CORPORATIONS 215 volves a partial departure from the general property tax. It will be more fully discussed below. We see then that only in Pennsylvania, New York, Cali- fornia and Rhode Island are there general corporation taxes, in the real sense of the term, applicable to practically all foreign as well as to domestic corporations. In Maryland the corpora- tion tax, although nominally applicable to foreign, is in reality levied almost exclusively on domestic companies. In Massa- chusetts and New Jersey, the law applies in terms only to domes- tic corporations. In Maryland and Massachusetts, again, the tax is really a general property tax on shares of stock, although ' paid by the corporation. Maryland and Pennsylvania are the only states which levy taxes on corporate bonds, although vir- tually only on the bonds of domestic corporations in the hands of residents. In California and Rhode Island, however, bonds are considered in arriving at the value of the franchise or of the corporate excess. Finally, only in Pennsylvania is the corporation tax in lieu of the local tax on personalty, while in California and Connecticut as well as in Pennsylvania the state tax on public-service corporations carries with it exemption from all local taxation. The important questions that have arisen in commection with these various points will be discussed below. 6. The Tax on Corporate Charters A mistake often made is that of confounding with the cor- poration tax what may be called the tax on corporate charters. This is in reality a license fee charged for the privilege of in- corporation or of increasing the capital stock of a company, and it is generally either a lump sum, or a percentage of the amount of the capital stock. It is in most cases of very recent origin. In only a few states does it antedate the last decade of the nineteenth century and in only one or two is it found before 1870. In Pennsylvania the eariiest act is that of 1849, which provided that certain manufacturing companies on their incorporation should pay a bonus of }4 oi 1% on the capital stock, payable in five annual instalments. In 1868 the rate was changed to 34 of 1% but the tax bonus was extended to all corporations with a few exceptions, among which railroads were the most important. In 1889 the same rate was imposed on the author- ized amount of all increases of capital stock. In 1897 the rate 216 ESSAYS IN TAXATION was increased to ^/s of 1% on the authorized capital stock, with some exceptions which were still taxable at the old rate. In 1899 the rate was made uniform on all corporations at ^/s of 1%, and the only corporations excepted from the bonus were building and loan associations and so-called corporations of the first class, i.e. those incorporated by the courts, and usually not for profit. Railroads were therefore first included in this year. In 1901 the bonus was extended to foreign cor- porations also and was applied to so much of the capital as might be invested in the state after the date of the passage of the act. In Massachusetts, where the charge is called an incorpora- tion fee, the first law — that of 1863 — simply imposed a fee of II for recording the certificate of incorporation. In 1865 this was increased to 15. In 1870 the charge was made a percentage one and the rate was fixed at 1-20 of 1% of the capital stock. In 1871 the minimum charge was fixed at $5 and the maximum at $200. This continued to be the law until 1903 when the charges were reduced, the rate being fixed at 1-40 of 1%, but with a minimum payment of $10. At present the tax on corporate charters is found in almost all of the states, although under widely varying names. In Alabama and in lUinois, it is called "license fees;" in Connect- icut, it applies only to foreign corporations seeking a charter in the state, and is termed the "tax on corporate franchise," although quite unlike the franchise taxes in other common- wealths; in Kentucky, it is called the "tax on organization"; in Maine, the "tax on new corporations"; in Maryland, "bonus on corporations"; in Missouri, the "corporation tax" or the "tax on corporations incorporating"; in Nebraska "occupation fee on corporations " ; in New Hampshire, " charter fees " ; in New Jersey, the " tax on certificates of incorporation"; in New York, the "organization of corporations tax"; in Ohio, "organization fee"; in Oklahoma "incorporating fee"; in Pennsylvania and Rhode Island, "bonus on charters"; in Texas, "franchise tax"; in Vermont, "corporation license tax"; in West Virginia, "license tax on charters and certificates of corporations." The rates of the tax are exceedingly multiform. They may be classed in five categories: flat rates; fixed percentage rates; graded rates, fixed in each grade; graded percentage rates; and graded rates, partly fixed and partly percentage. The flat rates are found in seven states : $4 in West Virginia; THE TAXATION OF CORPORATIONS 217 $5 in Arizona and Oklahoma; $10 in South Dakota and Washing- ton; $25 in Arkansas; and $100 in Florida. The percentage rates are found in fourteen states as follows: 2 cents per $1,000 in Colorado and Tennessee; 15 cents per $1,000 in Nevada; 20 cents per $1,000 in New Jersey (with minor variations in detail); 25 cents per $1,000 in Utah; 1-20 of 1% (or 50 cents per $1,000) in Massachusetts, Michigan and New York (for domestic companies); 3-20 of 1% in Ohio; 1-10 of 1% in Indiana, Kentucky, and Rhode Island; Vs of 1% in Maryland and New York (foreign companies) ; Vs of 1% in Pennsylvania. The graded rates, fixed in each class, are found in six states: Alabama ($25 when the capital is not over $50,000, to $250 when the capital is over a million dollars) ; Georgia ($5 to $100) ; Idaho ($5 when the capital is not over $25,000 to $25 when the capital is over $500,000); Oregon ($10 when the capital is not over $5,000 to $100 when the capital is over two million dol- lars) ; Virginia ($25 when the capital is not over $5,000 to $5,000 when the capital is over ninety million dollars; but when com- panies are incorporated under a general, instead of a special, act the rates are lower, ranging from $15 to a maximum of $600); Vermont ($10 to $50). The graded percentage rates are found in four states as follows : Connecticut (50 cents per $1,000 where the capital is not over five millions, and 10 cents per $1,000 above that); Kansas (1-10 of 1% on the first $100,000 of capital, 1-20 of 1% on the next $400,000, and $200 for each million or fraction thereof above $500,000 of capital) ; Montana (50 cents per $1,000 where the capital is not over one million dollars, and 25 cents per $1,000 above that) ; and South Carolina (one mill on each dollar up to $100,000 of capital, % mill from $100,000 to a million dol- lars, and }4 iiaill on each dollar of capital over a million dollars). The mixed graded rates, partly fixed and partly percentage, are found in nine states as follows; Colorado ($20 if capital is not over $50,000, and 20 cents on each additional $1,000); Delaware (the same as Colorado); Illinois ($30 where the capital is not over $2,500, $50 if not over $5,000, and $1 for each additional $1,000); Iowa ($25 plus $1 on each $1,000 where the capital is over $10,000) ; Minnesota ($50 for the first $50,000 of capital, $5 for every additional $10,000); Mississippi ($20 where the capital is not over $10,000, $40 to $60 where the cap- ital ranges from $10-$50,000, and 1-10 of 1% where the capital 218 ESSAYS IN TAXATION is $50,000 and over); Nebraska ($10 and in addition 10 cents per $1,000 where the capital is over one million dollars) ; North Dakota ($50 for the first $50,000 of capital, $5 for each addi- tional $10,000 or fraction) ; and Wyoming ($5 where the capital is not over $5,000, $10 on capital between $5-$10,000, and 5 cents on each additional $1,000). In five states — Maine, New Hampshire, New Mexico, Texas and Wisconsin — there is a very complicated system, the rates varying with different classes. In ten states — Alabama, Kentucky, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Virginia and Wyoming — the rates are payable also on a subsequent increase of the capital stock. In many of the above states the tax is now levied on foreign as well as on domestic corporations; while finally, some states follow the New York plan and impose the tax also on joint- stock companies. These taxes have really little in common with the corpora- tion taxes properly so called. In Pennsylvania and Ohio, for instance, the payment is held to be not a tax at all, but a price paid for the chartered privilege. The distinction between the tax on corporate charters and the corporation tax proper can, perhaps, best be expressed by saying that if the latter is a tax on the right to be, the former is a tax on the right to become. III. Bases of the Tax The summary just presented shows the chaos of principle in which the whole subject is involved. An analysis of the facts discloses no less than thirteen important methods of taxing corporations, not counting the various combinations of method which are practised in some states. The bases on which the taxes are assessed are as follows: — 1. Value of the property, i.e. the realty plus the visible and invisible personalty. This was originally the universal method and it is still the practice in the great majority of cases. 2. Cost of the property. This was the general rule in New Jersey from 1873 to 1876 as to all railroad companies, and is still the rule in isolated cases, as in New York in the local taxation of telegraph companies. 3. Capital stock at par value. This is true of the general cor- poration law in New Jersey,, of mining companies in Massa- chusetts, and of banks and savings institutions in Pennsylvania. THE TAXATION OF CORPORATIONS 219 4. Capital stock at market value. This is. true of the gen- eral corporation law in Massachusetts and in New York when applied to corporations where the dividends are less than six per cent. It was true of railroads in Connecticut between 1849 and 1864. It is also the custom in local taxation in many states. 5. Capital stock plus bonded debt at market value. This is true of all corporations in Pennsylvania and of railroads in Georgia and in Illinois. In the case of railroads in New Jersey and of corporations in general in Illinois and several other states, only the surplus of this valuation over the value of the tangible property is made the basis of the tax. 6. Capital stock plus total debt, both funded and floating. This is true of railroads in Connecticut, and in a measure true of corporations in general in California and Rhode Island. It was true of steamboat companies and of similar corporations in Virginia dxiring the Civil War. 7. Bonded debt or loans. This was true of railroads and canals in Virginia from 1872 to 1874, and is now true of all corporations in Pennsylvania. In this case, however, it is onlj' supplementary to the tax on capital stock. 8. Business transacted. This is true in several of the New England states of savings banks taxed on their ■ deposits ; in California, Maine and New York of foreign banks; in New Hampshire and Vermont of trust companies taxed on deposits; in Connecticut and Massachusetts of insurance companies taxed on the amount insured; in Montana of telegraph companies taxed on the instruments; in Connecticut, Florida, Montana and Tennessee of telephone companies taxed on the number of tele- phone transmitters; in several Southern states of sleeping-car companies taxed according to the number and mileage of cars; in Delaware of railroads taxed on the number of locomotives and passengers. It was also true in Pennsylvania from 1868 to 1874 of railroads; from 1868 to 1881, of coal companies taxed on tonnage; and from 1870 to 1889 of boom companies taxed on the number of logs rafted. 9. Gross earnings. This is true in many states of insurance companies taxed on gross premiums, and of transportation and other public-service companies taxed on gross receipts. 10. Dividends. This is true of gas and electric light com- panies in Delaware, New Jersey and New York, and of turn- pike companies in Kentucky. It was formerly true of banks 220 ESSAYS IN TAXATION and iron companies in Pennsylvania, and of banks and in- surance companies in Ohio and Virginia and of corporations in general in Alabama. 11. Capital stock according to dividends. This is true in New York of all corporations, when the dividends are at least six per cent. It was formerly true of banks in North Carolina and of all corporations in Pennsylvania. 12. Net earnings. This is true of railroads in Delaware; of street railroads in Massachusetts and Rhode Island; of in- surance companies in a number of states and of mining com- panies in Massachusetts. 13. Franchise. This is true of a large number of cases; but the term franchise, as we shall see, denotes nothing definite, and the value of the franchise is measured by each one of the preceding twelve tests except that of property. All the above methods may really be reduced to three: taxes on property (nos. 1-7 and 11); taxes on business (no. 8); and taxes on earnings (nos. 9, 10 and 12). Virtually, as we shall see, the choice lies between taxes on property and taxes on earnings. From this survey of the existing confusion, it is plain that we are still groping in the dark and that no one method has yet pre-eminently commended itself to the American sense of justice and expediency. In the next chapter we shall learn the judicial interpretation put upon these various methods, and shall attempt to analyze the situation from the economic point of view. That some change is imperative seems evident; precisely what the change should be can be ascertained only after careful consideration. It is a complicated problem that confronts us. CHAPTER VII THE TAXATION OF COEPORATIONS II THE PRINCIPLES In the preceding chapter we traced the history and actual condition of the corporation tax in the United States. The whole subject was shown to be involved in almost inextri- cable confusion, amid which, however, some twelve different bases for levying the tax might be distinguished. These, it will be remembered, were the value of the property, capital stock at par value, capital stock at market value, capital stock plus bonded debt, capital stock plus total debt, loans,, busi- ness, gross earnings, dividends, capital stock according to divi- dends, net earnings and franchise. In the attempt to analyze these methods it may be well to begin with the last, on account of its obscurity as well as of its importance. I. The Franchise Tax At the outset we are confronted by the question: what is a franchise tax? The matter was first brought squarely before the public by the provisions of the California constitution of 1879, and since then by tax laws of several states which prescribe that franchises of corporations shall be separately assessed. Before we can discuss the franchise tax, however, we must attempt to ascertain what a franchise really is. Blackstone defines a franchise as "a royal privilege or branch of the King's prerogative subsisting in the hands of a subject." His definition is obviously too vague for our purposes. The Su- preme Court of the United States has given this definition: A franchise is a right, privilege or power of public concern which ought not to be exercised by private individuals at their mere will and pleasure, but which should be reserved for public control and adminis- tration, either by the government directly or by public agents acting 221 222 ESSAYS IN TAXATION under such conditions and regulations as the government may impose in the pubhc interest and for the pubhc security.' This definition, however, is somewhat too narrow, since it emphasizes unduly the element of public control and public •interest. These are indeed very desirable adjuncts, but they scarcely seem to be indispensable parts of the conception. Nothing is more conunon than the possession by a purely private corporation of a franchise — for example, the mere privilege to act as a corporation. Furthermore, a privilege of a public character, like that possessed by a railway, is not necessarily confined to corporations. Thus, there is nothing to prevent the grant of the right of eminent domain to private persons. We therefore conclude that a franchise in the wider sense is simply a right conferred by govermnent of conducting an occupation either in a particular way or accompanied with particular privileges. The motive may be either public welfare or public revenue. This can be clearly seen by tracing the historical development of the franchise. One of the chief sources of royal income in mediaeval Europe consisted in the so-called "fines for licenses, concessions, and franchises." These were payments by individuals or associa- tions for all kinds of special privileges, such as to secure the general favor of the crown, to retain or to quit office, to obtain the right of exporting commodities, to conduct some business in a particular way, to obtain special jurisdictional privileges, to possess the right of firma burgi, and so on.^ A most common instance can be found in the trading privileges of the guilds, granted chiefly for the sake of the accruing emoluments. Similar to these mediaeval concessions are the modern licenses, especially in the Southern commonwealths, which are conferred on in- dividuals and corporations alike, and in most cases for purely fiscal reasons. What are called franchise taxes elsewhere are included in the South in the privilege or occupation taxes. A franchise of an individual or of a corporation is, therefore, simply a privilege — something over and above the value of the property, and in a measure analogous to the "good will" ' California vs. Southern Pacific R. R. Co., 127 U. S. 40. '' A characteristic example of a fine or franchise hard to classify is this: The wife of Hugo de Neville paid the king two hundred hens "eo quod" possit jacere una nocte cum domino suo" (who happened to be in prison). Roluli Finium, 6; quoted in Madox, History of the Exchequer, i., p. 471. THE TAX ATI OX OF CORPORATIOXS 223 of a firm. It is the indefinite something which gives vitality to the enterprise and makes its business worth having. In the case of a corporation this indefinite something is the privilege that individuals possess to act as one, with legal individuality and immortality, and with divisible share capital. This is a privilege which corporations share equally with joint- stock companies; accordingly, the corporation tax is frequently made applicable to such associations. A modern stock corpora- tion indeed possesses another privilege, which is exclusive to it, namely, limited liability. The corporate franchise therefore is really the privilege of juristic personality and limited liability; it is the right to exist as a corporation.^ Since it is something separate and apart from the property of the corporation, it is capable of being taxed.^ What has been said applies, however, only to domestic corporations. In the case of a foreign corporation, the state which has not given the franchise cannot tax it. With a domestic corporation the franchise or right to exist is an empty right if the corporation may not transact business; the right to exist is therefore inextricably bound up with the right to carry on the business. But as regards a foreign corporation, the two things are distinct, and the state can tax only the privi- lege of carrying on the business within its borders. The cor- porate franchise has no existence apart from the laws of the state which created it. In order to avoid trouble, therefore, the corporation tax is usually imposed on "the corporate franchise or business;" and the New York tax has been upheld as applicable to foreign corporations as a tax on their business, not on their franchise.^ The denial of the right to tax the franchises of foreign cor- porations applies equally to corporations chartered by the United States which are not legally foreign corporations. But where the corporation, as in the case of a railroad, exercises ' "By the term corporate franchise we understand is meant the right or privilege given by the state to two or more persons of being a corpora- tion, that is, of doing business in a corporate capacity." Home Insurance Co. vs. State of New York, 134 U. S. 594. Cf. Western Union Telegraph Co. vs. Mayer, 28 Ohio State, 521. 2 "Nothing is better settled than that the franchise of a private corpora- tion . . is property and of the most valuable kind, as it cannot be taken , for public use without compensation." Wilmington R. R. Co. vs. Reed, 13 ' Wall. 264, 268. ^^ ^^ „„„ ■1 People vs. Equitable Trust Co. of New London, Conn., 96 N. Y. 396. 224 ESSAYS IN TAXATION additional privileges in the state, it is held that it enjoys a state franchise as well as a federal franchise and that a state tax may be imposed on the former franchise without being an attack upon the privilege granted by the federal government.' This, however, does not apply to national banks which cannot be subjected to license or privilege taxes. ^ Some recent cases in Pennsylvania have even held that the tax on capital stock is invalid as to stock invested in a patent right, because such taxation involves a property right which depends for its existence exclusively on the federal constitution and on an act of Con- gress.^ This seems to be an extreme application of the general principle which, if persisted in, will render a great part of our corporation tax laws practically nugatory. For almost every corporation utilizes something covered by a patent; and if it is held that the capital stock represents in whole or in part this patented property, the corporation would to that extent escape taxation. Later decisions in other states, like New York and Maryland, seem to take the proper view. For in New York it has been held that even if the entire capital of a corporation is invested in patent rights, it is none the less subject to the capital stock tax.* And the same rule has been extended to trade-marks.^ Subject to these qualifications and to the principle, to be discussed below, that no commonwealth may impose a fran- chise tax to interfere with interstate commerce, the taxation of corporate franchise has no limitation, except the discretion of the taxing power. ^ The franchise that has been discussed thus far is the privilege of doing business. When, however, we analyze a little more closely the concept of a corporate franchise we see that there are other aspects to the problem. In order to do business, the ^ People vs. Central Pacific R. R. Co., 105 Cal. 576; and California vs. Pacific Railroad Companies, 127 U. S. 1. 