Special Franchise different states. It assumes a variety of forms sometimes applying to the whole net income, sometimes only to that part distributed as dividends above a certain rate per cent. A tax on the net income or earnings of corporations would seem at first thought an ideal method of compelling them to contribute to the government in proportion to their ability. It is out of the net income that interest and dividends are paid to investors and it is these that measure tax paying faculty. The difficulty is that in practice it is found impossible to prevent corporations from concealing their true net earnings when the tax system offers them a strong inducement to do so. They may do this by charging off each year outlays for enlargement and betterment of plant, which really represent new investments, by paying higher salaries, etc., than market conditions require, or by deliberate fraud in making their reports to tax assessors. Unless coupled with a more rigid supervision of methods of accounting than has yet been adopted in the United States, except for interstate railroads and public service corporations in a few states, the net income tax, though so fair on its face, is really a highly unsatisfactory source of revenue. It is distinctly inferior as a means of gaging tax paying ability to the combined capitalstock and bonded-debt test. § 281. The special franchise tax is a tax upon those corporations which enjoy peculiar privileges in connection with the use of the streets or other public property. As developed in New York State it subjects such special franchises to taxation as real estate and is thus a part, though a peculiar part, of the general property tax. The history of this tax is interesting. As is well known few corporations have proved so successful as those described as public service corporations, that is, gas, electric lighting, street railway, telephone and analogous companies. Under the old law these corporations were subject to the general property tax like individuals, that is, to a tax on their real estate and tangible personalty. When the attempt was made, however, to tax them also on their franchise privileges, which had become enormously valuable, on the ground that these also were a form of personal property, the courts held that they were not personal SPECIAL FRANCHISE TAXES 509 property for purposes of taxation. In this dilemma the legislature of New York State passed in 1899 the so-called Ford Special Franchise Tax law, which declared special franchises real estate and directed the state board of tax assessors to assess them as such. After a long legal contest the act was sustained not only by the courts of the state of New York, but by the United States Supreme Court. As the propriety of taxing these special privileges as they become valuable along with other property is generally conceded, New York's plan is very likely to be followed by other states. This lends more than local interest to the question of the effect of such taxes. to Land Taxes. Like the tax on land a tax on the value of a special and Their Reexclusive franchise must be paid by the owner of the fran- semblance chise. The imposition of the tax alters in no respect the terms on which he renders his service to the community nor the price which he receives for that service, and, consequently, it cannot be shifted. Moreover, like the tax on land the special franchise tax is capitalized at the current rate of interest and deducted from the value of the franchise as an investment. Thus the whole burden resulting from making special franchises subject for the first time to taxation at the rate applying to other property falls upon the investors interested in special franchise corporations at the time the tax goes into force. After the value of the securities of such companies is readjusted to the new conditions they pass to new owners at prices that make full allowance for the tax and, consequently, the tax is not felt by such new owners as a burden. We thus have here another instance of a tax that becomes virtually burdenless as it becomes old. In other states than New York special franchises may be taxed as personal property, if the courts approve, or under franchise taxes applying expressly and exclusively to them. But, however they may be designated, the same reasoning applies to them as to taxes on land. When first levied they are capitalized and impose a serious burden on the franchise owners. As time goes on and new owners acquire the franchises they become burdenless, so far as investors are concerned. Liquor § 282. License taxes have received their highest development in the United States in connection with efforts to control the liquor traffic. Beginning as moderate charges for the privilege of engaging in the liquor business they have grown until now under the high license system in force in the larger cities they require the annual payment of $1,000 or more for the privilege of maintaining a saloon, and of proportionate amounts for that of engaging in other branches of the liquor business. Space will not permit an exhaustive consideration of the effect of high license taxes but a few of their advantages may be emphasized. They are easily assessed and collected and they have