The difficulties of a gross earnings tax have led some to advocate and others to refuse to give up net earnings as the proper base for taxes. Net earnings can be used, either as the direct base for the tax or as the basis for finding the value of the company. If the capitalized net earnings be taken as the proper valuation of a concern, then no account need be taken of capital that may have been issued and squandered; of the different forms of stock exchange manipulations; or of the watered stock a company may have. The factor under consideration is what the enterprise is worth as a productive agent or as a going concern. The original cost, or the cost of reproduction, is not the controlling item which determines value; this is determined by the one characteristic-power to bring in a money return over and above expenses. The capitalized net income will most nearly correspond to what a purchaser would be willing to pay at a natural sale - and the courts have held this to be the value of property.

Mr. W. S. Stevens, of the New York Public Service Commission, expressed the opinion that the net earnings tax was the one which would have the support of basic principle. He said:

The only course open to the investor is to select those attributes which, in his judgment, would create a desire for the property, and then estimate how much that desire would induce a prospective purchaser to surrender for its satisfaction. ... Its one characteristic which gives it value is its supposed power to yield, directly or indirectly, a moneyed return equal to the investment, with a profit thereon. Its value lies not in what it is, but in what it will produce, or what it is believed it will produce in money. This is the essential proposition upon which all depends. Generally speaking, what it will produce in money will depend upon its earning power, directly or indirectly. To the ordinary investor it is its direct earning power as shown by the excess of revenues over expenses. . . . This fundamental consideration indicates that the net earnings rule, when properly and carefully applied with due regard to all the features of the individual case, is probably the one having the surest support of basic principle. It is also the one which accords with the practice of shrewd, broad-minded, and successful men of business.1

Objections to Net Earnings. - In spite of the apparent logical and theoretical soundness of net earnings as a tax basis, many practical difficulties are met in its administration. One which has proved most troublesome is in determining the true net earnings. Accounting systems have been anything but uniform, and no comparison can be had between net earnings of different enterprises. Even

1 Quoted in State and Local Taxation, 1912, p. 194, with uniform accounting, the difficulty still remains of separating the earnings of a corporation from those of its investments or subsidiary undertakings. Neither would this system secure equality in assessment between corporations and other forms of taxable property. The difficulties which Wisconsin and Michigan found with the gross earnings tax would be magnified here. A man's farm and buildings are taxed, even though they are producing no more than expenses. Yet a railroad with an investment of several million dollars would not be taxed until it became operative to the extent of having a surplus above expenses. Because of the fluctuation of earnings, moreover, the tax could not be counted upon as being in any degree stable. The Connecticut commission, quoted above, characterized the net earnings tax as follows:

To avoid serious inequality and evasion the tax On net earnings would require for administration a thorough examination into the accounts of every corporation taxed, together with strict rules as to how these accounts should be kept. ... It would be a continual source of irritation between the corporation and the taxing officials. It would involve the most disagreeable inquisition into the accounts and business of the corporations, and in the end would still remain room for personal judgment, thus leaving open the door to political intrigue and corrupt influence. . . . The practical difficulties in the way of imposing a tax upon net earnings seem overwhelming. A further objection arises from the fact that a corporation might have no net earnings whatever within a given year, and therefore escape taxation entirely. While it is true that this might be perfectly just under a tax system based fundamentally upon income, we should bear in mind that the American tax system is to-day based upon property. The individual whose property has yielded him no income in a given year cannot offer that as a reason why he should not pay taxes upon his property. While the importance of treating corporations and individuals upon the same footing must not be stretched, there can be little doubt that a tax system which would allow corporations having no net earnings to escape taxation entirely, would be out of harmony with the general tax system prevailing in America.