2 Mayor vs. National Bank of Macon, 59 Ga. 648; City of Carthage vs. Bank of Carthage, 71 Mo. 508; National Bank of Chattanooga vs. Mayor, 8 Heiskell, 814. ' Commonwealth vs. Westinghouse Co., 151 Pa. State, 265; Common- wealth vs. Air Brake Co., id. 265; Commonwealth vs. Philadelphia Co., 157 Pa. 527; Commonwealth vs. Lehigh C. and I. Co., 162 Pa. State, 603. * People ex rel. U. S. Aluminum Plate Co. vs. Knight, 174 N. Y. 475 (1903); Crown Cork and Seal Co. vs. State, 87 Md. 687. ' People ex rel. Spencerian Pen Co. vs. Kelsey, 105 App. Div. 133 (1905). " Delaware Railroad Tax Case, 18 Wall. 231; California vs. Southern Pacific R. R. Co., 127 U. S. 41. THE TAXATION OF CORPORATIONS 225 corporation must first come into being; and even after the corpo- ration has been created, it does not necessarily follow that it will do business. Consequently we must distinguish between the creation of a corporation and the exercise of its powers. If the latter is termed the franchise to do or to act, the former might be called the franchise to be or to become. For this privilege to be, as we have learned, virtually all the states make a charge; and while ordinarily called a fee, it is not infrequently termed a franchise tax. In addition to the franchise to be and the franchise to do, there is, however, still a third kind of franchise, which it has become usual of recent years to call a special franchise. This is the right accorded to certain corporations to possess privileges not enjoyed by corporations in general. The most important of such special privileges is the right to use public highways, and it is for this reason that the corporations enjoying this right are generally called public-service corporations. This special franchise was first brought into prominence in New York. In that state it is permissible to deduct debts from personalty, but not from real estate. It was accordingly easy for corpora- tions to escape taxation on their capital, which as we know is still locally taxable in New York. For when the bonded in- debtedness exceeded the capital stock, there would be nothing left on which to levy the tax except the real estate. When an attempt was made later to assess the value of the franchise over and above that of the personal property, the attempt was frustrated by the same facility of deducting the value of the bonds. Hence an ingenious plan was devised. A franchise in general, if it be any kind of property, is personal property. But it was now suggested that a franchise enjoyed by some corporations only, to use the streets, on the surface or above or below the level, might properly be termed an interest in real estate; and if so, there could not, under the New York system, be any set-off on account of mortgage bonds. Accordingly by the law of 1899 a new category of real estate was created in New York, to be known as a special franchise. The law added to the definition of taxable real property the following: — "The value of all franchises, rights or permission to construct, main- tain or operate the same [surface, underground or elevated railroads] in, under, above, on or through streets, highways or public places; . . . and the value of all franchises, rights, authority or permission to con- struct, maintaiu or operate in, under, above, upon, or through any 226 ESSAYS IN TAXATION streets, highways or public places, any mains, pipes, tanks, conduits or wires, with their appurtenances, for conducting water, steam, heat, light, power, gas, oil or other substance, or electricity for telegraphic, telephonic or other .purposes. ... A franchise, right, authority or permission specified in this subdivision shall for the purposes of taxa- tion be known as a 'special franchise.' " A special franchise shall be deemed to include the value of the tangible property situated in, upon under or above any street, highway, public place or pubhc waters in connection with the special franchise in 19C7.' Under this ingenious definition of a special franchise all public-service corporations in New York have now been com- pelled to bear a far greater burden of taxation than was pre- viously the case.^ The new conception soon spread to other states, although in most cases the special franchise is either measured by a certain proportion of gross receipts as in New Jersey, or is treated as a separate constituent of property without any decision as to whether it is realty or personalty. Only a few states, like Cali- fornia, follow New York in treating the special franchise as an interest in real estate. Thus we see that there are now in the American system of corporate taxation three kinds of franchises — the franchise to be, the franchise to do, and the franchise to act in a particular way or to enjoy a special privilege. It is interesting to observe that in the California law of 1911 all three species of franchises are included in the definition.' ' An amendment adopted later, provided that "the term ' special fran- chise ' shall not be deemed to include the crossing of a street, highway or public place outside the limits of a city or incorporated village where such crossing is less than 250 feet in length, unless such crossing be the con- tinuation of an occupancy of another street, highway or public place." Under this, in practice, ordinary railroad crossings were not treated as special franchises. But a later amendment, in 1907, made a steam railroad crossing in a city or village assessable as a special franchise. As special franchises are assessed by a state board, while ordinary real estate is as- sessed by local officials, this has caused much confusion in the actual ad- ministration. Cf. the interesting monograph by Benj. E. Hall, one of the New York State Tax Commissioners, Administrative Difficulties of the Special Franchise Tax Law. Address before the State Conference on Taxation held at Utica, Albany, 1911. 2 Cf. Seligman, "The Franchise Tax Law in New York," in Quarterly Journal of Economics, vol. xiii. (1899), p. 445 et seq. ' " These franchises shall include the actual exercise of the right to be a corporation and to do business as a corporation, under the laws of this state and the actual exercise of the right to do business as a corporation m this state when such right is exercised by a, corporation incorporated THE TAXATION OF CORPORATIONS 227 It must further be observed, however, — although it is an observation that has hitherto eluded the attention of well- nigh all writers on the subject — that amid the multiplicity of meanings attached to the word franchise two leading ideas are discernible in its relation to taxation. We refer here not to the distinction just discussed between a franchise to be, a franchise to do, and a franchise to act in a particular way; but to the distinction between franchises based on their assumed relation to property. Here there are two fundamental con- ceptions. The one is the conception of a franchise as a part of property; the other is the conception of a franchise as some- thing distinct from, or even opposed to, property. The first conception leads to the idea of a franchise tax as something of the same nature as a tax on physical, tangible property, but superadded to it. This is the case in all the states which include the value of the franchise in the ad valorem tax, as in Michigan, Wisconsin, Illinois, or even New York in the case of the special franchise tax. In all these cases the franchise tax is thought of as a property tax; but it is a tax on intangible property or on an intangible something of which the concept of property is predicated, whether in the eyes of the law it be treated as real property or as personal property. The other conception leads to the franchise tax as something distinct from, or opposed to, a property tax, as in the case of the capital stock tax in New York. Let us elucidate these conceptions. If we take up first that conception of a franchise which leads to the franchise tax as a property tax, the question at once arises as to how the value of the franchise as a piece of taxable property is to be ascertained. It is obvious that here we are face to face with great difficulties. We have seen that there are not less than twelve separate methods of taxing corporations and that each of these methods, with one exception, is declared to involve a franchise tax. There are yet other methods of measuring franchise, such as the value of the capital stock less the value of the property, under the laws of any other state or country, also, the right, authority, privilege, or permission to maintain wharves, ferries, toll roads and toll bridges, and to construct, maintain or operate in, under, above, upon, through, or along any streets, highways, public places, or waters, any mains, pipes, canals, ditches, tanks, conduits, or other means for conduct- ing water, oil, or other substances." Statutes of Cahfomia, 1911, chap. 335. Cf. the article by Professor C. C. Plehn, "The Taxation of Franchises in California," in the National Municipal Review, vol. i. (1912), p. 337 el seq. 228 ESSAYS IN TAXATION the value of the stock less the value of the tangible property-j the value of the stock less the value of the realty, the value of the stock and bonds less each or all of these items, etc. There is a total lack of uniformity. Each commonwealth measures the franchises of its corporations in its own way; and frequently a given commonwealth measures the franchises of different corporations in entirely different ways. There is an utter absence of any common standard of measurement. Capital stock, stock minus property, stock minus realty, bonded debt, business, gross earnings, dividends, profits, etc., are each declared to be the value of the franchise. The result is hopeless confu- sion. It would be useless to examine the methods of all the states; a few examples will suffice. The state board of assessors of New Jersey have published since 1884 annual reports in which they discuss the details of corporate assessment. In the case of railroads they adopted the following plan.^ The market value of the stock is added to the market value of the debt; from this aggregate the total value of the tangible corporate property is deducted, and the remainder is declared to be the "adventitious value of the entire road, its privileges included." Sixty per cent of this is taken as the value of the franchise, to which is added the value of the real and tangible property, known as the " abstract value" of the road, making a total which is termed the entire value of the railway for purposes of taxation. This, however, is not all; for if the value of the tangible property exceeds the value of the stock and debt, the board declares the franchise to be twenty per cent of the gross earnings. It will be readily perceived that this measurement of a franchise, which may give a result less than nothing, is rather awkward. Indeed, the courts of New Jersey have overturned this portion of the assessors' standard by pronouncing the estimate based on gross earnings unconstitutional; ^ but the main element in the method of valuation was upheld on the easy-going principle that no substantial injustice was done. It is this absence of "substantial injustice" to which is due the chaotic condition of franchise taxation in this coimtry to-day. ' Report of the State Board of Assessors of New Jersey, 1884, p. 26; 1885, p. 11; 1886, p. 28; 1888, p. 6. 2 Case of Railroad Tax Law, N. J. Court of Errors and Appeals, decided May 29, 1886. The case may be found in full in the Third Annual Report of the State Board of Assessors, 1886, pp. 79-173. THE TAXATION OF CORPORATIONS 229 In Illinois and in California, the method of taxing franchises is not far different from that of New Jersey. In Illinois, the board of equalization adds the cash value of the stock to that of the debt (excluding current debt), and pronounces the result to be the fair cash value of the capital stock including the franchise. From this the board deducts the equalized value of all the tangible property, and declares the remainder to be the value of the capital stock and franchise subject to taxation. This method was upheld by the Supreme Court of the United States as being "probably as fair as any other." ^ In California, the value of the franchise is determined by subtracting from the actual value of the capital stock or of the stock and bonds the value of all the items of property.^ In some cases only a fraction of the remainder is declared to be the value of the franchise. The only change introduced by the law of 1911 is that in the case of ordinary corporations, exclusive of public- service companies and banks, the good will is no longer to be included in the value of the franchise — a curious provision in view of the fact that in many corporations the good will of the business constitutes the major portion of the franchise value. In Kentucky, the assessors deduct from the amount of the capital stock the assessed value of all tangible property taxed in the state, and declare the remainder to be the value of the franchise. In the case of foreign companies, however, they take that proportion of the capital that the gross receipts in the state bear to the total gross receipts, and then deduct the value of the tangible property assessed in the state. In the case of transportation companies they take only that proportion of the capital stock which the length of the line within the state bears to the total length.^ In Indiana, if the full value of the franchise is represented by the capital stock, the franchise is not taxed; but when the franchise is of greater value than the capital stock, it is provided that the franchise "shall be as- sessed at its full cash value," and that the capital stock shall not be taxed.* • State Railroad Tax Cases, 2 Otto, 575. Cf. Railway vs. Backus, 154 U. S. 421. ''Approved as to public-service corporations in Spring Valley Water Works vs. Schottler, 62 Cal. 69, 118; Burke vs. Badlam, 57 Cal. 594; San Jos6 County vs. January, 57 Cal. 614; and as to corporations in general in Bank of California vs. San Francisco, 142 Cal. 276. ' Ky. Laws of 1892, chap. 102, art. iii., § 3. * Ind. Law of Mar. 6, 1891, § 74; now R. S. 1908, § 10324. 230 ESSAYS IN TAXATION Of considerable interest are the methods that have been employed by Michigan and Wisconsin, especially after the abandonment of the system of specific taxes on the earnings of public-service corporations and the reversion to the ad valorem system. In Michigan, after the passage of the law of 1901 which authorized the ad valorem system in the case of railroads, the appraisal of the so-called non-physical or immaterial ele- ments in the value of a railroad was entrusted to Professor Henry C. Adams. We quote from his report: " The rule submitted for the appraisal of the imraaterial values of railway properties, or what I prefer to term the capitalization of cor- porate organization and business opportunity, is simple, as follows: "1. Begin with gross earnings from operation, deduct therefrom the aggregate of operating expenses and the remainder may be termed the 'income from operation.' To this should be added 'income of corporate investments ' giving a sum which may be termed 'total in- come,' and which represents the amount at the disposal of the cor- poration for the support of its capital, and for the determination of its annual surplus. "2. Deduct from the above amount — that is to say 'total income' as an annuity properly chargeable to capital — a certain per cent of the appraised value of the physical properties. "3. From this amount should be deducted rents paid for the lease of property operated and permanent improvements charged directly to income. The remainder would represent the sinplus from the gross earnings from the year's operations, and for the purposes of this in- vestigation may be accepted as an annuity which, when capitalized at a certain rate of interest, gives the true value of immaterial prop- erties." Professor Adams himself added that the above rule failed to appraise the speculative element in railway property. As a matter of fact, however, this rule was applied only in part. It was soon realized that the calculation might easily result in a minus quantity. When this turned out to be the case, the awkwardness of the situation was relieved, in part at least, by entirely disregarding the non-physical element in the property, and taking only the valuation of the physical property. We are told that in only 26 of the 123 railroads appraised at the time was a non-physical value placed on them.^ ' See the address by Robert H. Shields, a member of the Michigan State Board of Assessors, entitled, "Railroad Taxation Problems," in Addresses and Proceedings of the Fourth Conference of the International Tax Associor tion. Columbus, 1911, p. 238. THE TAXATION OF CORPORATIONS 231 At present, the method actually followed in Michigan, as in most of the other states which attempt to tax the franchise as a piece of property, is very different. The laws refrain from lay- ing down any rule at all and leave the matter entirely to the discretion of the assessing body, which refuses to state in what its precise method consists. In California, e.g. the law of 1911 declared "franchises taxable at their actual cash value, in the manner to be provided by law." But the law simply placed the whole matter in the hands of the state board. As one of the Michigan assessors frankly stated, if the board were to reveal the grounds of their valuation, they would simply invite endless criticism and objection on the part of the corporations which they are required by law to assess.^ It is an open secret, how- ever, that the chief reliance of the Michigan board is upon earnings, so that the value of the franchise represents in great part a capitalization of earnings. In Wisconsin, again, while nothing definite is divulged, it is generally understood that the valuation is made by a combination of the "stock and bond method" with the "capitalization of earnings" method. But to what extent other criteria are actually taken into account, no one knows. Under such circumstances we are confronted by what is the chief objection to the whole method, namely, the danger of arbitrariness and the lack of any precise directions to guide the assessors or to enlighten the public. In such a complicated matter as that of appraising the value of a franchise, which has no market value because it is not the subject of purchase and sale, no two people, however expert, will agree. As one of the Michigan commissioners states: "When it comes to a question of the ultimate valuation, each member of the board has his own opinion." The result has been in Michigan as everywhere else, a sort of compromise which differs very materially from the valuation of the original experts. It is clear from the above review that the attempt to tax the franchise as a piece of property is highly unsatisfactory. If the value of the franchise is measured by any one criterion such as earnings, or dividends, or stock and bonds, there is nothing gained by the attempt to differentiate a franchise tax from a tax on earnings or on dividends or on stock and bonds. If, on the other hand, an attempt is made to reach the capital value of the franchise by a method of appraisal, without resort to any specific 1 See the admission in the Report of the Ontario Commission on Railway Taxation. Toronto 1905, p. 48. 232 ESSAYS IN TAXATION criterion, it becomes mere guess work. We may agree with the authors of the most discriminating of recent reports on the sub- ject that when all factors contributing to value are supposed to be taken into account and when in this way the board of assessors entirely avoid the responsibility of saying how their ultimate assessment is made up, even assuming it to be known to themselves, such a "system obviously has the fatal defect of making it impossible either for the railroads or the general public to distinguish between the most accurate and conscientious valuation and mere ignorant guess work or quite prejudiced and even dishonest returns. Certainly one cannot imagine a more complete departure from the fundamental basis laid down by the [Michigan] tax commission for the administration of the new system." 1 Such is the difficulty encountered in attempting to levy a tax on the franchise as a piece of property. As we saw above,^ how- ever, the other conception of a franchise tax is that not of a property tax, but of something different from a property tax. Let us now proceed to consider the meaning of this other kind of a franchise tax. What is the real significance of the franchise tax in this broader sense? Why is it desirable that such a hard and fast fine should be drawn between the property tax and the franchise tax? What is the meaning of the distinction? The answer is very plain. In the first place, according to the constitutions of several of the states, the taxes on prop- erty must be uniform. If, however, the corporation tax is held to be a franchise tax, there is no necessity of such uni- formity between the tax on individuals and that on corporations. Secondly, according to the principles of the property tax, deduc- tions are allowed for certain classes of exempt or extra-territorial property. If the tax is a franchise tax, such exemptions cannot be claimed. Thirdly, if the tax is a franchise tax, and not a tax on property or earnings, it may be upheld as not interfering with interstate commerce. Finally, if the tax is a franchise tax, many of the objections to double taxation would, as we shall see later, be removed. Every commonwealth imposing a fran- chise tax, for instance, could assess the entire capital of a cor- poration, — or at all events of a domestic corporation — although only a very small portion might be located or employed within ' Report of the Ontario Commission, etc., p. 53. 2 Supra, p. 227. THE TAXATION OF CORPORATIONS 233 the state. We can hence readily understand the persistence with which the corporations seek to uphold the distinction and to have the charge declared to be not a franchise, but a property tax. The question has arisen almost exclusively in connection with the taxation of deposits, capital stock or earnings. In the case of deposits of savings banks the decisions are almost uniform that the tax is one on the franchise and not on the property; ^ among the few commonwealths that tax such depos- its, Connecticut, Maine, Maryland and Massachusetts accept this view. Moreover, since there is no necessary relation be- tween the amount of the deppsits and the extent of the property, the tax is valid even if the deposits are invested in United States securities. Only one commonwealth. New Hampshire, has held out against the general tendency and pronounced the tax on deposits to be a property tax.^ In the case of capital stock the matter is more complicated and the decisions are more divergent. That capital stock is in one sense property will of course be denied by no one; but whether the tax on capital stock is tantamount to a tax on general property is an entirely different question. In several commonwealths it has been held that capital stock practically represents the property, and that the two are to all intents and purposes interchangeable terms.^ As regards the tax on capital stock in general, other commonwealths, however, have decided, and the federal courts have affirmed the decision, that it is not a tax on the property. Thus, it has been held that the Delaware railroad tax of one-quarter of one per cent on the actual cash value of the capital stock is a tax not on the property or on the shares of individuals, but on the corporation, measured by a certain percentage on the value of its shares.* In like manner the Massachusetts taxes on the corporate excess, i.e. on the whole value of the corporate shares and on the capital stock in excess of the value of the real estate and machinery, have been • Maryland vs. Central Savings Bank, 72 Md. 92; Coite vs. Society for Savings, 32 Conn. 173, affirmed in 6 Wall. 594; Provident Institution vs. Massachusetts, 8 Wall. 611. See also Commonwealth vs. Savings Bank, 123 Mass. 493; Jones vs. Savings Bank, 66 Me. 242. 