In attempting to impose an extra tax upon corporations, one of the first schemes hit upon was to place a levy of some nature upon the capital stock. This continues to be in use more than any other single plan, and is found in more than half the states. Some of the schemes in vogue are exceedingly complex, while others attempt no more than to exact a small percentage each year on the amount of capital stock. Since the state of New York is considered one of the most progressive states in matters of taxation, an outline of the Annual Franchise Tax used in that state may be given as an example of one of the more detailed methods in which capital stock is used as the basis for determining taxable values.

Annual Franchise Tax of New York. - The annual franchise tax, which was first adopted in 1880, and took practically its present form in 1906, does not replace the local taxation of corporations, so that the inequalities of local assessment still remain. Under the annual franchise tax corporations which are subject to the tax are required to make yearly reports to the comptroller, stating the amount of authorized capital stock, the amount of stock paid in, the date and rate of each dividend declared, the entire amount of capital, and the amount of capital employed in the state. The tax is to be paid in advance, and is to be based upon the amount of capital stock employed within the state during the preceding year. The capital stock employed within the state is that proportion of the entire capital stock that the assets within the state bear to the entire assets.

The capital stock is classified, for the purpose of assessing the tax, as follows: (1) If dividends have amounted to 6 or more per cent upon the par value of the stock, the tax rate is one fourth of a mill for each per cent of dividends made or declared. (2) If dividends have been less than 6 per cent and (a) assets do not exceed liabilities, exclusive of capital stock, or (b) the average selling price of the stock during the year has been below par, or (c) if no dividend was declared, then the rate of tax is three fourths of a mill. (3) If dividends have been less than 6 per cent and (a) assets exceed liabilities, exclusive of capital stock, by an amount equal to or greater than the par value of the stock, or (b) if the average selling price of the stock has been above par, the tax rate is one and one half mills: but the valuation of the stock shall not be less than (a) par value; (b) difference between assets and liabilities, exclusive of capital stock; (c) average selling price of the stock during the year. (4) If a part of the capital stock has paid more than 6 per cent dividend, while a part has paid no dividend or less than 6 per cent, the above rules are to be applied to each portion of the stock as if it existed alone. (5) Corporations not assessable under the above rules are to be taxed by an amount not less than would be produced by an assessment of (a) one and one half mills on the actual value of the capital stock, or (b) one and one half mills on the average selling price during the year.1

It is not intended that the reader will thoroughly understand this system, nor is it the intention of the author to attempt to clarify a system that has been involved in litigation ever since its adoption. It is seen that the basis for the tax is capital stock, while the rate is determined by a number of variable factors - dividends, market price of the stock, and the financial condition of the corporation. The difficulties and uncertainties which arise from the numerous complexities of the plan neutralize, to a great extent, any advantages which are expected to come from such a minute classification.

Massachusetts Plan. - In contrast to the New York plan, one may be cited which has been used for many years, which is comparatively simple, and yet has given a large

1 Not all corporations are subject to the annual franchise tax. The exemptions comprise banks, savings banks, insurance companies, trust companies, manufacturing and laundering companies, mining companies, and agricultural and horticultural associations. Public utility companies are also exempt from this law, but are taxed upon the basis of earnings and dividends by a system almost as complex as the annual franchise tax.

measure of satisfaction. This is the plan of taxing the corporate excess which is used in Massachusetts. It is an attempt to assess the real intangible value of the corporate privilege. This intangible value is arrived at by the tax commissioner from two sets of data: one is the assessed value of the plant which has been made by the local assessor; the other is the market value of the shares of stock which is obtained from detailed reports by the corporation. The difference between this local valuation and the valuation of the shares of stock represents the excess value which can be attributed to the form of organization, and is taxed at the general tax rate.

Other Methods of Taxation. - Various other methods have been used in other states for reaching the capital stock. In some cases the bonds have been added to the capital in order to approach more nearly the true value of the corporation. Some states use the par value of the shares of stock, and others use the market value as the taxable value. Either method is objectionable, and many cases have arisen where neither would represent the ability to meet tax payments. Two corporations with exactly the same income may follow radically different policies, which would be reflected in the value of the stocks. One may follow the policy of putting the earnings back into the business until it becomes immensely undercapitalized, yet all this time the market value of the stock has been low because no dividends, or only small ones, were paid. The other corporation paid large dividends, but has put nothing back into the business, and its stock would be selling much higher than that of the first organization. That the use of capital stock as a measure of taxable value has not been satisfactory is evidenced by the number of corporations which have been removed from such tax laws, and by the number of other plans which have been used in taxing them.