Extensive use has been made of earnings as a tax base in an attempt to get away from the difficulty of placing a taxable value upon public utility corporations. To make this concrete, the state of New York may again be called upon to furnish an illustration. Railroads are required to pay, semiannually, a tax of five tenths of 1 per cent of the gross earnings from business transacted in the state. All water, gas, heating, lighting, and power companies, in addition to a semiannual five tenths of 1 per cent franchise tax upon gross earnings, must pay a 3 per cent tax on dividends declared above 4 per cent on the capital employed. Reports are required which show capital, earnings, and dividends. Elevated roads, and surface roads not operated by steam, must pay an annual tax of 1 per cent of the gross earnings secured from business within the state, and 3 per cent of the dividends declared in excess of 4 per cent on the capital employed. The principal basis in this system of taxes, it is easily detected, is earnings - gross earnings directly, and net earnings as reflected in the amount of dividends declared. Some states make even a more extensive use of gross earnings as a base for taxes than does New York.
Advantages of Gross Earnings. - Some practical advantages in the use of gross earnings as a base for taxation at once appear. Gross earnings is a very much more definite concept than any other form of earnings. With the extensive adoption of standard systems of accounting, the determination of this item is comparatively easy. All items of expense must be taken from the gross receipts, and it is not illogical to consider taxes an item of expense along with rent, interest, and wages. The discretionary power of officials can be dispensed with, in large measure, since there is little chance of manipulating the gross receipts statement, while the tax can be computed by simple mathematical computation. Expenses of assessment and collection are likewise reduced to a minimum, so that the tax " takes out and keeps out of the pockets of the people as little as possible over and above what it brings into the treasury of the state." A gross earnings tax has, moreover, a close conformity to the American idea of a just base for taxation - property. The tax would be absent until a corporation was established upon an operating basis. It would fluctuate with business conditions - increase as business prospered, and prove a smaller burden in times of depression. It would eliminate the difficulty of attempting to place an estimate upon all the intangible franchise values which a company is supposed to possess. Tax Officials Favor Gross Earnings Tax. - Many tax officials have recognized these advantages and are using the gross earnings tax, or are strongly urging its adoption. After a careful investigation and consideration, an Ontario tax commission recommended it as being undoubtedly the best method for taxing railroads. A California tax commission pointed out that the plan would result in a closer approximation to justice than any other system which the state might select. The burden would vary with the fund out of which it was to be paid. In questions of taxation, practical considerations naturally outweighed theoretical ones, and this tax evidently possessed practical advantages. A Minnesota commission pointed out that the greatest advantage was the elimination of the necessity for valuing the complicated and peculiar properties of the corporation, which had formerly been inaccurate and but crude guesswork. Many other testimonials could be presented, but, as illustrative of their general nature, a brief quotation from a Connecticut report will not be out of place. It said:
The tax on gross earnings avoids all the difficulties inherent in the tax on net earnings. No corporation can do business without having accounts which will at least show the amount of its gross earnings. Gross earnings are a definite fact, ascertained by a glance at the accounts, and incapable of argument or difference of opinion. The tax on gross earnings can be evaded only by perjury of the most obvious sort, and is capable of easy detection. The gross earnings tax, therefore, has the greatest advantage of simplicity, certainty, and ease of administration. This is an advantage both to the corporation and to the state. The amount of the tax on gross earnings fluctuates with the prosperity or adversity of the business, and is, therefore, just to all parties concerned. Moreover, it enters each year into the accounts in a definite ratio, and can thus be counted on in advance.
A serious question remains to be answered. Will not the tax on gross earnings be distinctly unfair on account of the great diversity between different corporations in their ratios of expense to earnings? The answer is that such injustice is to be avoided by classifying corporations according to the prevailing ratio of net earnings to gross, and imposing different ratios upon the gross earnings of the different classes of corporations.
Investigation shows, for instance, that the ratio of net earnings to gross is fairly uniform for the railroads of the country. In the same way there is a general prevailing ratio of net earnings to gross for telephone companies, for express companies, etc. Having determined what this prevailing ratio is for each class of corporations, we are enabled to fix ratios for each class which will make the tax on gross earnings just to all. It is true that absolute justice as between individual corporations of the same class is not obtained. The resulting injustice, however, is not great. . . . Some inequality is unavoidable, but the inequality thus resulting is distinctly less than can be easily shown to result from any of the other schemes of taxation which are before us. No tax system can be absolutely perfect, and it is not a valid objection against a proposed scheme to point out a defect which is present in even greater degree in each of the other possible alternative measures.1
1 Report of the Special Commission on Taxation of Corporations, State of Connecticut, 1913.
Objections to Gross Earnings. - In spite of this wide advocacy, and its apparent success in many instances, the gross earnings tax presents serious difficulties. Gross receipts do not represent earning capacity, and it is earning capacity that makes a concern valuable and able to pay taxes. It is what is left after expenses are paid that spells success or failure. The gross receipts of two street railway concerns, for example, might be the same, while the net returns might be such as to make one a success and the other a failure. The one might be operating under auspicious circumstances - short lines, heavy traffic, level streets, etc., while the operation of the other might have the opposite conditions.
Similar conditions are found in varying degrees in all classes of corporations, and it is too much to expect that any system of classification can take them properly into account. The experiences of Michigan and Wisconsin do not stand out in support of the gross earnings tax. Both states, after giving it a thorough trial, have abandoned it. Wisconsin had used the system for nearly fifty years. The reasons assigned by the officials of both states for its failure to give satisfaction were practically the same-uniformity could not be secured between the corporations, and there was no relation between the tax paid on corporate property and that paid on other property. The governors under whose administrations the tax was given up, had pledged themselves to equality in taxation.