2 Bartlett vs. Carter, 59 N. H. 105. ' Jones vs. Davis, 3 Ohio, 474; Burke vs. Badlam, 57 Cal. 594; New Or- leans vs. Canal Co., 29 La. A. R. 851; Whitney vs. Madison, 23 Ind. 331; County Commissioners vs. National Bank, 48 Md. 117. But see Wilkens vs. Baltimore, 103 Md. 293, reversing the former doctrine. * The Delaware Railroad Tax Case, 18 Wall. 206. 234 ESSAYS IN TAXATION pronounced taxes on the franchise.^ In a later case it has been held that this tax, although nominally upon the shares of capi- tal stock, is in effect a tax upon the organization on account of property owned or used by it, and therefore valid. It is an ex- cise tax, not a property tax, and therefore not limited by the constitutional restrictions as to the uniform taxation of all property.^ On the other hand, the Connecticut courts have held that the tax on capital stock and debt is a tax not on fran- chise, but on property; ^ and the older cases in Alabama and Missouri were similarly decided.* Secondly, in the case of capital .stock as measured by divi- dends, the courts of Pennsylvania and New York have arrived at diametrically opposite conclusions. In Pennsylvania a long series of cases has consistently maintained the doctrine that the tax is one on property. *■ The court has endeavored to lay down this rule: — " The test whether the tax in any given case is a franchise as dis- tinguished from a property tax, would seem to be that a tax according to a valuation is a tax on property, whereas a tax imposed according to nominal value or measured by some standard of mere calculation — as contrasted with valuation — fixed by the law itself may be a franchise tax." 6 The New York and New Jersey courts, on the other hand, have held the tax on capital stock to be a franchise tax.'' The New York case was carried in last instance to the federal court. Of course the fact that the statutes of Massachusetts and New York expressly declared the tax to be a franchise tax was of no weight; for it was juAly contended that no importance should attach to mere nomenclature. But the United States Supreme Court had already shown the tendency of its thought in the Massachusetts and Delaware decisions just cited. In a subse- 1 Hamilton Co. vs. Massachusetts, 6 Wall. 632; Commonwealth vs. Ham- ilton Manufacturing Co., 94 Mass. 298; Manufacturers' Insurance Co. vs. Loud, 99 Mass. 146; Portland Bank vs. Apthorp, 12 Mass. 252 (1815), the basis of all subsequent decisions. 2 Western Union Telegraph Co. vs. Massachusetts, 125 U. S. 530. ' Nichols vs. Railroad Co., 42 Conn. 103. ■* State vs. Insurance Co., 89 Ala. 335; State vs. Railway Co., 37 Mo. 265. ' Fox's Appeal, 112 Pa. 359; Commonwealth vs. Standard Oil Co., 101 Pa. 1 19; Phoenix Iron Co. vs. Commonwealth, 59 Pa. 104; Catawissa Appeal, 78 Pa. 59. » 101 Pa. 127. ' People vs. Home Insurance Co., 92 N. Y. 328; Singer Co. vs. Heppen- heimer, 25 Vroom, 439. THE TAXATION OF CORPORATIONS 235 quent case, the court said, although indeed obiter, that the New York tax was " a franchise tax in the nature of an income tax." ^ Finally, in a later case, the tax was definitely pronounced to be on franchise, the court holding that the tax was not upon the capital stock nor upon any bonds of the United States com- posing a part of that stock; but that reference was made to the capital stock and dividends only for the purpose of deter- mining the amount of the tax to be exacted each year.^ This decision may be defended on economic, as well as on legal, grounds. It may be granted, and in fact it is difficult to dispute the contention, that the tax is in one sense a tax on capi- tal stock. Nevertheless, it does not follow that the tax is a prop- erty tax; for from the economic point of view capital stock is not necessarily identical with the property of a corporation. In the first place there is the question of the market or par value of the stock. Some of the commonwealths, as we know, tax corporations on the amount, i.e. the par value, of the capital stock. Yet manifestly, where the market value of the stock may be double or half the par value, it cannot be maintained that the latter is identical with, oi: an index to, the value of the property. In no sense, therefore, can capital stock at its par value be declared equivalent to the whole property. Even if we take the market value of the stock, we are not in a much better position, for many of our corporations, especially rail- roads, are created on the proceeds of the bonds. In such cases, although the property may be great, the profits are devoted mainly to meeting the interest on the bonded debt, and since there may be no dividends, the value of the stock may be very sfight. Yet the property which produces these profits may be enormous. Evidently the capital stock and the whole property are not identical. But we may go still farther. Even in the case of corporations without a bonded debt, but whose property does not pay good dividends, the capital stock at its market value is no index of the value of the property. Thus, a model-dwellings company may have property worth a milfion dollars; yet if it is so managed as to pay no dividends, the stock will sell in the market for a very small sum. The value of this depreciated stock is evidently not the same as that of the company's real property. They are not interchangeable terms. Hence, from • Or, as it was said in another place, " a tax upon its franchise based upon its income." Mercantile Bank vs. New York, 121 U. S. 158, 160. 2 Home Insurance Co. vs. State of New York, 134 U. S. 594. 236 ESSAYS IN TAXATION whatever point of view we regard it, capital stock is not identical, economically speaking, with the total corporate property; a tax on capital stock is not a tax on the entire property. The courts of New Jersey, New York and the United States are then quite right in their decisions; and the Pennsylvania cases seem to be incorrect both in law and in economics. The third case in which the question of a franchise tax is of importance is in coimection with the subject of interstate commerce. The growth of the interpretation put upon the principle that no state may levy a tax interfering with interstate commerce will be more fully discussed hereafter.^ It may be stated here, however, that in a large number of cases it has been held that a tax on the franchise of a domestic corporation is vaUd even though the value of the franchise is measured by the gross receipts, a part of which are derived from interstate commerce.^ Were the tax not a franchise tax, it might be invalid as a tax on interstate business. It will be seen from the above review that the entire treat- ment of this kind of a franchise tax is based largely on a legal fiction. The conception is legal, not economic. It was de- vised by the legislatures and extended by the courts in order to evade the evil results of the general property tax.^ It is remarkable that in the state of New York, where the common- wealth tax on capital stock is held to be a franchise tax, the local tax on capital stock, which is levied in almost the identical way, is held to be a property tax. In the local tax a deduction must be allowed for any non-taxable property in which the capital may be invested; in the state tax no such vdeduction is permitted.^ Such a distinction is economically incorrect, ' Infra, pp. 264 et seq. 2 State Tax on Railway Gross Receipts, 16 Wall. 284; Maine vs. Grand Trunk R. R. Co., 142 U. S. 217; People vs. Wemple, 117 N. Y. 136, and other cases cited below. ' This is apparent from the New York law of 1866, chap. 761, which declared the privileges and franchises of savings banks to be personal prop- erty, and taxable to an amount not exceeding the gross sum of the surplus earned. In Monroe County Savings Bank vs. City of Rochester, 37 N. Y. 365, the law was upheld, although the bank had a portion of its property invested in United States bonds. The court held that since the tax was upon a franchise it was unimportant in what manner the property of the cor- poration was invested. "The reference to property is made only to ascer- tain the value of the thing assessed." * People vs. Barker, 139 N. Y. 55; People vs. Commissioners, 72 Hun, 126; People vs. Coleman, 126 N. Y. 433. THE TAXATION OF CORPORATIONS 237 however defensible it may be on the legal ground that in the one case we are dealing with a tax on property and in the other with a tax on privilege. Except in so far as corporations may be made to pay for their charters, there is no reason why they should be put on a different footing from joint-stock companies or other associations. Th6 ability of an association to pay — its earning power — is not changed a whit by the simple fact of in- corporation. The privilege of limited liabiHty, however im- portant it may be to the individual stockholders and however great the amount that may be demanded for the privilege as a condition precedent to organization, does not alter the taxable capacity of the association after it has once become a corpora- tion. If the corporate franchise, in the sense of the privilege of being a corporation, itself constituted the only justification of a tax, how would it then be possible to tax unincorporated com- panies in the same way? And yet to exempt the latter would clearly constitute a glaring economic inequality. The value of the franchise from the economic point of view consists in the earning capacity of the corporation. That is the real basis of all taxation and can best be gauged by the amount of business done. It \\'ill be remembered that the court says: "Whether the tax upon a domestic corporation be called a tax upon franchise or upon business is wholly unimportant." ^ We may go farther and say that from the economic standpoint it is wholly immaterial whether the tax upon any corporation be called a tax enfranchise or a tax on business. In an economic sense the franchise tax means nothing at all. It is so utterly in- definite that it defies exact analysis. However valuable it may be to the lawyer in the effort to evade certain constitutional restrictions, to the student of the science of finance it is a useless conception. If we sum up the above discussion as to the two kinds of franchise tax which we have been studying — the franchise tax as a property tax and the franchise tax as a non-property tax — we are in a position to gauge its real value. The first kind of a franchise tax, as we now know, was devised in order to fit a concept based primarily upon earnings or income into a system of taxation based on property or capitalized income. The second kind of a franchise tax was devised, as we have seen, to over- come the still remaining difficulties of a property tax. The objection to the first kind of a franchise tax is that as a property 196 N. Y. 396. 238 ESSAYS IN TAXATION tax it is a mere piece of guess work, leading to arbitrariness and furnishing no opportunity for effective redress on the part of the taxpayer. The objection to the second kind of a franchise tax is that it is a mere makeshift or legal subterfuge. Both kinds of franchise taxes furnish eloquent testimony to the shortcomings of a tax system where the criterion qf ability to pay is still made to reside in property rather than in product or income. For all the manifold complications and litigations that attend the American franchise tax are unknown elsewhere in the world where the general test of faculty in taxation is considered to be income rather than property. The problem of the franchise tax is a part of the problem of the general property tax; if we ever shake off the incubus of the general property tax theory, as we are bound to do in the not distant future, the entire problem, and the conception itself, of the franchise will disappear from the realm of taxation. II. Economic Theory Let us therefore leave this whole subject of franchise taxation and attempt to analyze the economic principles underlying the taxes actually in vogue, irrespective of the question whether they are called franchise taxes. It will be best to take them up in the order adduced above.^ The general property tax, or the taxation of the corporate realty plus its visible and invisible personalty at its actual value, assessed piecemeal by the local assessors as in the case of in- dividuals. It will not be necessary to show the inadequacy of this primitive plan; all the actual reforms are moving away from it. With the variation of this system known as the ad valorem tax, assessed by a state board under the unit plan, we shall deal below. But so far as the general property tax with local piecemeal assessment is concerned, we may conclude with the railroad tax commission of 1879, that as a system it is open to almost every conceivable objection.^ The cost of the property. As a basis for taxation this is even less defensible than the value of the property. For no one would assert that the original cost of corporate property bears any necessary relation to the present value, much less to its ' Supra, pp. 219-220. 2 Taxation of Railroads and Railroad Securities, by C. F. Adams, W. B. Williams and J. H. Oberly (1880), p. 8. THE TAXATION OF CORPORATIONS 239 present earning capacity. This method is so obviously unjust as to deserve no further mention. The capital stock at its market value. This plan is open to several vital objections. The idea is that the market value of the stock will be practically equivalent to the value of the property, or, as it is put by some of our state courts, that the entire property of a corporation is identical with its stock. As has already been observed, heavily bonded corporations would in this way entirely escape taxation; because in such cases — and they are the great majority — the capital stock alone would not represent the value of the property. Secondly, even in the case of corporations without any bonded debt, the tax is unjust, because it does not necessarily bear any rela- tion to the earning capacity. If a company without bonded debt pays dividends, the value of the stock is indeed a fair index to earning capacity; its value would represent the capitalized earnings. But if there are no dividends, the value of the capital stock is wholly uncertain and largely speculative, depending on the manipulations of the stock exchange. It frequently happens that non-dividend-paying stock fluctuates in value from thirty to fifty per cent within one year. A standard of taxation which in such large classes of cases bears no propor- tion to the earning capacity or productiveness of the property clearly cannot be successfully defended. We can again agree with the railroad tax commission in their conclusion that the tax on the value of the capital stock is "clumsy and devoid of scientific merit," that it "would admit of evasions in a most obvious way," and that "it is impossible of any general appli- cation." ^ The New York statute which governs the taxation of cor- porations for local purposes requires the capital stock to be assessed "at its actual value in cash." In determining the "actual" value, the assessors may take "book value," i.e. a value obtained by estimating the assets separately and deduct- ing from the aggregate the total amount of the liabilities, actual or contingent.^ The latter method is employed when the market value of the stock is fictitious or artificially inflated, but in principle is open to precisely the same criticism as the other ' Report, etc., p. 7. Cf. the Report on the Valuation and Taxation of Railroads, to the Pennsylvania Tax Conference, 1894, written by Mr. Joseph D. Weeks. 2 107 N. Y. 541. 240 ESSAYS IN TAXATION method. In fact, the objections are rather stronger; for, whereas in the case of the tax on capital stock according to market value the bonded indebtedness is not taxed at all, in this case the bonded indebtedness is actually deducted. Under the New York law it has been decided that "capital stock" does not necessarily mean share stock, but the capital owned, the fund required to be paid in and kept intact as the basis of the business enterprise. When the capital is undisclosed, the assessor may consider the market value of the shares as an aid in dis- covering the capital, but not as the thing to be valued and assessed.^ In the state franchise tax, however, whenever the law requires the " intrinsic or actual value " of the stock to be ascertained, it has been held that book value does not govern the valuation, but that the good will is also to be included.^ According to the Peimsylvania law of 1891 the capital stock on which the tax is assessed is to be appraised "at its actual value in cash, not less however, than the average price which said stock sold for during said year and not less than the price indicated or measure by net earnings, or by the amount of profits made and either declared in dividends or carried into surplus or sinking funds." This has led to much litigation. It has been decided, for instance, that the price at which the shares sell in the market is not conclusive;' and in a more general way that the actual value in cash is to be determined by " considering the value of the tangible property, the amount of its business, the rate of dividends declared, and the extent and value of its good will, franchises, and privileges, as indicated by the evidence bearing upon those subjects at that particular time.^ The result is that in practice the taxation of capital stock, by such a method of appraisal, does not differ much from the ad valorem system mentioned below. The capital stock at its par value. This method is open to all the objections of the preceding and to many more in addition. Moreover, it is peculiarly liable to evasion. For example, in New York it was a common practice, before the recent reduction of the rate to a minimum, for corporations to evade the organiza- ' People vs. Coleman, 126 N. Y. 433, distinguishing many preceding cases. See also People vs. Commissioners, 72 Hun, 126 (1894). 2 People ex rel. J. B. Co. vs. Roberts, 37 App. Div. 1 (1899); and People ex rel. Johnson Co. vs. Roberts, 159 N. Y. 70 (1899). ' Com. vs. Philadelphia Co., 164 Pa. 284 (1894). * Com. vs. John W. Haney Co., Lim., 1 Dauph. Co. Rep. 184 (1895); cf. Com. vs. Del., Susq. & S. R. R. Co., 165 Pa. 44 (1894). THE TAXATION OF CORPORATIONS 241 tion tax by issuing a nominally small capital, but selling it to the stockholders at a premium of several hundred per cent; the market value of the stock thus being many times the par value. The sole recommendation of this plan is the facility of fixing a basis for assessment; but this does not compensate for its obvious defects. The par value of stock is certainly no gauge either of the real worth of the property or of its earning capacity. This is perhaps the least defensible of all the methods. The capital stock plus the bonded debt at the market value. The justification for adding to the value of the stock the value of what the company owes, in the shape of its funded debt, is the simple fact that the existence of this indebtedness makes the stock worth just so much less. The sum of the two elements is a far better index to the value of the property than the capital stock alone. This method is preferable to any that has hitherto been discussed, because it prevents the exemption of heavily bonded companies; and yet it is not entirely free from objec- tions. Owing to the complications of interstate polity, the proceeds of the tax, in all cases where the stock and bonds of a corporation are owned outside of the commonwealth, will accrue not to the state of the owner's residence, but to the state where the corporate property is situated. Secondly, the market value of bonds depends not only on the rate of interest but also on the life of the security. Two companies may have raised exactly the same amount from the sale of 6% bonds, and yet at any given time the bonds of the one corporation may have a long time to run and those of the other corporation only a short time. If the normal rate of interest has fallen to let us say 4%, the market value of the bonds of the first corporation will be far higher than that of the bonds of the second corporation. Yet the discrepancy represents not "any difference in the value of the respective corporate properties, but simply the difference in the amortization quota of the two classes of bonds. Thirdly, when the tax is on bonds as well as on stock it will be inadequate, because applicable only to the bonds owned by residents of the state. If the tax is, however, levied not on the bonds, but on a valuation equal to the stock plus bonds, this objection may be obviated. Both these points will be discussed more fully below. Fourthly, in ail those cases where the corporation pays no dividends and its stock nevertheless possesses a speculative value, the tax, for the reasons adduced above, will not necessarily bear any 242 ESSAYS IN TAXATION relation to the earning capacity of the company. In short, while this method is far better than the taxation of capital stock, it does not avoid all the objections that have been xirged againsl the latter. There remain thus only the taxes on earnings, on business, on dividends and on profits. The gross earnings. This tax was the one recommended by the railroad tax commission. It possesses many xmdeniable advantages. It is certain, easily ascertained and not susceptible of evasion. But it has one serious defect; — it is not propor- tional to the real earning capacity, it takes no account of the original cost, nor does it pay any regard to the current expenses, which may be necessary and just. For example, when the cost of building a railroad is great, its gross earnings must be correspondingly large in order to enable its owners to realize any fair return on the investment. A tax on gross earnings does not recognize this distinction. It discriminates unfairly between companies, and makes a line built at great expense and with great risk pay a penalty for the enterprise of its con- structors. Again, a gross earnings tax takes no account of expenses. Of two corporations which have equally large gross receipts, one may be in a naturally disadvantageous position which unduly increases the cost of operation or management. Clearly its ability to pay is not so great as that of its rival in possession of natural advantages. Above all, the gross earnings tax makes no allowance for good management. If a corporation is managed with such ability that its business increases greatly, this will ordinarily mean a great increase in gross receipts; while, on the other hand, the net receipts or profits, although also larger, will almost surely increase not indeed in a smaller ratio, but to a smaller actual extent, than gross receipts. For with a larger business there come greater expenses. The prospect of increased net receipts is of course the stimulus to activity on the part of the owner; but if the tax is imposed on gross receipts, that stimulus will be pro tanto weakened. Thus a tax on gross receipts is really a tax on enterprise and foresight, and a premium on supineness or inactivity. In short, the gross receipts tax is like the old tithe, the most primitive of all land taxes. These defects in the proportional earnings tax are