securities are held by persons in that city, who, if they conformed to the requirements of law and handed in lists of their taxable possessions, would be called on to turn over to the tax-gatherer about one-half of the income derived from these securities. In the large cities of the state of Ohio the nominal tax rate is even higher-$25 per $1,000, and even more. In Ohio an extraordinary endeavor to enforce this impossible tax (for impossible it may be fairly called) has been made through a system of tax inquisitors, persons authorized to ferret out the possessions of citizens subject to taxation, and awarded a share in the plunder so secured. One knows not what feeling of revulsion is strongest at this spectacle; humiliation that a great free commonwealth should resort to the worst devices of despotism, indignation that the state should incite directly to blackmail and corruption, or amazement that a cure for the evil should be really expected from a remedy so ingeniously designed to aggravate it.

I turn to another aspect of our subject. Some of you will say: "True, these are deplorable facts; no doubt the common practice makes the system impossible of execution; but is not the principle sound? May not better administration, and reform throughout, make the traditional methods tenable? Must we give up entirely the reasonable taxation of the wellto-do and the privileged because they now evade unreasonable taxes? These questions call for attentive consideration; and I propose now to deal with them, pointing out the reasons why the existing system, even when reformed and whitewashed, is not tenable, and why something fundamentally different should be devised to take its place.

Securities have been spoken of hitherto as if universally subject to taxation. But this is not the case. In many states corporations are taxed, or at least, are meant to be taxed, on their entire property, and some or all of the securities issued by them are then dismissed from the taxgatherer's ken. Thus, in the state of Massachusetts, corporations organized under its laws are taxed (to make a summary statement) on the total value of their property as indicated

by the market value of their outstanding shares of stock; thereafter the shareholders who own such stock are no longer called on to contribute. In Connecticut, on a method similar in principle, railways are taxed on the total value of their outstanding capitalization-stock and bonds together-and the individual holders of these securities are no longer considered. Some such method is coming into increasing use in the several states, where taxes on corporations are being levied more and more; and the natural corollary-the exemption of the shareholders as such-is slowly following.

The advantages of this mode of taxing corporate property are obvious-so obvious that there is quite as much danger of its abuse as of failure to use it. As to most corporations, the facts needful for a rigid assessment of taxes are easily procurable. The capital stock and the bonds outstanding, the gross income and the net income are often matters of public knowledge; and, where not so, can be ascertained by the tax-gatherer with comparative ease. One serious obstacle in the way of the ordinary taxation of the property or income of individuals is avoided. Since it is not material by whom or in what proportions the shares or securities of the corporation are held, there is no need of inquiry into what are regarded by individuals as their private affairs-regarded as private by Americans more jealously than by any other people. We need not stop to consider what precise method of taxing the corporations is the best-whether on the basis of capitalization of the total market value of securities, of gross earnings, of net earnings, or what not. No doubt different methods would be expedient for different classes of corporations; but these are somewhat technical questions, which need not engage our attention. It may be noted, in passing, that a method which is susceptible of simple administration may be preferable to one more perfect in principle but less easy of management; and thus for example, taxation on the basis of gross earnings or of market value of securities may be better than taxation on the more equitable but more elusive basis of net earnings. Whatever method be used, the evidence of tax

able possessions is clearly more overt and more easily controlled than could possibly be the case as regards the individual owners of the corporate securities.


If the general property tax is unsatisfactory, and especially if all that form of property represented by "securities" is not properly taxable as property, to what source is the State to turn for its revenue? One of the most prominent expedients, the one that has been most widely discussed and frequently employed, is to tax corporations. But this tax, while recognized as sound in principle, is also one of the most difficult taxes to administer effectively and equitably. Many methods of levying the tax have been tried with varying success. Professor Seligman thus describes and criticises these several forms of the corporation tax:1 [1890].

First, the general property tax, or the taxation of the corporate realty plus its visible and invisible personalty at its actual value. It will not be necessary to show the inadequacy of this method. All the actual reforms are away from this primitive plan. We have seen in a previous essay that the standard of taxation is ability to pay, and that this ability is no longer proportional to the general mass of property. The general property tax is to-day antiquated. When it is levied by the local assessors, it becomes especially unjust. Even when assessed by a separate state board it is inexact, and exhibits all the defects of the general property tax on individuals. 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, 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 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 1 See above page 411, note.

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. But as I have already observed, heavily bonded corporations would in this way entirely escape taxation. In such cases— and they are the great majority-the capital stock alone would not represent the value of the property. But secondly, even in the case of corporations without any bonded debt, the tax is unjust, because it does not necessarily bear any relation to the earning capacity. If a company without bonded debt pays dividends, then indeed the value of the stock is 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 nondividend-paying stock fluctuates in value from thirty to fifty per cent. within one year. Clearly a method of taxation which in such large classes of cases bears absolutely no proportion to the earning capacity or productiveness of the property 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 application."

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. Thus in New York it is a common practice for corporations to evade the organization tax of one-eighth of one per cent. on the amount of the capital stock, 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 is at once many times the par value. The sole recommendation of the tax is the facility of ascertainment. 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, and merits no serious consideration.

The capital stock plus the bonded debt at the market value, or more logically still, the capital stock plus the total debt. The justification for adding to the value of the stock the value of all that the company owes, i. e., the funded and the unfunded 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; for it prevents the exemption of heavily bonded companies. This method is much preferable to any that has yet been discussed. And still it is open to some objections. Owing to the complications of our 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, 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. Thirdly and principally, in all those cases where the corporation pays no dividends and its stock nevertheless possesses a speculative value, the tax will not necessarily bear any relation to the earning capacity or productiveness of the company, for the reasons adduced above. In short, while this method is better than the taxation of capital stock, it does not avoid all the objections that have been urged against the latter.

There remain thus only the taxes on earnings, business, dividends and profits.

The gross earnings. This tax was the one recommended by the railroad tax commission. It possesses many undeniable advantages. The tax is certain, easily ascertained, and not susceptible of evasion. But it has one fatal defect. It is not proportional to the real earning capacity. It takes no account of the cost, nor does it pay any regard to the

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