§ 12. Special taxes on banks. Attempts to deal with the difficulty without clear perception of its cause took the form of legislative tinkering and patching. Taxes were gathered from corporations by any device that seemed workable. The banks, being the earlier important corporations, were first experimented upon. Taxes on capital stock and on circulation were tried first (in 1805, by Georgia), then a tax on dividends (in 1814 in Pennsylvania, and in 1815 in Ohio), examples that were followed or modified by a number of states. After the national banking system was started in 1864, attempts to tax both the capital of the banks and the stock in the hands of individuals led to federal court decisions and then to state legislation, by which now in many of the states the banks are separately taxed on their real estate and the shares are assessed to the individual holders (by various rules), but the taxes deducted from dividends and paid by the bank. There are, besides, special franchise taxes and fees paid by banks in various states.

§ 13. Special taxes on insurance. Insurance companies present in a striking manner the complexities of the ambiguous property concept. The assets of the insurance companies (we refer here particularly to the reserve companies), which belong in equity to the policy-holders (less the claim of the stockholders in the case of the stock companies), are nearly all invested in stocks and bonds of corporations and in mortgages on real estate. Now, under the general property tax, strictly interpreted, the policies are assessable at their surrender or reserve valuation in the hands of the policy-holders; secondly, the securities and credits that compose the assets are assessable to the company; and, thirdly, the railroads, factories, and houses, built with the outstanding loans made by the insurance companies, are assessable as tangible wealth to the various owners (individuals or, usually, corporations) of the wealth. Even more complex problems may and do arise. If such an interpretation were practically enforced it would result in double or multiple taxation levied upon the same economic source, and would be utterly prohibitive of the insurance business. The enforcement has, however, been impossible in practice. Insurance companies have comparatively little tangible wealth excepting real estate for offices. This is taxed locally. Several methods have been tried (beginning as early as 1824) to make insurance companies pay taxes (usually for state purposes) on something besides tangible wealth. A tax on receipts from premiums proved most workable, first as applied to "foreign corporations" (that is, to those of other states) and later, generally, to domestic companies also. Now, amid bewildering variety and interstate rivalries in tax laws, the most usual rate is 2 per cent on gross (in a few cases on net) premiums collected. The taxes on premiums, with various licenses and fees, now amount to 2.15 per cent of the total receipts from life insurance premiums in the United States. This is taxation not on an existing body of accumulated wealth, or upon income, but upon the process of accumulation, a tax directly on the act of saving. A consistent policy of wealth taxation, combined with income taxation, would require the abandonment of the present forms of special insurance taxes.

§ 14. Special taxes on transportation. Another great group of businesses whose taxation has been especially complex, because they are distributed throughout different taxing districts, are agencies of transportation and communication, especially railroad, sleeping-car, express, telegraph, and telephone companies. A state tax on railroad tonnage (Pennsylvania, 1860) was declared unconstitutional by the United States Supreme Court. But many other plans have been tried to compel the railroads to contribute, the chief being by taxes on dividends, gross earnings, equipment, and valuation of capital stock, taxed either to the company or to the stockholders, (Connecticut since 1849). About a third of the states no longer make the physical plant the basis of taxation, except that in most of them some part or kinds of real estate are taxed locally.9

Telegraph companies are still locally assessed in most states, but in more than a third of the states are taxed either on gross receipts or on mileage of wire. Telephone companies are similarly taxed, but sometimes on the number of transmitters, or of subscribers, or on each plant, or otherwise. In a similar manner, express and sleeping-car companies are taxed, in the same group of states, on mileage, or on capital stock proportional to mileage, or by license and privilege taxes.

In the case of these corporations, and also of various other miscellaneous kinds of companies, no clear-cut principles serve to guide. The result is "a chaos in practice - a complete absence of principle." 10

§ 15. Alternative policies in corporate taxation. If the taxation of corporations is not to continue to be treated in a mere hit-or-miss manner, with every possible kind of inconsistency among the various states, some general principles must be recognized and some clear policy be formulated. But there is no general agreement to-day among jurists and economists upon a definite and consistent plan in this matter.

Two alternative policies appear. The first is to make the scheme for taxing corporations quite different in principle and plan from that for taxing natural persons. The assumption in this is that the "general property tax" is an irremediable failure, and is particularly inapplicable to corporations. This plan goes along with the separation of state and local taxation.11 An unfortunate result of this is to relieve the great mass of taxpayers of the state from any apparent and measurable part of the tax burden for state purposes, and thus to separate responsibility and power in state government. This policy nevertheless is favored by some of the leading authorities on finance.

9 E. R. A. Seligman, "Essays on Taxation" (1895), p. 156. 10 Seligman, op., cit. p. 136. 11 See above, § 7.

The other policy is to tax the wealth and business of corporations (excepting those enjoying special privileges) in essentially the same way as other wealth and business. The improvement of corporate taxation would thus be but a part of the transformation of the "general property tax" into a general tax on tangible wealth.12 If first there is recognized the error of assessing the equitable ownership interests in addition to the body of wealth, and secondly there is created an efficient agency of assessment, the taxation of corporations can be logically and easily brought into accord with a harmonious system of state and local taxation.

The assessment feature of this proposal is exemplified more nearly than anywhere else, though still imperfectly, in the "Indiana plan." By this all the wealth of the corporation is assessed as a whole, but the shares of corporations are not taxed in the hands of the shareholders.

§ 16. General plan for corporate taxation. The main features in such a plan of reform would be as follows:

(a)   State assessment: assessment of all wealth by state agency, with expert non-local assessors, appointed and serving only under the merit system.

(b)   Unit rule: the assessment of the value of each enterprise and body of wealth as a unit for the whole state, and apportioned to the minor divisions as the basis for levying local taxes.

(c)   Mileage rule: apportionment of the total value in the state among the localities by general rule, in the case of transportation and transmission companies, by mileage with due regard to the presence of local real estate and of special industrial equipment such as repair shops and power plants.

12 See above, § 5.

(d)   Interstate comity: taxation of interstate enterprises only in due proportion to the whole business, by mileage or other rules; interstate comity to be further developed in this matter.

(e)   Intangible factors in unit valuation: account to be taken, in assessment, of various factors determining the earning power, such as good-will, patents, and other monopolistic elements, pertaining to and helping to determine the value of the tangible plant of the enterprise.

(f)   Securities not separately taxable: account to be taken of the market value of securities and notes owned by a corporation, in determining the taxable value of the whole business, but these not to be treated as a separately assessable "property" (in addition to the tangible plant).

(g)   Investors exempt on normal tax: exemption of the holders of securities and evidences of indebtedness of corporations, (though this need not prevent a supplementary system of graduated taxation on incomes).13

(h) Special franchises: treatment of special privileges granted to public-service corporations for the use of streets and public highways on the principle of rent-payment to the community rather than by levying a percentage on an assessment.

13 See ch. 19, § 11.

References

Bullock, C. J., Selected readings in public finance. Bost. Ginn.

1920. Compton, W. M., Recent tendencies in the reform of forest taxation.

J. P. E., 23: 971-979. 1915. Hamilton, W. H., Readings in current economic problems. Univ. of Chi. Press. 1914. Pp. 560, 561. Jorgensen, E. 0., One hundred Reasons for the Single Tax. Chicago.

The Chicago Single Tax Club. 1920. Post, L. F., The taxation of land values. Bobbs-Merrill. Indianapolis. 1915. United States Bureau of Corporations, Report on the taxation of corporations. Pts. I-IV. 1909-1912. Young, A. N., The single tax movement in the United States.

Princeton Univ. Press. 1916.