so ap- parent that several commonwealths, as we know, have intro- duced, in the case of railroads at least, the graded gross earnings THE TAXATION OF CORPORATIONS 243 tax, the rate per cent increasing with the earnings. But this system removes the objection only in part; for the graduation takes place only up to a certain point. Above all, there is no guarantee that the increase of net receipts will correspond to the increase of the gross receipts. There is no necessary con- nection between them. A corporation with gross receipts of five thousand dollars per mile may have actually less net receipts than one with four thousand dollars per mile. In such a case a graded earnings tax- would intensify the disadvantages of the first line and augment the injustice. To tax gross earnings is, therefore, in theory at least essentially a slip-shod method. In practice, however, as we shall see, its administrative advan- tages are so marked as to render the gross earnings tax under certain circumstances desirable. The business transacted. This tax, while closely analogous to the gross earnings tax, does not possess all its advantages. The business may be large but not lucrative. An extensive business does not mean even proportionally extensive gross earnings. The business transacted is an exceedingly rough way of ascertaining the prosperity of a corporation. It affords no accurate test of profits, and fails to take account of the personal equation which may make all the difference between good and bad management. Clearly, the tax on business is but a clumsy device. The dividends or the capital stock according to dividends. Economically speaking these taxes are the same; but from the legal point of view, at least according to the opinion of the Supreme Court, there is a decided difference. The dis- tinction is brought out in connection with the subject of extra- territoriality, and will be fully discussed below. We are here deaUng only with the economic problem. The dividends tax, it may be said, is good so far as it goes; but it does not go far enough. It is indeed true that some of the objections are slight. Thus it has been contended that this tax fails to reach the profits which are not divided but which are simply put into a reserve fund; and some common- wealths have even sought to obviate the supposed difficulty by providing that the tax should apply to the dividends, whether declared or merely earned and not divided. This objection, however, is not of great importance; for even if the undivided earnings are not taxed, they go into the reserve or surplus fund; and as this increases the corporate capital, it must in the long 244 ESSAYS IN TAXATION run lead to increased earnings on the larger capital. Since the surplus cannot be increased indefinitely, it will ultimately find its way to the shareholders as dividends, and thus become liable to the tax. Another objection which might be urged is that a corpora- tion may devote a portion of its earnings to new construction or to new equipment. This expense may be defrayed out of profits, instead of from the capital or construction fund. The dividends in such a case, it might be said, do not represent the actual earning capacity of the enterprise. While this is true temporarily, the improvements made by the corporation necessarily enhance the value of the property and ultimately lead to increased dividends, so that in the long run a tax on dividends would still reach the corporation. The real objection to the dividends tax is of quite a different character. It is inadequate when applied to those corpora- tions which have bonded indebtedness. Thus one corporation having no bonds may earn enough to pay dividends of five per cent on its stock, while another, with the same earnings, may have devoted half to the payment of interest on bonds, and only half to the payment of dividends. A tax on dividends, while nominally just, would be actually most unjust, for one corporation would pay just twice as much as the other. The objection has been recognized in American legislation, but only once. The United States internal revenue law of 1864 pro- vided for a five per cent tax (raised from three per cent in 1862), which, in the case of railroads, canals, turnpike, naviga- tion and slackwater companies, was imposed on all dividends, as well as on all coupons or on all interest, on evidences of indebtedness and on all profits carried to the account of any fund. In the case of those companies which were not presumed to have any bonded debt, like banks, trust companies, savings institutions and insurance companies, the tax was imposed only on dividends and surplus. The federal law, indeed, violated strict consistency in imposing a gross earnings tax also on transportation and on certain insurance companies; but the correct implication in the law was the inadequacy of a tax on dividends alone. On the other hand, the federal law of 1909 imposing an excise tax of 1% on the "net income" of corporations is open to serious objections. For it permits among the deductions from gross income all interest actually paid in the year on bonded or other indebtedness up to an THE TAXATION OF CORPORATIONS 245 amount of debt equal to the paid up capital. That is, since interest on the bonds is not taxable, the tax is virtually levied on dividends, or at all events on the sums available for divi- dends. In fine the objections to the dividends tax are closely analogous to those which we found in the capital stock tax as compared with the tax on stock plus debt. Its great defect is that it reaches only a part of the corporate earning capac- ity. \Ve thus come finally to the tax on net earnings, or rather on net receipts, profits or income. This is the most logical form of corporate taxation. The tax is not, like the gross earnings tax, unequal in its operation. It holds out no induce- ment, like the general property tax, to check improvements. It is just; it is simple; it is perfectly proportional to productive capacity. In short, it satisfies the requirements of a scientific system. Several objections, however, might be raised to a tax on net receipts. One is that the accovmts may be " cooked " by pa3dng unduly large salaries to the officers; that is, the profits may be divided as nominal expenses, thereby leaving very insignificant net receipts or none at all. This objection, however, would not apply at all to the vast majority of corporations, whose stock or bonds are held by outside parties, that will not consent to see their dividends or interest curtailed by any practices of this nature. The danger can be real only in respect to the few cor- porations in which the stock is owned entirely by the managers. But these are chiefly manufacturing corporations, which, as we know, are usually exempted from the general corporation tax. Even here, however, the danger is not very great. We hear of no complaints on this score in the American common- wealths where the net receipts tax prevails; and in Europe, where this method of taxation is well-nigh universal, the objec- tion has never been raised. It may thus be pronounced of little importance. Secondly, it may be contended that the tax is impracticable in the case of great railroad corporations which, having leased lines in other states, are interested in so manipulating the traffic that the heavily mortgaged leased lines will earn little or nothing above fixed charges. Such cases are very common. The commonwealths in which such leased lines are situated will, it is argued, be robbed of the whole benefit of the tax; since the proceeds accrue to the state of the parent company. In reality. 246 ESSAYS IN TAXATION this objection arises simply from a quibble about words. Of course net receipts must be strictly defined. The logical basis of corporate taxation is the total annual revenue from all sources minus all actual expenditures except interest and taxes. The reason for not deducting fixed charges, i.e. interest on the bonds, is the same as that which leads some cf the states to levy the railroad tax on capital plus debt, and which made the federal government in 1864 tax coupons as well as dividends. Both together represent earning capacity.-' Although the interest on the funded debt is known by the name of fixed charges, it is really part of the profits which, in the absence of funded debt, would go to the shareholders as dividends. It would obviously be suicidal so to frame the definition of net receipts as to ex- clude this interest on bonds. Net receipts of a corporation mean gross receipts minus actual current expenses. Any other defini- tion would confuse the whole conception. In several commonwealths some very dubious and arbitrary distinctions have been attempted. The Minnesota courts have held that "earnings" means only receipts from operation.^ Under the New York law it has been held that "income " means gross income, and that "profits" means gross profits, not clear profits; ^ but this decision was owing to some peculiarities of the statutory phraseology. From the standpoint of the science of finance we understand by "income," net income, and by "prof- its," only net profits. So in Peimsylvania and Alabama it has been held that income, gains or net earnings means the whole product of the business, deducting nothing but expenses.'* In Pennsylvania it has been well settled that net earnings are the excess of gross earnings over the expenditures incurred in producing them and the amount incurred in necessary repairs, but not including the amount expended in enlarging or ex- tending the works. ^ The Thurman law, indeed, which regulated the relations of the federal government to the Pacific railroads, defined net earnings in a different way, viz., as the gross earnings, 1 Cf. supra, pp. 106-107. ' State vs. Railroad Co., 30 Minn. 311. ' People vs. Supervisors of Niagara, 4 Hill, 20; People vs. Supervisors of New York, 18 Wend. 605. * Commonwealth vs. Pa. Gas Coal Co., 62 Pa. 241 (1869); Board of Rev- enue vs. Gas Light Co., 64 Ala. 269. In the case of mines, "net proceeds" have been defined; Montana Code, § 1791. ' Com. vs. Minersville Water Co., 13 Pa. C. C. 17 (1893); and Com. vs. Sharon Coal Co., 164 Pa. 284 (1894). THE TAXATION OF CORPORATIONS 247 deducting "the necessary expenses actually paid within the year in operating the Hnes and keeping the same in a state of re- pair," and also deducting "the sums paid by them in discharge of interest on their first mortgage bonds," but "excluding all sums paid for interest on any other portion of their indebted- ness." ^ The explanation of this arbitrary definition hes not in any economic principle but in a particular legislative provision whereby the first mortgage bonds were given precedence over the government liens. The Supreme Court has held that "net earnings" as here used exclude expenditures for new construe tion and new equipment.^ In Virginia the taxable net income of corporations was formerly ascertained by "deducting from gross receipts the costs of operation, repairs, and interest on indebt- edness." So also by the federal law of 1909 the excise tax is vitually levied only on corporate dividends; but this, as we have seen, is economically incorrect. Interest on bonds should not be exempted. If it be desired to obtain in the case of railroad companies a more exact definition of net receipts or income, the following would be a soimd method of procedure: Gross receipts consist of all earnings from transportation of freight and passengers, receipts from bonds and stocks owned, rents of property and all miscellaneous receipts from ancillary business enterprises or otherwise. From these aggregate gross receipts we should deduct what are classified by the Interstate Commerce Com- mission as operating expenses.' No deduction should be made for fixed charges, i.e. for taxes or for interest on the debt, or for the amount used in new construction, in betterments, in invest- ments, in new equipment, or for any of the expenditures that find their way into profit and loss account. The method here suggested would lead to the abolition of one of the serious abuses of American railway management — that of putting all possible expenses into the construction ac- count. The railways, for example, formerly often failed to • Act of May 7, 1878, 45th Cong., 2d Sess., chap. 96, sec. 1. 2 Union Pacific R. R. Co. vs. United States, 99 U. S. 419. ' The operating expenses which it is permissible to deduct from the gross receipts are defined as "maintenance of way and structures" including: " repairs of roadway and renewal of rails and ties; repairs and renewal of bridges and other structures; maintenance of equipment; conducting trans- portation, including: salaries and wages in the operating department, supplies, car mileage, switching charges, damage for injuries, advertising, outside agencies and commissions; and general expenses." 248 ESSAYS IN TAXATION charge the maintenance and repair of their rolling stock to cur- rent expenses. When the equipment has become unserviceable, new stock is bought and charged to the construction or to the profit and loss account. In the meantime the nominal earnings of the railway seem large, and the managers reap whatever temporary benefit they may desire. The taxation of net profits in the sense that has been indicated would tend to check this practice, since deductions would be allowed for maintenance, but not for new equipment. A tax on net receipts, thus, prop- erly defined, would possess not only a financial, but also a wider economic advantage. The federal corporation tax of 1909 gives a definition of net income which is clear and satisfactory, with the exception, as noted above, that it permits deductions for taxes and for inter- est on debt. Omitting these two points, the definition is as follows: "Such net income shall be ascertained by deducting from the gross amount of the income received within the year from all sources: (First) All the ordinary and necessary expenses actually paid within the year out of income in the maintenance and operation of its business and properties, including all charges such as rentals or franchise pajonents, required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property, if any, and in the case of in- surance companies, the sums other than dividends paid within the year on policy and annuity contracts and net addition, if any, required by law to be made within the year to reserve funds : [(third) and (fourth) omitted as representing taxes and interest] ; (fifth) all amounts received within the year as di^ddends upon stock of other corporations, etc., subject to the tax herein imposed." ' So far as intra-state carriers are concerned, most of the state commissions now follow the system prescribed by the federal ' In an interesting memorandum by a number of prominent accountants attention is called to the fact that it would have been far more in consonance with modern accounting methods to substitute for the words "expenses actually paid" the words "expenses actually incurred"; and for the words "losses actually sustained" the words "losses actually "ascertained". See The Corporation Tax Law of 1909. A Letter to the Members of the American Association of Public Accountants together with Copies of Correspondence with the Attorney General. New York, 1909. THE TAXATION OF CORPORATIONS 249 commission. As to other public-service corporations less prog- ress has been made, although the public-utility commissions in some important states like New York, New Jersey and Wis- consin have laid down equally minute rules applicable to these. With every year, therefore, the objections to the net earnings rule based on inability to define net earnings are losing force. A final objection, occasionally urged, is that the net earnings tax is inadequate for the reason that corporations sometimes have no net earnings while the government always needs a revenue. This objection, however, is without much weight. For if the accounts are carefully prescribed, the absence of net earnings will be far less frequent than is commonly feared; and if it nevertheless happens that in any particular year a given corporation actually earns nothing, there is no reason why it should be called upon to pay the tax. If the rule — no net earn- ings taxation because of the possibility of no net earnings — were strictly followed, it would render impossible any general income tax on individuals; and yet, as we know, the tendency through- out the world is towards an income tax. The fact that individ- uals here and there fail to secure an income from their business or otherwise is not considered any valid objection to the imposi- tion of an income tax in general. Corporations, like individuals, normally make profits; and where losses are incurred by some, they are more than compensated by the profits of others. The public revenue continues because of the balance of profit mak- ers. Moreover it must not be forgotten that under a proper system of taxation, a corporation even without any net earn- ings would still be subject to taxation on its real estate for local purposes. But to tax a corporation for state purposes on its property when the property yields nothing, or on its gross receipts when the receipts are all swallowed up by necessary expenses, is assuredly not to be defended on any principle of equity, as a permanent rule. Above all, however, if in the exceptional case of no net earnings it is still desired to secure a revenue it is easy to adopt the simple solution of the problem, as practised in Austria.^ The tax there is levied on net earnings, but in no case is permitted to be less than a certain percentage of the corporate capital. In this way net earnings are reserved as the normal basis of the tax, and yet some revenue is assured to the government. ' Cf. infra, p. 263. 250 ESSAYS IN TAXATION III. Practical Reforms It is clear from the above discussion that the various methods that have been reviewed, have both advantages and drawbacks. Practically, however, there are two fundamental questions: (1) Shall we choose a tax on property in preference to a tax on earnings? and (2) If the first question is answered in the negative, shall we choose a tax on gross earnings in preference to one on net earnings? The problem involved in the first question is the advisability of the ad valorem system. This system, it will be remembered, differs from that of the general property tax discussed above, ^ in that the assessment of corporate property is made as a unit by a state board. There is no doubt that the ad valorem system constitutes a decided advance over the primitive methods of the general property tax, not only because a valuation according to the unit rule, conducted by a state board, is at once more effective and more equal than the disjointed system, or lack of system, involved in the piecemeal assessment by local officials; but also because the ad valorem system now usually includes the value of the franchise, which it is well-nigh impossible to reach by local methods. So much can freely be admitted. But what shall be said of those states, like Michigan and Wisconsin, which have reverted from an earnings to an ad valorem system? Are we to consider this a step forward or a step backward? The reasons for this reversion were twofold. In the first place, the earnings tax was imposed on gross earnings and some dissatisfaction was manifested with the lack of equality as between the corporations. We are told that " the principal objection was the inequalities produced in the relative amount of taxes paid by the different companies. The plan provided for' a certain per cent of the gross earnings per mile and was graduated. It may have been the fault of the graduating, but the fact remains that the tax was not an equitable one and the system was abolished." ^ As a matter of fact, however, this was not the principal objection. Of far greater weight was the second reason for the change, namely, the desire for so- called equal taxation as between individuals and corporations. ' Supra, pp. 145-148. ''Cf. Sixth Report of the Board of Tax Commissioners. Lansing, 1911, p. 55. THE TAXATION OF CORPORATIONS 251 It was claimed, and the claim was undoubtedly well founded, that the property of the public-service corporations was not taxed at the same rate as that of individuals. It was pointed out that these corporations were practical monopolies, and it was alleged that their charges were extortionate, their profits inordinate, and their owners, while enjoying special privileges, unwilling to bear their fair share of the public burdens. This cry of equal taxation won the day, and the simplest method of carrying out the mandate of the people seemed to be to make all corporate property liable equally with that of individuals. It will at once occur to the critic to ask: if the gross earnings tax was objectionable chiefly on the ground of inadequacy, why would it not have been better simply to increase the rate of the tax and to leave all the machinery unaltered? It ap- peared, however, to those in charge of the movement in both Michigan and Wisconsin that an increase in the rate of the gross receipts tax .would be difficult to accomphsh in the face of the powerful interests engaged, and that a far more effective and more easily understood battle cry would be that of the equal taxation of all property. This argument prevailed, and it is not to be denied that it may have been the part of political wisdom in those states; although it must be borne in mind that b6th in Minnesota at the time and in California a few years later the other argument proved equally effective as a political shibboleth, and that the desired equahty was brought about simply by the imposition of higher gross earnings taxes. Moreover, from the point of view of tax reform in general, this demand for "equal taxation" of property must be pro- nounced regrettable and even mischievous. No one of course will dispute the desirability of equahty in taxation; but it is necessary to define more exactly what this really implies. If a satisfactory norm of taxation, or criterion of ability to pay, is selected, equality in the application of this norm is assuredly to be desired. But, as we have seen in an earlier chapter, property in general is no longer an adequate test of ability to pay. Equal taxation, so far as property is concerned, is supposed to mean the continuation of the general property tax, undiffer- entiated and unclassified. This theory, which is still so widely held by the average American, is really responsible for all our troubles. As we have seen, progress is taking place here, as it took place elsewhere, through a splitting up of the general property tax, through a classification of property and through 252 ESSAYS IN TAXATION a differentiation of taxation. Moreover, it is none the less true that equality does not necessarily mean the identical tax p,t the same rate on every particular piece of property. But if this is so, and if, as is now not infrequently the case, we select certain kinds of property and tax them in a different manner or at a different rate, why, it may be asked, is not the same method applicable to corporations also? The cry for "equal taxation" reflects credit on the general intuition or instinct of the partisans of the ad valorem system, but it does not reflect