proved a source of large revenue. They compel concentration of the business affected into fewer establishments and this makes supervision easier and more efficient. The economies resulting from this concentration are so great that it may be doubted whether they lessen greatly the profit of those obtaining licenses on the one hand or add appreciably to the prices charged for the commodities sold under the license system on the other. Retail trade, whether in liquors, or in drugs, milk, ice, groceries, provisions, or even merchandise, is strikingly wasteful when exposed to the effects of an unregulated competition. The needless multiplication of stocks and selling places, the reckless entry into the field of men with little capital and less experience due to the feeling that any one can keep a store " and the losses which result owing to the fact that only competent persons can make storekeeping pay, the costly duplication of distributing machinery-all these aspects of retail trade supply telling arguments against a competitive organization of industry. The high license system, although not primarily intended for that purpose, substitutes regulated for unregulated competition. It is believed to be within the truth to claim that more than half of the revenue that the government derives from license taxes is wealth that without the moderate regulation the system imposes would have been wasted in a vain competition. The incidence of the remainder of the tax is similar to that of excise or customs taxes. In the case of liquor licenses a part of it is probably borne by the holder of the license and part of it by the consuming public in the slightly higher prices they are required to pay for the same quantity and quality of liquor. § 283. Inheritance taxes are becoming a very common Inheritance source of revenue in the United States as they have long been Taxes. in Europe. The question who pays them can be answered with ease and certainty, as they present no possibility of shifting. They must lessen the inheritance and in this way fall upon the heir. Their payment, unless they are excessive, will not usually, however, be looked upon as a burden. Those who inherit property usually need the protection of the government against the pretensions of other claimants. Their thoughts are naturally fixed on the share of the inheritance that is to come to them, and if the inheritance tax is an established institution they are apt to accept it as a fair means of compensating the state for its part in securing to them whatever may be left. Inheritance taxes thus combine in unusual degree the characteristics of a good form of taxation: they may be easily and fairly assessed and collected; they cannot be shifted and consequently have no tendency to interfere with business relations; they impose little or no felt burden upon those out of whose inheritances they are paid. The principal difficulty that arises in connection with their use is to decide at what rate they should be imposed. On this point, as is explained in the next chapter, the practices of different countries vary widely. REFERENCES FOR COLLATERAL READING *Adams, Science of Finance; *Seligman, Essays in Taxation, The Shifting and Incidence of Taxation and Progressive Taxation; Bastable, Public Finance; Daniels, Elements of Finance; Plehn, Introduction to Public Finance. 13 Fractical The Tariff the United States. CHAPTER XXVII PRESENT TAX SYSTEM OF THE UNITED STATES § 284. Before attempting to discuss the effect upon the distribution of wealth of the various taxes considered in the last chapter and to formulate suggestions for the reform of the taxing system of the United States, it will be well to review very briefly some of the practical aspects of the more important taxes now in operation. The tariff system of the United States has already been System of discussed at some length. In its present form it may be fairly characterized as a plan by which the machinery of taxation is employed for industrial rather than for fiscal purposes. From the point of view of public revenue it is open to criticism because the burden which it imposes upon taxpayers is out of all proportion to the income which it affords the government. This results from the fact that the principal, and, of course, deliberately intended, effect of the tariff is to force consumers to buy, not foreign goods subject to the duties, but domestic products enhanced in price because of the duties. This, it need hardly be said, is no conclusive argument against the tariff, but it makes its discussion merely as a plan of taxation entirely profitless. Customs and Internal Revenue Duties From the point of view of revenue, customs duties were, prior to the imposition of the corporation income tax in 1911 and the individual income tax in 1913, somewhat more productive than internal revenue duties. Thus, during the ten Compared. years 1902 to 1911, customs duties yielded on an average $292,900,000 a year as compared with $259,900,000 from internal revenue taxes. The addition of the individual income tax and the lowering of the rates of duty on imports by the Underwood Act of 1913 quite changed this relation. In 1915, the United States received only $209,786,672 from customs * Chapter XXII. |