the same credit on their knowledge. For a more adequate acquaintance with fiscal theory would have brought them to the conclusion that the equal taxation of property in modern times does not necessarily mean the equal taxation of the property owner; or to put it in another way, that the equal taxation of the taxpayers — whether individuals or corporations — does not necessitate an equal taxation of their property. The test of equality under modem conditions is as we now know no longer to be found in the undifferentiated mass of property. It is instructive to note, moreover, that in the very state where the battle for ad valorem taxation was won on the plea that corporate property was undertaxed, the old principle should be thrown overboard, in the face of the weU-founded complaints on the part of some corporations that they are now overtaxed. We read in a recent report of the special com- mission in Michigan the following: "This complaint (of inequality) must be considered in connection with the fact that the properties to be assessed by the state board of assessors forms a class different from that assessed under the general tax law. Where it is possible to separate property into classes for purposes of taxation, it is permissible to impose varying rates upon the different classes. "It is not the purpose of this system to make a discrimination be- tween the two classes, but if, incidentally in the process of adminis- tration, discrimination through a difference in rates arises, that fact does not even make a prima facie case against the equality of the tax levied through such a board of assessors or against the validity of the law." » In other words, "equal taxation" is to be invoked when it means a remedy for the relative over-taxation of individuals; '■ Report of Commission of Inquiry into Taxation. Lansing, Michigan, 1911, p. 53. THE TAXATION OF CORPORATIONS 253 but it is not to be invoked when it means the relative over- taxation of corporations. We may go still further and say that, entirely irrespective of the question of the basis of taxation, the attempt to put corpora- tions and individuals on precisely the same plane in matters of taxation is based upon an essentially erroneous theory and that it fails to distinguish between the principles applicable to nat- ural and to artificial personalities. For a corporation, after all, is a fictitious entity whose economic power consists of that of its stockholders and bondholders. The fundamental point of our whole contention is that corporations should not be treated like individuals, but should be subjected to special forms of taxation. It is gratifying to see that the truth of this contention is now being recognized by the specialists in Germany and Switzerland — the two countries where the most active discussion of these topics, outside of the United States, has taken place ^ — as well as by those of this country ^ and Canada. '■ "Gewiss ist bei den Aktiengesellschaften eine besondere Steuerkraft vorhanden, aber dieselbe kann durch die allgemeinen Subjektsteuem von Vermogen und Erwerb nicht in geeigneter Weise in Anspruch genommen warden. Unser Wirtschaftsleben ist so komplizirt, dass die Subjektsteuem allein zur Verwirklichung der Prinzipien der allgemeinen und gerechten Besteuerung nicht ausreiohen. Dazu ist ein System versciiiedenartiger Steuern notwendig . . . und in einem sololien Steuersystem darf eine spezielle Aktiengesellschaftssteuer nicht fehlen. Denn auf die Aktiengesell- schaften mtissen, dem Wesen dieser Korporationen entsprechend, bes- ondere Steuergrundsatze Anwendung finden." — Dr. W. Gerloff, Die kantonale Besteuerung der Aktiengesellschaften in der Schweiz. Bern, 1906, p. 190. A s imil ar conclusion is reached by the chief German writer on the sub- ject. "Fassen wir das Ergebnis unserer la-itischen Betrachtung der Be- steuerung der Aktiengesellschaften durch die deutschen Personalsteuem zusammen, so miissen wir als den Grundfehler der deutschen Gesetzgebung bezeichnen, dass sie sich an die juristische Personlichkeit der Akti- engesellschaft klammert, den wirthschaftlichen Charakter der Unterneh- mungsform aber in keinerlei Weise beriioksiehtigt. Von diesem rein forma- len Ausgangspunkte aus gelangt sie dazu, die Aktiengesellschaften den physischen Personen nicht blosz in handelsrechthcher, sondern auch in steuerUcher Beziehung gleich zu stellen (itahcs mine). Dass aber dieses fiber einen Kamm Scheren nicht ohne Gewaltanwendung und ohne Hint- ansetzung der Prinzipien der Personalsteuem moglich ist, zeigen schon die mannigfaltigen Modifikationen die an den Steuergesetzen vorgenommen werden mussten um den fiir physische Personen bestimmten Steuerrock auch fiir die Aktiengesellschaften einigermaszen passend zu machen." — L. Blum, Die stenerliche Ausnutzung der Aktiengesellschaften in Deutschland. Stuttgart, 1911, pp. 1-32-133. 2 Cf. the conclusion of Dr. G. E. Snider in his careful study, The Taxation 254 ESSAYS IN TAXATION The Canadian commission which was instituted to probe this question to the bottom puts the matter so clearly as to deserve quotation in detail. After a comprehensive statement of the actual facts and after pointing out the various distinctions of fiscal importance between individuals and corporations, the commission proceeds: "In the light of the facts here pointed out it is quite obvious that the popular belief and claim that corporate property can. and should be assessed and taxed on exactly the same basis as private property is quite impossible of realization. A survey of the actual practice of taxation in different states and provinces reveals the fact that, where both corporations and private individuals are professedly taxed on the same basis of real and personal property, the greatest inequaUty actu- ally prevails. Thus, if the tax is levied on tangible property . . . cor- porations are found to be taxed very lightly as compared with indi- viduals. But where the so-called ad valorem or general property tax has been apphed to corporations, in such a way that their real and personal property is valued by capitalizing the income which the cor- porations derive from their whole business, as in the case of the new valuations in Michigan and Wisconsin, and, in milder form, in several other states, the result has been to very considerably overtax corpora- tions in proportion to private property. ... To place the capitalized income of corporations upon the same basis as the general property of private individuals is plainly neither an accurate nor an equitable adjustment of taxation, as between corporate and private property. of Gross Receipts of Railways in Wisconsin, Publications of the American Economic Association, Third Series, vol. 7, no. 4, 1906. After quoting the statement of the Wisconsin commission that "The safety of all interests rests on the principle of uniformity between all classes of property . . . there must be equality between the classes as well as between the property in the same class," Dr. Snider remarks (p. 120): "Such a program fails to rec- ognize modern industrial conditions and patent fiscal practices. . . . The tendency and necessity have been for segregation and classification rather than aggregation and unification of property. The industrial organization is now so complex that uniformity between classes of property is an indef- inite, indefinable and imattainable ' ideal.' What the Wisconsin and Mich- igan experience shows, what is made evident by the history of taxation in this country, is the selection of classes of property for special taxation. Real property has been the bearer in the past, corporations are having es- pecial attention at present, and especially corporations receiving special privileges from the state. A frank recognition of the true state of affairs would do much to clear away the debris in our tax systems. . . . Had the Wisconsin commission frankly recognized this principle and said 'we believe that the railways are able to contribute more revenue to the state, and that it is desirable to levy a heavier rate upon them,' the present sys- tem, based upon a false premise, with its possibilities of political corrup- tion, would not have been substituted for the tax on gross earnings." THE TAXATION OF CORPORATIONS 255 "Since then it is impossible to equitably tax private property and corporate property on the same basis, there is no necessary injustice or inequahty in taxing them upon different principles or by different pubUc authorities. In fact, it is the attempt to tax them both upon the same principle which works injustice and inequality, and it is only by taxing them upon different principles suited to each form of prop- erty that it is possible to attain to approximate justice and equality." ' We see then that the cry of "equal taxation " is really not an adequate reason for the introduction of the ad valorem system. For ia the first place "equal taxation of property " is in modern times not real equality of taxation; and secondly, the equality of taxation so far as it is desirable at all can be brought about as well by an earnings tax as by an ad valorem tax. It is entirely a question of the rate. So much for the negative side of the argument — ^namely that ad valorem taxation is not needed in order to achieve equality. We now come to the positive side of the argument — ^that the earnings tax is preferable. As we have seen above, if the basis of the corporation tax is to be put in terms of property, corporate property includes more than merely the physical property. The franchise or the immaterial elements in the property must be included. As soon, however, as an attempt is made to measure the value of the franchise, recourse must be taken, as we have learned, to earnings. It is a commonplace of modern economics that capital is nothing but capitalized income; or, to put it in terms familiar to every business man, a business or a piece of property is worth what it will earn. As the Wisconsin commission puts it : "It is the financial rule in the markets of this country and all over the world, that the worth of property is determined by what it will produce in income. If the permanency of the income is assured from past results xa operation, the risk of investment is less and the value more stable. The earnings in the opinion of financiers is the final test of the value of corporate securities, and the estunate of the earning capacity of railroads formed by such men and acted upon in buying and selUng of the securities in the market generally estabUshes the market price." ^ ^Report of Ontario Commission on Railway Taxation, Toronto, 1905, pp. 11-12. 2 First Biennial Report of the Wisconsin Tax Commission, Madison, 1903, pp. 185-186. In a later report the commission states : " As to nearly all such properties, this capacity to produce income will ordinarily be the dominant factor in ascertaining values." Fifth Report, 1911, p. 53. But the conclu- 256 ESSAYS IN TAXATION Where individual pieces of property are subject to purchase and sale in the market, the property or capital value is as readily ascertainable as the earning or income value. But where, as in the case of large corporations, there is no market or no regular purchase and sale, the only possible method of ascertaining capital value (or so-called property value) is by capitalizing the earnings, present and prospective. Hence the ad valorem system cannot satisfy itself with the inventory method, or the mere appraisal of the physical property of a corporation. It has been found necessary to add the valuation of the franchise; and as soon as this is done, the earnings method which has been abandoned is brought in again by a back door.^ The various boards of assessment as we have seen, generally refuse to divulge the exact method, for fear of an attack on their assessments. But that earnings is the chief factor in their appraisal is an open secret.^ It is not a matter for pride to read in a foreign commentary: "We see why it is, then, that though on almost every hand, even in the states which beMeved themselves forced to abandon it, the earn- ing power of corporations is held to be the only reliable and satisfactory basis of taxation . . . practically none of the American states find themselves able to frankly and fully accept it. Where it is employed, it is under some disguise or legal fiction, and commonly with the tacit consent of the taxpayer and taxing authority that the fiction shall not be called in question." ^ sion that therefore the ad valorem system should be continued by no means follows. ' " Thus, though earning power had been expr&sly discarded as a basis of taxation, and the ad valorem system adopted in its place, yet the more the Commissioners studied the subject in its practical operation, the more they were driven back to income as the leading factor in value." — Report of Ontario Commission on Railway Taxation, 1905, p. 49. 2 See the statement by one of the officials himself that in West Virginia ' ' the element of value which is chiefly relied upon in valuing all the different classes of public service corporations is the earning power of the property." Addresses and Proceedings of the Fourth Conference of the International Tax Association, 1911, p. 259. ' Report of Ontario Commission, p. 17. On another page the Commission sums up its estimate of the ad valorem system — an estimate, in which every impartial judge will concur: "The state of Michigan in determin- ing to change from the gross earnings to the ad valorem system of taxing its railroads, made the most elaborate and perfect attempt on record to determine what the physical property of the railroads was worth on the basis of cost of reproduction, less the normal depreciation for wear and use. But when at a cost of $60,000, this very elaborate and accurate appraisal THE TAXATION OF CORPORATIONS 257 If, however, the ad valorem method necessarily means in practice the indirect use of the earnings method, the question arises: why not use directly what you are compelled to use indirectly.' We may go further and affirm that nothing is gained, but much is lost, by electing the indirect, rather than the direct, earnings method. For, as we have seen, the direct earnings method is susceptible of reduction to a mathematical rule; whereas the indirect earnings, or ad valorem, method is open to the objections of secret, irresponsible, star-chamber methods. We may again agree with the Ontario commission in thinking that: " The essential fairness of taking earnings as a basis for taxation of corporations is based on the general principle that the taxes vary with the capacity of the company to pay them, whereas taxation on the basis of general property results in all manner of inequality. The amount of tangible property required by the various corporations has, in the first place, no necessary relation to their relative earning power, and in the second place, bears no accurate relation to the earning power of the same company at different periods. The capital stock tax has some- thing of the same defect in addition to those already mentioned, yet it has a certain amount of flexibility. Only the tax on earnings follows automatically the capacity of the corporation to pay, and while even it has inequalities, yet it is very much more equitable than any other practical system." '■ The difference between the earnings system and the ad valorem system is the difference between publicity and secrecy, between certainty and arbitrariness, between simplicity and complexity, was made, what was the practical value of it for taxation purposes? Vir- tually nil. The real valuation was determined on quite other grounds and mainly, as was admitted by those making the assessment, on the basis of earnings. The result was that some roads were valued considerably above the cost of reproduction, while others were valued very much below it and where the valuation was much the same as that of appraisal it was a mere coincidence. Where the valuation was above the appraisal the dif- ference was called the intangible or franchise value, but where it was below the appraisal the difference was not named, though more or less intangible also. But, though somewhat costly for Michigan, the experiment tried there has been exceedingly valuable for the rest of the world, and therefore, by us at least, the outlay need not be regretted. The experiment has demonstrated that, however serviceable such a valuation may be in af- fording an independent and scientific basis for judging the cost of produc- tion of modem railroads, under the varying conditions of such a state as Michigan, it is quite futile as a means of getting at the commercial value of a railroad as a going concern, or as a basis of taxation. — Ibid., p. 14. ' Op. cU., p. 23. 258 ESSAYS IN TAXATION between precision and guess work — in short, between modernism and medisevalism.^ If then the earnings tax is to be preferred to the ad valorem tax the question remains, shall it be gross earnings or net earnings? As a matter of principle it is conceded by all writers that net earn- ings approach more closely to the ideal method. " It is plain," we are told by the Ontario commission, "that the only true estimate of a railroad property is its earning power or its income. Its income, therefore, would appear to be the proper and indeed the ideal basis for taxation, if," they add, " it is found to be ca- pable of discovery and definition without too elaborate or costly a mechanism." It is owing to the doubt expressed in the last sentence that not a few authorities prefer gross earnings. For the ascertainment of gross earnings presents none of the diffi- culties which are deemed to be inseparable from that of net earnings. This is the position taken by the Ontario commission of 1895, by the California commission of 1906, and by the Virginia commission of 1911. It is necessary, however, to bear in mind two points. One is the marked progress that it is being made in the matter of corpo- rate accounting in the United States, thus annually bringing us nearer to the time when the ascertainment of net earnings will * For an instructive comparison in detail between the ad valorem and earnings methods see the work of Snider, mentioned supra, page 253. For other material and discussion on this question see the Report of the Commission on Revenue and Taxation of the Stale of California, Sacramento, 1906, chaps, iii. and iv.; First Biennial Report of the Minnesota Tax Com- mission, Saint Paul, 1908, chaps, vi. and vii.; and Second Biennial Report of the same, 1910, chap, xviii. ; Report of the [Special] Virginia Tax Commis- sion, Richmond, 1911, appendix. The Virginia report terms the ad valorem system "compHcated, confused and uncertain"; op. cit., p. 256. For an interesting contemporary discussion of the Wisconsin agitation see L. W. Bowers and F. P. Crandon, Argument submitted to the State Tax Commission of Wisconsin on behalf of the Chicago and Northwestern Rail- way Company, Chicago, 1901; F. P. Crandon, Railway Taxation in Wis- consin, Chicago, 1901; J. M. Dickinson, Railway Taxation in Wisconsin, Argument made before the Joint Committee on Assessment and Collection of Taxes at Madison, March 5th, 1901; G. R. Peck and A. S. Dudley, Should the present System of Railway Taxation in Wisconsin be changed? Sugges- tions to the Honorable Tax Commission, Chicago [1901]. For later arguments in favor of the earnings taxation of railways see Railway Assessment and Taxation in the Province of Ontario. Arguments presented by Messrs. Hellmuth and MacMurchy to the Ontario Commission or Railway Taxation, Oct., 1904; Railroad Taxation, Remarks before the Minnesota Academy of Social Science at Minneapolis, Dec. 6, 1907, by W. W. Baldwin of Burlington, Iowa. THE TAXATION OF CORPORATIONS 259 be subject to far less difficulty than is the case at present. The other is the fact that the Cahfornia commission itself, which reported in favor of gross receipts, recommended the utilization of net earnings as a necessary means of ascertaining the proper rate of the gross earnings tax.^ Furthermore, as we have seen, many of the states which levy either a gross receipts or a fran- chise tax require from the corporations returns which enable the board to compute the net earnings, and which then lead to a valuation of the property through a capitalization of the net earnings. If net earnings are thus utilized indirectly, why should they not be utilized directly? The argument in this respect as to the choice between gross and net earnings is pre- cisely the same as the one advanced above as to the choice between property and earnings taxation. As a matter of practical wisdom it may be conceded, however, that in not a few of the American states simplicity and conven- ience of administration are preferable to more ideal but more difficult methods. In such states the taxation of gross earnings may be recommended as an easy solution of the problem for the time being.^ It must, however, not be forgotten that with the improvement of administrative methods and with a fuller appreciation of the modern principles of accounting, the time is fast approaching when the net earnings system will be ap- plicable to all corporations in general by the states, as it is now applied without difficulty by the federal government in the United States, and by most of the leading countries abroad. One objection still remains. It has sometimes been urged that a tax on corporate property is more just than a tax on corporate earnings, because the value of a corporate security is fixed not onjy by its present, but also by its prospective, productiveness. This is, however, a specious objection, since under a system of 1 Op. at, p. 95. 2 Mr. AUen Ripley Foote makes an ingenious suggestion designed to accomplish the results of a net earnings method through the medium of a gross earnings method. His proposition is to levy on railroads at least, a flat rate tax on gross operating revenue plus a differential on the margin between operating revenue and operating expenses. Cf. "Taxation of Raih-oads in the United States," in Addresses and Proceedings of the Fifth Annual Conference of the National Tax Association, Columbus, 1912, p. 193 et seq. Cf. the suggestive and practical discussion in Alfred E. Hol- comb, The Assessment of Public Service Corporations, Richmond, 1911, re- printed from the Proceedings of the Fifth National Tax Conference; and the same author's, One Assessment — One Levy. Address delivered at the Second State Tax Conference held at Buffalo, Jan., 1912. 260 ESSAYS IN TAXATION earnings taxation the future product will be taxed when it ulti- mately appears. If productiveness be accepted at all as the standard of capacity — and this is tacitly assumed in the above objection — the most logical and defensible method is the taxa- tion of the product as it appears. But consideration for the individual producer makes it necessary, as has been pointed out above, to regard net, not gross product; and, therefore, if any one principle be accepted as the basis of the general corporation tax, it should be net profits, and not gross earnings or property. European experience all points to taxation of net earnings as the best system. One country, indeed, still assesses cor- porate property in some form or other. Switzerland, as we have seen, is the only European state which has retained the mediaeval system, once common to all countries. The reasons, as was pointed out, are the comparative equality of conditions and the survival of the primitive villages and agricultural communities with their placid and homogeneous economic life. It is significant, however, that many of the Swiss common- wealths, in which we notice a gradual industrial development and a consequent differentiation of property, have attempted to remedy some of the obvious defects of the general property tax by supplementing it with an income tax. Thus some can- tons, like Schaffhausen, Zurich, Basel, Aargau and others, tax corporations on their capital or their reserve fund; or, if the net receipts exceed a certain percentage of the capital, on their income.-' This system resembles, although in a very sHght degree, those of New York and Pennsylvania. Other cantons, like Bern, have abandoned the general property tax, and assess corporations only on their real estate and their income. Finally, some cantons, like St. Gall and Neuch^tel, tax corporations directly only on their income. Even in Switzerland, with its fondness for mediaeval customs, we see, therefore, that the tendency is almost everywhere away from the taxation of corpo- rate property. In the other European states this tendency has passed into accomplished fact. In England, all corporations are held to be "persons" within schedule D of the income tax, and consequently they pay a tax on their net annual profits or gains. A series of important ' The facts stated in this paragraph are accurate as of 1895, the ddte of the first edition of this book. For the few changes that have taken place since that date see the details in W. Gerloff, Die Kantonale Besteuerung der Aktiengesellschaften in der Schweiz, Bern, 1906. THE TAXATION OF CORPORATIONS 261 cases has elaborated the principles that should determine the exact nature of net profits.^ The rules laid down are analogous to those described in the definition of net receipts just given. The tax, moreover, is paid before the dividends are declared. Railroads are also subject to the special passenger duty of five per cent on receipts from passengers, which is merely a survival of the old tax on stage coaches, and to a corporation duty, which is intended to take the place of the "death duties" on individuals. Even in the matter of local taxation or rates the railways are taxed on what amounts roughly to net receipts. In theory the real estate of railways like that of individuals is rated on the basis of rental value, i.e. in the case of railways the property is locally taxable on the basis of what a hypothetical tenant would give for it if renting it. In practice the gross receipts are taken and certain rough deductions permitted. The difficulty arises from the fact that each local stretch of line or piece of real estate is separately assessed by the local officials, as is still the case in New York state. In Scotland on the other hand the unit rule is observed under the name of cumulo-value rating — i. e. a valuation of the line as a whole. From the gross receipts 73% are deducted for working expenses and tenants' allowances, separated under distinct heads. The remainder — roughly the net earnings — is divided between sta- tions and running line, and the rates due on the latter item are then distributed or "allocated" to the separate local divisions on the basis of relative mileage. In Ireland where the unit rule is also observed, the distribution to the localities is made on the basis of train mileage.^ In France, all corporations pay a tax on net profits in the shape of a three per cent tax on dividends, coupons and prof- its, known as the tax "sur le revenu des valeurs mohilieres." The tax is also applicable to joint-stock companies and to commercial enterprises,' while mutual insurance companies and similar associations have by judicial interpretation been ' Ellis, A Guide to the Income Tax Acts, 2d edition, pp. 80, 92-101. 2 For details of the system in the three countries see the Final Report of the Royal Commission on Local Taxation, 1901. ' The tax is imposed on "les int^rets, dividendes, revenus et tons autres produits des actions de toute nature " of stock companies, and on "les in- t>s, produits et bfe^fices annuelles des parts d'intSr^t et oommandities " of all associations, etc., without a divisible share capital. Law of June 29, 1872, art. 1. Cf. Tanquerey, Traite theorique et pratique de I'impdl sur le revenu des valeurs mobilieres, pp. 23, 51, 143, etc. ■ 262 ESSAYS IN TAXATION exempted. Like individuals, ' corporations are also subject to real estate taxes and to the license taxes {impots des patentes) on occupations. In the case of railroads, however, we still find a partial tax on gross receipts. The five per cent tax on gross' receipts from freight, which was imposed after the Franco- Prussian war, proved to be so vexatious and so obstructive to industrial development that it was abolished a few years later. ^ But the old "tax on public conveyances" — a percentage on the fare — , which dates from the last century, was extended in 1855 to the receipts from passengers and from express traffic. In practice, this "public conveyance" or transportation tax^ is not a direct tax on the corporations, but an indirect tax on passengers and on consignors of express packages; for the tax is added to the price of the ticket or receipt and is paid by the individual. The only direct tax is thus laid on net earnings. Corporations also pay the indirect taxes, like the stamp tax (droit de timbre) and the transfer tax (droit de transmission) on shares and bonds; but, simply to facilitate the administra- tive procedure, they may and generally do commute for these by paying an annual tax of one-twentieth and one-fifth of one per cent respectively on the amount of their capital stock. In Italy corporations are taxed on their income or net earn- ings by the imposta sui redditi della ricchezza mobile. This "revenue of personal property," as it is called, is declared to consist, so far as corporations are concerned, in "all interest or dividends paid." ' To make the term dividends still clearer, the law provides that "in the estimate of income are included all sums, under whatsoever title, distributed among the share- holders or added to capital, surplus or sinking fund or otherwise used in cancelling debts." ^ The Italian system is thus as com- prehensive as the English. ' Levied in 1874; abolished in 1878. 2 Droit sur les voitures publiques. Cf. Vignes, TraM des imp6ts en France, 4th edition, i., p. 192. ' "Sono considerati come redditi di ricchezza mobile esistenti nello stato . . . gh interessi e dividendi pagati . . . delle compagnie commer- ciah, industriali e di assicurazione." Law of August 24, 1877, art. 3, b. * "Nel reddito delle society anonime ed in accomandita per azioni, com- presevi le societa d'assicurazione mutua od a premio fisso saranno compu- tate indistintamente tutte le somme ripartite sotto qualsiasi titolo fra i soci e quelle portate in aumento del capitale o del fondo di riserva ed ammortizzazione, od altrimente impiegate anche in estinzione dei debiti." Ibid., art. 30. Cf. in general, Oronzo Quarta, L'imposta sulla Ricchezza Mobile, 2 vols. (Turin). ' See also Alessio, Saggio sul Sistema Tributario in THE TAXATION OF CORPORATIONS 263 In Germany the taxation of corporations varies widely in the different commonwealths.^ A few of the smaller states tax corporations for state purposes only on their realty and on their occupation (Gewerbe-steuer) , and not on their income or net profits, because the shareholders are individually taxed on their income from the corporations. This point will be discussed in de- tail in the following chapter. In most of the states, however, cor- porations are now taxed on their income. In a few cases, indeed, they are also subject to the supplementary and very slight prop- erty taxes that have been imposed in the last few years. The local taxes vary exceedingly throughout the empire. But when- ever corpprations are taxed at all on receipts, it is on net income. Corporations were formerly exempt from the local income tax, but they are now usually subject to it wherever it exists.^ In only one instance are corporations taxed on their capital stock — in the case of mutual insurance companies, whose so-called dividends merely return in part the premiums paid by policy holders. On account of the difficulty of ascertaining the exact profits, Baden has therefore levied the income tax on an assumed amount of net profits, fixed at five per cent of the capital stock. ^ A detailed statement of the German situation is unnecessary, because, according to the confession of the German experts themselves, Germany is still backward in its system of corporate taxation, in that it does not yet recognize the necessity of special corporation taxes and still clings in great measure to the principle of "equal taxation" with individuals, which the scientists con- cede to be a mistake.* In Austria, on the other hand, all corporations are subject to a special tax of ten per cent on net profits (including interest on Italia, i., p. 345; and the various authorities mentioned in Seligman, The Income Tax, 1910, p. 339. '■ For full details as to corporate taxation in each of the German states in 1888 see Antoni, "Die Steuersubjecte in Zusammenhalte mit der Durch- fuhrung der Allgemeinheit der Besteuerung nach den in Deutschland geltenden Staatssteuergesetzen," in Finanz-Archiv, v. (1888), pp. 382-499, especially 475 et seq. For the details brought down to date see L. Blum, Die steuerliche Ausnutzung der Aktiengesellschaften in Deutschland. Stutt- gart, 1911. 2 Cf. Meier, "Ueber die Frage der Communalbesteuerung" (in Zehn Gutachten und Berichte uber die Communalsteuerfrage, veroffentlichi vom Vereinfur Socialpolitik), p. 104. ' Lewald, "Die direkten Steuem in Baden," in Finanz-Archiv, iii., p. 807. ' See the explanation of the " Ruckstandigkeit " of the German states in Blum, op. cit. p. 139. 264 ESSAYS IN TAXATION bonds), but with two interesting variations ; first that if dividends exceed 10%, the rate is higher; and second, that if there are no profits at all the tax must be at least one per mill of the stock and bonds. ^ The net receipts tax may thus be declared applicable in theory to all corporations. Some pecuhar hmitations arise, it is true, from the clashing of commonwealth laws, but these will be discussed in the next chapter. IV. The Legal Situation Our conclusion that the taxation of receipts is without doubt the best system brings us face to face with the facts of American constitutional law. Is a tax on receipts unconstitutibnal? Is it in conflict with the constitutional inhibition of state interfer- ence with interstate commerce? This is an important question. Let us, then, consider the legal as well as the economic aspects of the problem.^ The earliest important case involving this question construed the Permsylvania law which imposed a tax on each ton of mer- chandise carried, and an additional tax of a certain percentage on the gross receipts of railroad companies. The tonnage tax was declared unconstitutional.' The same principle was later applied to a tax of one cent for every message sent by a telegraph com- pany. This also, was held to be void as a tax on interstate com- merce.* On the other hand, a state tax on the gross receipts of a domestic railroad company was upheld chiefly on the ground that the tax was laid upon a fund which had already become prop- erty. The gross receipts were said to be the fruits of transpor- tation after they had become intermingled with the other prop- erty of the carriers.^ The court, however, also contended that '■ Steinitzer, Die jungsien Reformen der veranlagten Steuem in Oesterreich, Leipzig, 1905; and the same author's "Ziir Besteuerung der Aktiengesell- sohaften in Oesterreich," in Conrad's Jahrbiicher, dritte Folge, vol. xxviii. (1904), p. 319 etseq. 2 See in general, Professor Goodnow's articles on "Taxation of Railway Gross Receipts," in Political Science Quarterly, vol. ix. (1894), p. 233, and "State Taxation of Interstate Commerce," in Publications of the American Economic Association, vol. v. (1904), p. 153 et seq. Cf. also H. J. Daven- port, "The State Taxation of Interstate Commerce," in Political Science Quarterly, vols. xxv. and xxvi. (1911-1912). 2 State Freight Tax Cases, 15 Wall. 232 (1872). ■■ Telegraph Co. vs. Texas, 105 U. S. 460 (1881). « State Tax on Railway Gross Receipts, 15 Wall. 284 (1872). This was in imitation of the case of Brown vs. Maryland, which held that articles lost THE TAXATION OF CORPORATIONS 265 this was a tax on the franchise, measured by the amount of the business transacted, so that it was not clearly decided what was taxed, the franchise or the property.^ Later the Supreme Court limited this general principle and decided that when the gross receipts, even of a domestic corporation were derived entirely from interstate or foreign commerce, they could not be taxed.^ In the case of foreign companies, the rule seemed at one time to be more strict; for a tax on the gross receipts of a foreign corporation, even if derived only in part from interstate com- merce, was declared void to the extent that the receipts were derived from such interstate commerce.' A tax on the gross receipts from business done wholly within the state was, how- ever, upheld.* This distinction between foreign and domestic companies seemed to be maintained in a later leading case. The Maine tax on gross receipts was upheld as being a tax not on receipts, but on the privilege of exercising the corporate franchise, the resort to receipts being made simply to ascertain the value of the business. But although this action was brought nominally against a foreign corporation, the facts show that the tax was due from a domestic corporation leased by this foreign corpora- tion.^ The reason for the distinction between domestic and foreign corporations, if there was such a distinction, in the view of the court, seems to be that in the case of a domestic corporation the their character of imports after they had left the original package or the hands of the original importer, and had then become a part of the general property of the state. But see the second note following. See also Balti- more and Ohio R. R. Co. vs. Maryland, 21 Wall. 456 (1874), which held that a charter stipulation that a railway should pay a part of its earnings to the state as a bonus, was not a tax, and was perfectly valid. ' In Fargo vs. Michigan, 121 U. S. 210, the court emphasizes this side of the Railway Gross Receipts Tax decision. For a recent case, see People ex rel. R. R. Co. vs. Campbell, 74 Hun, 210. 2 Philadelphia S. S. Co. vs. Pennsylvania, 122 U. S. 326 (1886). In this case the court showed that the case of Brown vs. Maryland was really no authority for the decision in the case of the State Tax on Railway Gross Receipts, decided fifteen years before. 3 Fargo vs. Michigan, 121 U. 8. 230 (1886) ; Western Union Telegraph Co. vs. Alabama Board of Assessment, 132 U. S. 472 (1889). Cf. Coe vs. Errol, 116U.S. 517(1885). *Ratterman vs. Western Union Telegraph Co., 127 U. S. 411 (1888). ' Maine vs. Grand Trunk R. R. Co., 142 U. S. 217 (1891). The real party to the case was the Atlantic and St. Lawrence R. R. Co. 266 ESSAYS IN TAXATION thing taxed is the franchise, which may be measured at the discretion of the legislature (except that when all receipts are from interstate commerce the tax is invalid); while in the case of a foreign corporation the franchise cannot be taxed, but only the business. Since the thing taxed in the latter case is the business, the constitutional provision is violated whenever that business is so extended as to include interstate commerce.^ The same distinction which is observable in the Gross Re- ceipts Tax cases has been maintained in others. Thus a hcense tax on foreign companies doing an interstate business is held invalid because it is a tax on the privilege of doing interstate commerce; ^ but a license on a domestic corporation for boats used in interstate commerce is valid.' So, too, a privilege tax upon every sleeping car belonging to a foreign corporation has been declared unconstitutional as a regulation of interstate commerce; * but when the sleeping cars are run wholly within the state over the line of a domestic corporation, the tax is vaUd.^ Again, a tax proportioned to capital stock and dividends is valid as to domestic corporations even though they be engaged in interstate commerce;^ but if the business of a foreign corporation is interstate commerce exclusively, the tax on capital stock is void.'^ On the other hand, even though the tax be imposed on a 1 Cf. Horn Silver Mining Co. vs. New York, 143 U. S. 305. 2 United States Express Co. vs. Allen, 39 Fed. Rep. 712; Leloup vs. Port of Mobile, 127 U. S. 640; Krutcherus. Kentucky, 141 U. S. 47. ' Wiggins Ferry Co. vs. East St. Louis, 107 U. S. 365 (1882). Cf. Osborn vs. Mobile, 16 Wall. 479 (1872), where a license fee was imposed on an agent of an express company doing business in Mobile. * Pickard vs. Pullman Southern Car Co., 117 U. S. 34 (1886). It was dis- tinctly held that the cars in question had no situs in the state (Tennessee) imposing the tax. s Gibson County vs. Pullman Southern Car Co., 42 Fed. Rep. 512 (1890). Whether the counties may levy such a tax depends entirely upon the author- ization which must be express, given them by the state law. " People vs. Wemple, 117 N. Y. 136 (1889). ' People ex rel. Pennsylvania R. R. Co. vs. Wemple, 138 N. Y. (1893). This was the case of a railroad corporation whose line terminated without the state, but which had terminal facilities within the state for the delivery of passengers and freight, the sale of tickets and the collection of dues. A somewhat similar case was that of Gloucester Perry Co. vs. Pennsylvania, 114 U. S. 196 (1885). Here the state attempted to impose a tax on the capi- tal stock of a New Jersey company having no property in Pennsylvania except a wharf in Philadelphia. This tax was held void, as an interference with interstate commerce. Another similar case was that of Norfolk and Western R. R. Co. vs. Pennsylvania, 136 U. S. 114 (1890). The railway had no line in the state, but had an office there, and traffic contracts which THE TAXATION OF CORPORATIONS 267 foreign corporation, if it is assessed not on tlie business itself, but on the capital stock or property according to mileage, and if the corporate property is actually situate in the state, it will be upheld.^ The law, therefore, seemed to distinguish in part between foreign and domestic companies. Yet in the Maine case, the tendency of the court, although it was expressed only in a dic- tum, seemed to be opposed to this distinction; and the reasoning of the court would tend to uphold a gross receipts tax, whether imposed on domestic or on foreign corporations, provided any of the receipts be earned within the state. ^ This legal reason- ing was also economically sound, for from the economic point of view the distinction between domestic and foreign corpora- tions is entirely indefensible. Strictly carried out, it would render substantial justice in taxation almost impossible. If a foreign corporation cannot be taxed where its earnings are re- ceived, because it is a foreign corporation; and if it carmot be taxed by the state of its domicile, because the earnings are not received there, it would manifestly evade its due share of the burden. But if every state could tax the receipts of any corporation, so far as they are actually earned within the state, no corporation could escape under the plea of its foreign origin, and the foundations would be laid for an equitable system based on interstate agreement. The force of the constitutional provi- sion would, moreover, still be sufficiently strong to prevent made it a part of a system doing interstate business. A tax on capital stock of this corporation was held invaUd, as interfering with interstate commerce. » Pulhnan Car Co. vs. Pennsylvania, 141 U. S. 18 (1890); Pullman Pal- ace Car Co. vs. Assessors, 55 Fed. Rep. 206 (1893). Cf. Telegraph Ca vs. Massachusetts, 125 U. S. 530 (1890). 2 "The privilege of exercising the franchises of a corporation within a state is generally one of value, and often of great value and the subject of earnest contention. It is natural, therefore, that the corporation should be made to pay some proportion of the burdens of the government. As the granting of the privilege rests entirely in the discretion of the state, whether the corporation be of domestic or foreign origin, it may be conferred upon such conditions, pecuniary or otherwise, as the state in its judgment may deem most conducive to its interests or policy. . . . The character of the tax or its validity is not determined by the mode adopted in fixing its amount for any specific period or the times of its payment. . . The rule of apportioning the charge to the receipts of the business would seem to be eminently reasonable, and likely to produce the most satisfactory results both to the state and the corporation taxed." Justice Field, in Maine vs. Grand Trunk R. R. Co., 142 U. S. 217 (1891). 268 ESSAYS IN TAXATION unjust discriminations against foreign commerce or foreign business. More recent cases have now definitely settled both the un- tenability of the distinction between foreign and domestic corporations in this matter and the precise extent to which gross receipts taxation is constitutionally permissible. In the Wisconsin case a tax was sustained which made the income of a railroad company within the state, although including inter- state earnings, the measure of the value of the property. The court said: " In form the tax is a tax on ' the property and business of such railroad corporations operated within the state/ computed upon cer- tain percentages of gross income. The prima facie measure of the plaintiff's gross income is substantially that which was approved in Maine vs. Grand Trunk Railway Co." ^ Shortly afterwards, in the Texas case, a tax of 1% on the gross receipts of a domestic company was declared invalid on the ground that the tax was imposed on the receipts as such. Jus- tice Holmes attempted to distinguish this case from the Maine case on the gromid of a difference between a tax on property and a tax on commerce.^ " ' By whatever name the exaction may be called, if it amounts to no more than the ordinary tax upon property or a just equivalent therefor, ascertained by reference thereto, it is not open to attack as inconsistent with the Constitution.' Telegraph Cable Co. v. Adams, 155 U. S. 688, 697. See New York, Lake Erie & Western B. R. Co. v. Pennsylvania, 158 U. S. 431, 438, 439. The question is whether this is such a tax. It appears sufficiently, perhaps from what has been said, that we are to look for a practical rather than a logical or philosophical distinction. The State must be allowed to tax the property and to tax it at its ac- tual value as a going concern. On the other hand, the State cannot tax the interstate business. The two necessities hardly admit of an absolute logical reconciliation. Yet the distinction is not without sense. When a legislature is trying simply to value property, it is less likely to attempt to or effect injurious regulation than when it is aim- ing directly at the receipts from interstate commerce. A practical line can be drawn by taking the whole scheme of taxation into account. That must be done by this court as best it can." ' Wisconsin & Michigan Railway Co. vs. Powers, 191 U. S. 379. 2 Galveston, Harrisburgh & San Antonio Ry. Co. vs. Texas, 210 TJ. S. 217. THE TAXATION OF CORPORATIONS 269 Tn the meantime, this distinction between a tax on property and a tax on commerce was strengthened by a number of cases which upheld the legitimacy of a tax on property, even if some of the property was used in interstate commerce.^ Finally, however, in 1912 the whole controversy was laid to rest, in principle at least, by two cases decided on the same day. In the Oklahoma case,^ a gross receipts tax of 3%, levied in addition to the general property tax, was declared invalid be- cause clearly a tax on the gross receipts as such, and therefore on the receipts from interstate commerce. On the other hand, in the Minnesota case,^ a tax of 6% on the gross receipts was upheld because declared to be in lieu of all taxes on the prop- erty of the corporation. The decision quotes a dictum of Jus- tice Peckham with approval: " When it is said, as it is in this act, that the tax collected by this method shall be in lieu of all other taxes whatever, it would seem that it might be claimed with great plausibility that a tax levied under such circumstances and by such methods was not in reality a tax upon the gross earnings, but was a tax upon the lands and other property of the company, and that the method adopted of arriving at the sum which the company should pay as taxes upon its property was by taking a percentage of its gross earnings." * The court furthermore held that the Minnesota tax came 1 The case of Western Union Telegraph Co. vs. Mass., 125 U. S. 530 (1887), which upheld a tax on that proportion of the capital stock of a corporation that the state mileage bore to the entire mileage, was applied to a railroad in C. C, C. & St. Louis Ry. Co. vs. Backus, 154 U. S. 439; and to an express company in the Express Cases, 165 U. S. 194 (1896). These ca.ses upheld the legality of the so-called unit rule. Again while a license tax on each Pullman car was declared invalid as an interference with the privilege of engaging in interstate commerce in Pickard vs. Pullman Southern Car Co., 117 U. S. 34, a tax on the capital stock of a similar company in proportion to the mileage of the cars run in the state as com- pared to the total mileage was upheld in P. C. C. Co. vs. Pa., 141 U. S. 18; and a tax levied by Tennessee upon " each sleeping car doing business within the state " for purely intra-state business was upheld on the ground that there was no compulsion to do this business. Allen vs. Pullman Co., 191 U. S. 171 (1903). On the other hand, the Kansas tax of Vw of 1% on the authorized capital stock of a similar company was declared inadmissible as a burden on interstate commerce. Pullman Co. vs. Kansas, 216 U. S. 56 (1910). 2 Meyer, Auditor, vs. Wells, Fargo & Co., 223 U. S. 298. ' U. S. Express Co. vs. Minnesota, 223 U. S. 335. « McHenry vs. Alford, 168 U. S. 651. 270 ESSAYS IN TAXATION within the principle laid down in the Postal Telegraph case ' cited on the preceding page, and concluded : "Upon the whole we think the statute falls within that class where there has been an exercise in good faith of a legitimate taxing power, the measure of which taxation is in part the proceeds of interstate commerce, which could not, in itself, be taxed, and does not fall with that class of statutes uniformly condemned in this court, which show a manifest attempt to burden the conduct of interstate commerce." Under this decisi6n the constitutionality of any kind of earn- ings tax — gross or net — is henceforth indisputable, provided only that the earnings tax takes the place of the property tax and be not levied as an addendum to it. We may indeed criticize from an economic point of view a decision which declares a tax on earnings to be a tax on property or equivalent to it. But we must none the less applaud the ingenious way in which the Supreme Court has extricated itself from a difHcult position. It must be remembered that the Supreme Court was dealing with a situation where the ordinary tax — on individuals and corporations alike — was the general property tax; and the prob- lem presented was if possible to uphold a state earnings tax in terms of a property tax "or its equivalent." This problem the court has successfully solved, and the way is thus open for the development of a proper system of corporate taxation un- trammelled, in one important respect at least, by the fancied limitations of a federal constitution. A tax on corporate earnings, according to a law properly drawn, is therefore not only economically correct but legally unassailable. The only question that still remains is whether, under these decisions a local tax on the real property of corporations will be permissible contemporaneously with a state tax on earnings. It is to be hoped — and may we add to be expected — ^that when this question is presented the court will take the view that a local tax on real estate is in no way to be confounded, or to be regarded as inconsistent, with a state tax on earnings. When once this question is decided correctly, the progress of corporate tax reform will be assured. This, therefore, is our general conclusion; but it does not yet exhaust the problem of corporate taxation. We are, in fact, only on the fringe of the difficulties. Let us proceed in the next chapter to study some of the more complicated questions. ' Postal Telegraph Co. vs. Adams, 155 U. S. 697. CHAPTER VIII THE TAXATION OF CORPORATIONS III COMPLICATIONS AND CONCLUSIONS The discussion of the taxation of corporations would be incomplete without an examination of the various phases of double taxation. This is the more necessary for the reason that no attempt at a thorough analysis has ever yet been made. Yet the problems that hinge upon this particular question are so especially important in the United States as to demand the most serious attention. In a former chapter ^ we have already discussed some of the general aspects of double taxation. Let us now attempt to develop the principles in the light of actual practice. There are in reality no less than five different forms of double taxation in the case of corporations : — 1. Double taxation of property and of debts, or of income and of interest on debts. 2. Double taxation of property and of income. 3. Double taxation of property and of stock. 4. Double taxation arising from conflicts of jurisdiction. 5. Double taxation of the corporation and of the holders of stock or bonds. I. Taxation of Property and of Debts This first case need not detain us long. The only illustra- tions in the United States are found under the general property tax, which we have discarded as the basis of corporation taxa- tion. In many of the states corporate debts must be considered in estimating the value of the capital stock. In New York, as regards local taxation, the indebtedness must be taken into " Supra, chap. iv. 271 272 ESSAYS IN TAXATION account in assessing the capital stock; but after the valuation has been fixed, the amount of the indebtedness cannot be de- ducted.^ If the capital stock is of no value because the indebted- ness exceeds the assets, it should not be assessed.^ In the case of foreign corporations, however, which are taxable on the amounts invested in the state, it has been held that the law does not contemplate the deduction of debts.^ We have already pointed out that there is really no injustice in not exempting corporate indebtedness.^ The mortgage bonds of a corporation are really a part of the working capital. Cor- rect policy demands the taxation of corporate bonds as well as of stock, of loans as well as of share capital. To tax corporate debts may, indeed, be called double taxation in so far as the tax on both stock and debt is paid out of the same income; but if so, it is double taxation of a perfectly legitimate kind. It is here that the principles of individual and corporate taxation diverge. Some of the American commonwealths, as California, Con- necticut, Maryland and Pennsylvania, recognize this distinction between the taxation of individuals and that of corporations, by permitting the deduction of indebtedness from the property of individuals but refusing a like deduction in the case of corpo- rate property. In California, the courts held distinctly that what would be double taxation in the case of individuals is permissible in the case of corporations.^ Some of the Swiss cantons, like St. Gall, Zurich and Ticino, observe the same distinction.* Perhaps more interesting and probably of greater future importance in the United States is the other phase of this ques- tion of the taxation of indebtedness — double taxation of income and of interest on debt. While the true theory of income taxa- tion in the case of individuals demands the deduction of interest on debt's, it has already been shown that in the case of corpora- tions the interest paid on mortgage bonds must be included in the taxable income. Taxation of interest on corporate debt is not double taxation, because the coupons, like the dividends, 1 1 Thomp. and C. 635; 100 N. Y. 597; 112 N. Y. 665. 2 People vs. Commissioners, 31 Hun, 32 (1st Department). ' People vs. Barker, 141 N. Y. 118. ■• Cf. supra, p. 106. * Central Pacific R. R. Co. vs. Board of Equalization, 60 Cal. 35. ' Schanz, Die Sleuern der Schweiz, ii., p. 338; ii., p. 435; iv., p. 281. THE TAXATION OF CORPORATIONS 273 are integral parts of the income; because both bonds and stock together form what is really the working capital from which the income is derived. This question has already been discussed; but the difference in economic significance between most cor- porate bonds and ordinary individual debts must be continually borne in mind. II. Taxation of Income and of Property This second form of double taxation, hke the first, involves no very complicated question; nor does the solution present many difficulties. Is it permissible to tax a corporation both on its property and on its net receipts or income? If corpora- tions are put upon the same plane as individuals, the simulta- neous taxation of the property and of the income from the prop- erty works no injustice. As we have seen above,' if all are treated alike and if the tax is uniform, there is really no cause for complaint. So far as corporations are concerned, this was until recently not a matter of practical importance. The only case in which this special question formerly arose was under the laws of Alabama, now repealed, which provided for the taxation not only of corporate property but also of the corporate income during the preceding year.^ Such taxation was upheld on the ground that it was only apparently double taxation.' What the court meant was, of course, not that it was not double tax- ation, but that it was not invalid or economically unsound taxa- tion. In this the court was correct, for the law applied equally to all individuals and to corporations. Now, however, under the new (1911) income tax of Wisconsin which is deemed to take the place of the tax on intangible personalty, henceforth exempted, corporations are still taxable on their real estate and tangible personalty as well as on their income, but they are permitted to deduct from their taxable income all sums paid for taxes in any part of the country upon the source from which the income is derived. Moreover, all public-service corporations (as well as insurance companies) which pay taxes directly to the state are exempt from income tax altogether. 1 Supra, p. 100. 2 Ala. laws of Feb. 22, 1866; Feb. 19, 1867; Dec. 31, 1868; March 19, 1876; March 6, 1876. 2 Board of Review vs. Montgomery Gas Light Co., 64 Ala. 276. Cf. Lott vs. Hubbard, 44 Ala. 593. 274 ESSAYS IN TAXATION At present in the United States apart from the situation in Wisconsin, no attempt is made to tax simultaneously both corporate property and corporate income. The nearest ap- proach to the practice is the system in some states like Mary- land, Pennsylvania and New York of taxing the capital stock and also the gross receipts of certain corporations. No objec- tion has been raised to these taxes on the score of double taxa- tion; nor is it likely that such an objection will be sustained.^ One might as well object to a combination of direct and indirect taxes as involving duphcate taxation, on the groxmd that all taxes are in the last resort paid (or presumed to be paid) out of annual income. So again, in some of the Southern and Western states, as we know, corporations are taxed on their business, by license or occupation taxes, and again on their receipts, and this practice is upheld as perfectly vahd.^ This second form of double taxation is entirely proper. The classic home of double taxation of this sort is Switzer- land. Baselstadt, for instance, taxes corporations one per mill on the paid up capital, a quarter of one per mill on the capital not yet paid up, and one per cent on the total net income from all sources.^ In Baselland corporations are taxed on their general property and again on their total profits, with the ex- ception that when any of the profits consist of interest on capital the profits are not taxed if the capital has already been assessed.* Many of the cantons, however, seek to avoid the simultaneous taxation of property and income by an arrangement of the following sort: While the law provides for the assessment of both property and income, a deduction is made in the case of the income tax for so much of the income as is supposed to represent the actual profits of the capital already taxed. The proportion thus deducted is fixed in accordance with the esti- mated current rate of interest, ranging from four per cent in Thurgau and Grisons to five per cent in Zug, Schaffhausen, Ticino, Vaud and Zurich. The federal government deducts five > In U. S. Electric Power and Light Co. vs. State, 79 Md. 63, a vigorous objection has now been made, but the objection was not sustained by the court. ' Cf. 95 Mo. 360, where the court holds that it is not duphcate taxa- tion. ' Law of 1889, §§ 2, 3. Schanz, Die Steiiem der Schweiz, ii., p. 84; v., p. 50. As to the Swiss conditions mentioned in this paragraph, cf. the warning, supra, p. 260, note. * Schanz, op. cit., i., p. 55; v., p. 35. THE TAXATION OF CORPORATIONS 275 per cent.^ This principle has now also been applied in Germany. In Prussia, since 1891 the income tax is assessed on corporate income, after deducting a sum equal to three and a half per cent of the paid up capital.^ In Baden and Wiirtemberg the deduction is limited to 3% and cannot exceed the amount of dividends declared.^ Bern and St. Gallen are the only Swiss cantons which attempt to draw a sharper line by levying the. property tax solely on the corporate real estate, but subjecting all the other property to an income tax.* In St. Gallen the real estate tax is for local, the income tax for cantonal purposes. The solution of the supposed difficulty attempted by the Swiss and the German commonwealths is, however, not a happy one. The deduction from income of the three or five per cent, assmned to represent the earnings of property in- volves a misconception. It is impossible to say how much of the income represents earnings of capital and how much represents the other ingredients of profit. We are brought face to face with complicated questions of economic theory — with the distinction between interest and profits, and the separate ingredients of profits. A discussion of these questions lies beyond the province of this essay. But it may be confi- dently asserted that if a railway corporation with no bonded indebtedness and a capital of one million dollars earns seventy- five thousand dollars, it is impossible to maintain that fifty thousand dollars represents the earnings of the property and the remainder the earnings of the management. From one point of view all such profits are profits on capital or property. An in- dividual can indeed obtain a professional income without any capital; but in the case of a business with capital invested, it is impossible to say how much of the profits are due to the capital, how much to the personal management. Without the capital there would be no profits at all, because there would be no busi- ness. Therefore, in taxing profits we are really taxing property, or rather the proceeds of property. To segregate a part of these proceeds and to say, as do the Swiss cantons, • that only this particular part represents the income from the property, is an entirely arbitrary proceeding. '■ Schanz, op. cit., i., p. 66. ^ Einkommensteuergesetz vom 24 Juni, 1891, § 16. ^ L. Blum, Die steuerliche Ausnidzung der Aktiengeselhckaften in Deutsch- land, Stuttgart, 1911, pp. 48, 52. * Schanz, op. dt., ii., pp. 318, 368; iii., p. 292. 276 ESSAYS IN TAXATION Again, it cannot be contended that even this four or five per cent of income exempted by the Swiss laws represents only the interest on the capital, and that the remainder of the income represents the earnings of management. Under no theory of economic profits can the surplus above current in- terest be entirely dissociated from capital. Even granting that a sharp line can be drawn between interest, earnings of management and profits, it still remains incorrect to confine the proceeds of capital to interest alone. It is thus inadmissible to say that in taxing income only on the surplus above four or five per cent of the taxable capital we avoid taxing both property and income. The Swiss system has indeed a very decided significance in connection with an entirely different matter, viz., the question of funded or unfunded income. But as regards the point now under discussion it is evident that the Swiss cantons do not really succeed in avoiding double taxation. As we have seen, however, it is a form of double taxation which is in itself legitimate if applied equally to all taxpayers. III. Taxation of Property and of Stock This third form of duplicate taxation must not be under- stood to refer to the taxation of shares of stock in the hands of individuals. That is a different problem, and falls under an- other heading, to be discussed below. The point here to be discussed is this: Is it permissible to tax the corporation on its property and again on its capital stock? The answer is plain. Manifestly not, if the corporate stock can be regarded as representing actual property. We have, indeed, seen that it is a mistake, economically, to say, as do some of our courts, that the entire property of a corporation is identical with its capital stock. This point has been brought out so well in a Massachusetts case, and is so generally mis- understood, that it may be wise to make a more extended quota- tion from the decision: — "The market value of the shares of a corporation . . . does not necessarily indicate the actual value or amount of property which a corporation may own. The price for which all the shares would sell may greatly exceed the aggregate of the corporate property, or it may fall very far short of it. Undoubtedly the amount of property belonging to a corporation is one of the considerations which enter into the market value of its shares; but such market value also em- THE TAXATION OF CORPORATIONS 277 braces other essential elements. It is not made up solely by the valua- tion or estimate which may be put on the corporate property, but it also includes the profits and gains which have attended its operations, the prospect of its future success, the nature and extent of its corporate rights and privileges, and the skill and ability with which its business is managed. In other words, it is the estimate put on the potentiality of a corporation, on its capacity to avail itself profitably of the franchise, and on the mode in which it uses its privileges as a corporate body, which materially influences and often controls its market value." ' While it is true, therefore, that capital stock and total prop- erty are not iaterchangeable terms, it cannot be denied on the other hand that the capital stock represents at all events a part of the property, or rather that the corporate property is one of the elements that contribute to the value of the capital stock. So far as this is true, the simultaneous taxation of corporate property and corporate stock involves, to this extent at least, duplicate taxation of an unjust character. Unfortunately, there is no uniformity in the legal decisions on this point. While the majority of the commonwealths hold taxation of this kind to be imjust, Pennsylvania has pronounced it valid. In a celebrated case the court used this language:— " Double taxation has never been considered unlawful in this state. The real and personal property of a corporation may be taxed, although it pays a tax on the stock which purchased it. The power of the legis- lature is as ample to tax twice as to tax once, and it is done daily as all experience shows. EquaUty of taxation is not required by the constitution." ^ Such a decision may be correct legally, but beyond all doubt it is unsoimd economically. Equality of taxation may not be required by the constitution of Pennsylvania, but it is one of the first laws in the science of finance. Abandon equality, and you throw the door wide open to all kinds of glaring abuses. The theory as formulated by the Pennsylvania courts cannot possibly be upheld from the scientific standpoint. The Pennsylvania courts, however, hold that so far as the capital stock of a domestic corporation represents tangible property outside of the state, it is not taxable.^ Further, it has also been decided that the real estate of a corporation, 1 Commonwealth vs. Hamilton Manufacturing Co., 12 AUen, 303. 2 Pittsburgh etc., R. R. Co. vs. Pennsylvania, 66 Pa. State, 77. Cf. Lacka- wanna Iron Co. vs. Luzerne County, 42 Pa. State, 424. ' 101 Pa. State, 119; 41 Legal Intelligencer, 125. 278 ESSAYS IN TAXATION being part of its capital stock and paying state taxes, is not locally taxable.^ Finally, in another case it has been held that so far as the property of a corporation is essential to the exercise of its corporate franchise, it is included in the capital stock and is not taxable. The law will not subject it to duplicate taxation by mere inference.^ Thus Pennsylvania is gradually abandon- ing its earlier decisions. Far wiser from the very beginning were the Maryland courts, which held that all laws must be so construed as to avoid double taxation of this kind; and that, since in their opinion the capital stock of a corporation represents the corporate property, the payment by the corporation of a tax on capital stock necessarily exempts all the corporate property.^ In this broad form the decision is perhaps open to criticism because of the complete identification of capital stock with corporate property; but as regards the point at issue here, it is correct. To tax corporations simultaneously on their stock and on their property is inde- fensible. A few commonwealths, like Alabama, Illinois, In- diana, Vermont and (for local purposes) New York, have now recognized this principle in their statutes, deducting from the value of the capital stock the value of the realty or of both the real and personal property taxed.* On the other hand, the apparently similar statute of Mas- sachusetts, which taxes corporations on their capital stock less the value of the real estate and machinery,^ is open to criticism for another reason. According to the Massachusetts law, corporations are taxable by the local bodies on their real estate and machinery, but at a rate equivalent to the combined rate for local and state purposes. They are then taxable by the state on the value of their capital stock, deducting the value of the real estate and machinery; but this state tax is fixed at a rate equivalent to the combined local and state rate on gen- 1 7 Lane, 317. 2 148 Pa. State, 162; 148 Pa. State, 282. See also 145 Pa. State, 96. * County Commissioners vs. National Bank, 48 Md. 117. Cf. State vs. Sterling, 20 Md. 520; State vs. R. R. Co., 40 Md. 22. ^ Ala. Code, § 453, sec. 8; 111. Rev. Stat., chap. 120, § 3; Ind. Laws of 1891, chap. 4; New York Laws of 1857, chap. 456, § 3, vol. 2, p. 1; Vt. Rev. Laws, § 288. In New York, as we know, corporations are locally taxable on their realty and their capital stock, deducting the amount invested in real estate. The earlier Maryland provision to this effect (Public General Laws, art. 81, §§ 84, 85, 141, 144), has now been abandoned. See 103 Md. 293. ' Mass. Pub. Stat., chap. 13, § 40. THE TAXATION OF CORPORATIONS 279 eral property. While, therefore, Massachusetts avoids double taxation of both property and stock, it does not solve the problem of affording the commonwealth government an ade- quate revenue. According to the theory elsewhere elaborated in these chapters, corporations should always be locally taxable on their realty; but the commonwealth tax should be levied on the total income, or on the total property, without any deductions (except those arising from considerations of inter- state comity and equity, to be discussed below). The whole treatment of double taxation is here based on the assumption that the tax is levied by administrative units of the same grade, whether state or local divisions. It manifestly does not apply to cases where one tax is levied by the common- wealth, and another similar or different tax is levied by the county or city, as in Massachusetts. Otherwise we shouldbe forced to the conclusion that the property tax always involves a double, triple or quadruple taxation so far as state, county, town and village levy different rates on the same property. This is, however, only a juggle with words; such taxation is not in the scientific sense double taxation. Strictly speaking, therefore, the Massachusetts principle, while ostensibly sound, is really incor- rect. So far, however, as it attempts to solve another problem — that of the division of the tax between the place where the corpo- ration carries on its business, and the place where the stockholder resides — the law is deserving of consideration. But that is a point which belongs properly to one of the subsequent sections. In Switzerland, we find, in the few cases where both tangible property and capital are assessed, that the value of the taxable property is deducted from the corporate capital. Thus the constitution of 1885 in Aargau provides for the taxation of the corporate real estate for both commonwealth and local purposes, the value of the realty being then deducted from the capital stock.^ The same custom prevails in Schaffhausen.^ In Ger- many, Saxony and two of the smaller states are the only ones which permit corporations to deduct from their taxable property not only their debts but also the par value of their capital stock.^ The Swiss tendency, like the American, is gradually coming to be in accord with the sounder principles. ^ Schanz, Die Steuern der Schweiz, ii., p. 239. Cf. the warning above on page 260, note 1. ^Ibid., ii., p. 170, note 1. ^ L. Blum, Die steuerliche Ansnutzung der Aktieiigesellschaften, p. 128. 280 ESSAYS IN TAXATION We come now to the most important aspects of double tax- ation — the fourth and fifth forms. Here we have the benefit of a wide European experience. In the phases of dupUcate taxation hitherto treated we can learn very little from Europe, because in no European state except Switzerland and to a minor extent in Germany are corporations taxed on their property as a whole; and in both Switzerland and Germany, as we know, the entire question of corporation taxation is in a very primitive and unsatisfactory stage. But the problems that we now take up present themselves in Europe as well as in the United States, and have there received in some respects extended consideration, although they have not yet been suc- cessfully solved. IV. Double Taxation due to Conflicts of Jurisdiction This fourth form of duplicate taxation appears in connection with almost every method of corporate taxation. It is so com- prehensive that it will be advisable to discuss the subject under four chief headings : — 1. Interstate taxation of corporate property. 2. Interstate taxation of stock and bonds or of dividends and interest. 3. Interstate taxation of non-resident stockholders or bond holders. 4. Interstate taxation of corporate receipts or income. 1. Interstate taxation of corporate property. The difficulty here arises in connection with the taxation of personal property. In the case of real estate the rule universally adopted in the United States is that the property should be taxed where it is situated, and there is accordingly no chance for interstate com- plications. But in the case of personalty the great problem is that of situs. Should the personalty be taxed where it is situated or should it follow the domicile of the owner? The legal con- ditions in the United States are most imsatisfactory. We have seen in another place "^ that the American states waver between the principles of situs and of mobilia personam sequuntur, — that is, some tax only the personalty actually situated in the state; while others tax all the personalty, no matter where situated, of a resident. The same piece of per- 1 Supra, p. 114. THE TAXATION OF CORPORATIONS 281 sonal property may therefore be taxed in two states. The obvious result, of course, is double taxation of a nature which cannot possibly be justified. In the case of corporations, we are confronted by precisely the same difficulties, for corporate property is treated in the main like that of individuals. It is entitled to the same exemp- tions and subject to the same conditions. It will be readily perceived, however, with what difficulties the problem is beset when, as is usually the case, the personalty of a corporation is assessed at its place of business as the legal situs. In many states, Uke Michigan, Pennsylvania and New York, it has been held not permissible to tax corporations for property — or at all events for tangible property — outside the state; ^ and in South Carohna the tax is specifically limited to corporate prop- erty within the State.^ In other cases it has been held that the movable property of a corporation in use in other states is taxable only in the state of the corporation's domicile.' In Pennsylvania, it has been held that corporate property, con- sisting of dredges, etc., not permanently located anywhere, may be taxed in the state of the corporation's domicile as part of the stock.* Some states, Uke New York and California, apply the same rule to corporate as to individual property, and seek to avoid double taxation of this kind. In New York, in order to exempt the personal property of a corporation be- cause it is outside of the state, the change of location must be permanent and unequivocal.^ But in most of the states the rule mobilia personam sequuntur is appfied, and domestic corporations, at all events, are taxed on their whole prop- erty.^ In the case of foreign corporations, however, it is fast ^ State Treasurer ex rel. vs. Auditor-General, 46 Mich. 224; Graham vs. Township of St. Joseph, 67 Mich. 652. 2 S. C. Rev. Stat. chap. 12, sec. 28. For other cases, see Commonwealth vs. RaUroad Co., 145 Pa. State, 96, distinguishing Commonwealth vs. Dredg- ing Co., 122 Pa. State, 386; Comcmonwealth vs. Westinghouse Air Brake Co., 151 Pa. State, 276; Commonwealth vs. St. Bernard Coal Co., 9 South- western Reporter, 709 (Ky.). 3 Baltimore and Ohio R. R. Co. vs. Allen, 22 Fed. Rep. 376. * Commonwealth vs. American Dredging Co., 122 Pa. State, 386. * People ex rel. Pacific Mail S. S. Co. vs. Commissioners, 64 N. Y. 541. As to how the realty outside the state should be valued, see 52 Hun, 93; People ex rel. Panama R. R. Co. vs. Commissioners, 104 N. Y. 240 (1887). For California, see San Francisco vs. Fry, 63 Cal. 470 (1883); San Francisco vs. Flood, 64 Cal. 504 (1884). ^ This was formerly the case also in New Jersey, where personal property 282 ESSAYS IN TAXATION becoming the custom, even in most of the states which levy a corporate property tax, to exempt the intangible property, on the principle that the domicile of the foreign corporation is not changed by its doing business in other states.^ Manifestly, if the commonwealths will still cling to the policy of taxing the actual corporate property, the only logi- cal and just method is for each state to exempt so much of the corporate property as is already taxable in another state. The federal government has unfortunately not exercised its right — if indeed it possesses any — ^to compel such imiformity. Our only hope, therefore, hes in the progress of correct public sentiment and its influence on commonwealth legislation. Until then, we shall still be confronted by the present confusion. 2. Interstate taxation of corporate securities. The evils arising from the simultaneous taxation by different states of the same corporate stock or bonds or dividends and interest have been so patent as to lead to statutory changes and judicial interpre- tations of considerable importance. In Pennsylvania, after being long the custom, it was subsequently judicially decided to be the law, that the tax on capital stock applies not to the whole capital but only to such a proportion of the capital stock as is employed, either actually or constructively, within the state.^ The act of 1907 applied the same principle to the bonus on charters. In New York, the original statute at- tempted to follow the old rule; but the law was subsequently so amended as to provide expressly for the taxation of only so much of the capital stock as is employed within the state.^ In a case which arose under the old statute, although decided after the passage of the amendment, the court of appeals de- clared itself forced to adhere to the old rule, saying that, although it was extremely hard and unjust, the court was unable so to construe the statute as to relieve the corporation from the provisions of the law.* The principle in both these common- outaide of the state, which was exempt in the case of individuals, was tax- able when owned by corporations. State vs. Metz, 3 Vroom, 199; State vs. Haight, 6 Vroom, 279. This was however altered by subsequent legislation. Cf. the N. J. Revised Tax Act of 1903, sec. 3. ^ Cf. Insurance Co. vs. Assessors, 44 La. Ann. 760. Cf. ibid., 765. 2 Commonwealth vs. Standard Oil Co., 101 Pa. State, 119. As to the previous custom, etc., see Decisions of the Auditor-General, 1878-80, p. 296. ' New York Laws of 1885, chap. 501, p. 858. * People vs. Horn Silver Mining Co., 105 N. Y. 76, especially 88. THE TAXATION OF CORPORATIONS 283 wealths now applies equally to domestic and to foreign corpora- tions. In Massachusetts, however, where the franchise tax, as we have seen, is applicable only to domestic corporations, the general corporation tax is levied on the total capital stock irrespective of its employment. So far as railroads are concerned, it has become the common practice to assess only so much of the capital stock as is rep- resented by the proportion which the mileage in the state bears to the total mileage. This is true even in states like Massa- chusetts, which do not apply the principle to corporations in general, as well as in states like Connecticut, where stock and bonds are taxable. Such a standard, while not perfectly exact, is fairly acciurate; and has been upheld as entirely constitutional. '' It is applicable equally to telegraph companies and to other transportation companies; and is gradually being applied to them, although not quite so commonly as in the case of railroads, in all those states which tax: capital stock directly. The prin- ciple is sound, although it may be contended with justice that business done, i.e. receipts, is an even better test than mileage, even though mileage would have to be one of the factors em- ployed in apportioning receipts. For other corporations, however, it will readily be seen how vague is the New York and Pennsylvania doctrine of "capital employed within the state." What business firm or corporation with ramifications all over the country can tell exactly or even approximately how much of its capital is "employed" within any one state? Even if they can, how many of them will tell, when concealment will enable them to evade the tax? In some of our commonwealths the state officers have the right to inspect the books of corporations and to change the assessments if they deem them too low. Even then, what guarantee is there that they will discover the real proportion? The taxation of so much of the capital as is employed within the state is extremely difficult. Because of the fact that many states still follow the old New York practice it may be interesting to notice some New York decisions of cases which occurred before the present amend- ments were adopted. A Massachusetts corporation — a tele- phone company — was taxed in New York by assessing the whole capital in proportion to the number of telephones used in the 1 Delaware Railroad Tax Case, 18 Wall. 208; Erie Railroad vs. Pennsyl- vania, 21 Wall. 492. 284 ESSAYS IN TAXATION state. Although the tax was declared invalid for quite another reason, viz., that the corporation was not technically "doing business" in the state, the court entered into a discussion, obiter indeed, of the question with which we are deaUng here. Chief Justice Ruger used the following language: — "It is by no means clear that the mode adopted . . . produces a correct result. . . . We are quite unable to sanction a principle which would subject it [the corporation] to the liability of being taxed, not only in [the state] where it is located, as it undoubtedly would be under the law as laid down by us [in the Horn Silver Mining Company Case], on its entire capital stock and gross earnings; but also in each state of the Union ia which it should own telephones on such proportion of its capital stock and gross earnings as the law-makers of such state saw fit to impose.! It is difficult to see the justice of this conclusion. It happens to be true that Massachusetts still follows the incorrect and inequitable plan of taxing the whole capital. But that was no excuse for the New York court to interpret the old statute in the same way, or to assume that other states will also follow the precedent which the court itself pronounced "extremely hard and unjust." Two wrongs do not make a right. In the absence of any federal law regulating the subject, the only upright course for each commonwealth to pursue is to follow the dictates of interstate comity and the sotmd principles of the science of finance by taxing only so much of the corporate capacity as is, economically speaking, within its jiu'isdiction. As we have repeatedly said, the taxation of corporate stock is by no means the ideal method. But if the New York principle of taxing capital stock and gross earnings be nevertheless followed, it is difficult to discover any more practicable or more defensible method of ascertaining the due proportion of capital stock employed or gross profits earned within the state than by considering the number of, or royalties from, the telephones used. This is analogous to the Connecticut system of proportional mileage as applied to railroad companies. In the case of telephone companies, however, the number of instruments used is a better test than the mileage of the tele- phone wires; for the capital, as well as the expenditure, is far more nearly in direct proportion to the number of telephones in use than to the amount of wire employed. In the above case the law was declared invalid because the » People vs. American Bell Telephone Co., 117 N. Y. 242, especially 256. THE TAXATION OF CORPORATIONS 285 tax was assessed on a foreign corporation. Even though this foreign corporation held stock in various domestic corporations, it was not legally doing business in the state; since before a foreign corporation can be taxed under the New York law it must not only employ a portion of its capital in that state, but must also be engaged in doing business there. ^ In the case of a domestic corporation the fact that the capital is em- ployed within the state is a suiEcient groimd for taxation. So far as its capital stock is invested in the stock of foreign companies, it is not taxable because it is not employed within the state; but so far as its capital is invested in the bonds of foreign corporations taken in return for the sale o£ patent rights, it is taxable.^ In another case which also arose under the old law it was held that the proportion of sales within the state to the total sales of a foreign corporation is not a fair test of the capital employed within the state. Sales may be made by sample, so that the corporation may simply keep an office in the state and employ none of its capital there.^ In some recent laws, as in Kentucky, the proportion of the capital stock which is taxed must bear the same proportion to the entire capital stock that the corporate receipts in the state bear to the total corporate receipts. This is a simple solution of the problem, but falls properly under the heading of double taxation of receipts, to be discussed below. 3. Interstate taxation of non-resident bondholders or stock- holders. The subject of the taxation of corporate stock or bonds is complicated in another way by the question of extra- territoriality. The problem is this: Can a corporation, even though its capital be employed wholly within the state, be taxed on its capital or bonded debt if these are owned in part by residents of another state? The federal Supreme Court has arrived at some very remark- able conclusions. So far as bonds are concerned, the above practice has been pronounced unconstitutional. In one case it has been held that a state tax on bonds issued by a railroad company and secured by a mortgage on a line. lying partly ' People ex rel. American Construction and Dredging Co. vs. Wemple, 129 N. Y. 558 (1892). 2 People ex rel. Edison Electric Light Co. vs. Campbell, 139 N. Y. 543 (1893). ' People ex rel. The Seth Thomas Clock Co. vs. Wemple, 133 N. Y. 323 (1892). 286 ESSAYS IN TAXATION in another state was void, because the state was' taxing to that extent "property and interests beyond her jurisdiction." ' A later case went further and decided in general terms that a tax on corporate bonds is invalid as to non-resident owners, because the debts are the property not of the debtor, i.e. the corporation, but of the creditors, i.e. the bondholders. They are the obligations, not the property, of the debtors. But the creditors cannot be taxed on their property because they are not within the jurisdiction of the state. ^ The particular statute in this case was the Pennsylvania law of 1868, requiring cor- porations to retain five per cent on the interest due on the bonds, iifiyable to non-residents. The state courts which had hitherto entertained a different opinion were compelled to acquiesce; and in a later case, decided in the same common- wealth, the state tax on corporate loans, i.e. on bonded indebted- ness, was upheld only so far as it applied to the bonds owned by the residents,^ being declared to be a tax on the bondholder, not on the corporation.* This, therefore, is the accepted law of the land as to bonds. Shares of stock, on the other hand, are treated quite differ- ently. It has indeed been decided that a state tax on divi- dends is unconstitutional as to non-residents if the corporation be required to withhold the tax from the dividends.^ The New Jersey courts, moreover, have held that a corporation is not liable on that part of its stock owned by non-residents.^ The United States courts, however, have uniformly maintained that a state tax on capital stock, even though the stock be held partly by non-residents, is legitimate on the ground that the tax is laid on the corporation as a whole, and not on the individual shareholder.^ A later case even decided that a state tax on the shares of stockholders, which the company is required to pay irrespective of dividends, is not a tax on the shareholders but on the corporation.^ This is held to be true ' Railroad Company vs. Jackson, 7 Wall. 262. 2 State Tax on Foreign-held Bonds, 16 Wall. 300. ' Commonwealth vs. Delaware Division Canal Co., 123 Pa. 594. « Bell's Gap R. R. Co. vs. Commonwealth, 134 U. S. 232. * Oliver vs. Washington Mills, 11 Allen, 268. ' 26 N. J. 181 ; 3 Zabriskie, 506, 517. ' Delaware Railroad Tax Case, 18 Wall. 208. " New Orleans vs. Houston, 119 U. S. 265. Cf. also 196 U. S. 466, up- holding the Maryland tax on non-resident stockholders. See Corry vs. Baltimore, 96 Md. 310. THE TAXATION OF CORPORATIONS 287 notwithstanding the fact that in another case a tax on dividends or interest paid by the corporation was held to be a tax on the income of the stockholder or of the creditor, and not on the income of the corporation.^ The present state of the law, therefore, is that the entire capital stock of a corporation may be taxed by any common- wealth, but that only so much of the bonds are taxable to the corporation as are owned by residents of the state. The mere statement of this proposition makes it evident how impracti- cable would be the otherwise defensible system of taxing cor- porations by a separate tax on stock and an additional tax on bonds. The Pennsylvania system, which at first blush seemed to be an excellent solution of the problem, thus appears to be shorn of its chief merits, if the present law of the land is sound. The great majority of states, the bonds of whose corporations are owned mainly outside of the state in large financial centres like New York or Boston, would find such a tax sadly inad- equate.^ Even in the state of New York, where for several 1 United States vs. Railroad Co., 17 WaU. 332. 2 An investigation by the Pennsylvania Tax Conference disclosed the following facts as to certain Pennsylvania railroads: — LL Bond Issues Amount held in Pa. appbaised value Stock OF JTERCENTAQE OF Line in Pa $ 450,000 $ 116,000 % 450,000 100 352,000 63,000 1,400,000 72,800 2,700 383 I 230,000 384 I 240,000 8,000 48,000 I 320,000 121,100 I 5,250,000 1,200,000 3,388,550 I 890,000 1,400,000 ( 990,000 80,000 1,278,300 ( 3,400,000 6,000 2,000,000 " 2,900,000 127,000 50 800,000 100 3,546,670 179,000 179,000 144,375 2,280,000 2,100,000 2,900,000 495,000 456,000 1,850,000 500,000 410,000 650,000 200,000 200,000 80,000 1,800,000 1,800,000 600,000 800,000 800,000 800,000 270,000 260,000 2,370,466 300,000 300,000 275,000 fi