-- 10. #Various reforms in land taxation.# While the single tax plan is defective in principle, its wide discussion has served to direct attention toward the need of reform in the taxation of land. Some proposals looking toward this end are widely favored by opponents as well as by advocates of the single tax. Such are the following:
(a) The abandonment of the taxation of mortgages.[7]
(b) A more correct assessment, in accordance with the present laws, of lots and lands held for speculative purposes, which in practice are now greatly under-assessed.
(c) More adequate special franchise taxation upon corporations for special privileges in the public highways.
(d) Exemption, in value equal to the costs, of improvements on land, such as buildings, drains, fences, and fertilizers, for a limited time after they are made, perhaps five years.
(e) The separate assessment of urban lands used as mere building sites and of the buildings on them.
(f) Taxation of the increase ("increment") of urban land values, periodically or on the occasion of transfer of ownership.
-- 11. #Difficulties in taxing corporations.#[8] Until near the second quarter of the nineteenth century, business corporations (of which there were few) were taxed just as was the general property of individuals. This still continues to be the case in the main in most of the states. The methods and machinery of assessment were (and still are) essentially local and simple, and have proved to be inadequate to reach or justly assess the larger and more complex corporate enterprises when their equipment and business extend beyond town, then county and, finally, state lines. Moreover, the corporate forms of organization presented in complex and puzzling forms the dual conception of property.[9] Here was the tangible wealth of the corporation and there were the diffused rights of ownership, the capital of individual stockholders and bondholders. Confused by this ambiguity, the men of that time believed (as many still believe) that there were here two separate and justly taxable funds of value. The popular will declared (and still declares) that "all kinds of property ought to bear their fair share of the burdens of taxation." Yet to apply this principle would obviously be double taxation and result in confiscation in many cases. Between this doubt and the practical difficulty of assessment, it turned out that corporate wealth, far from being doubly taxed, was largely escaping even its due single burden.
-- 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 which 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 companies#. 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 which 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 owners. If such an interpretation were practically enforced it would result in triple taxation to be drawn from 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 two 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, 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 stock-holders, (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.[10]
Telegraph companies are still locally assessed in most states, but in over 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."[11]
-- 15. #Alternative policies as to 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.[12] 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.
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.[13]
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.[14]
-- 16. #General plan for corporate taxation.# The main features in such a plan of reform would be as follows:
(a) Assessment of all wealth by a state agency, with expert nonlocal assessors, appointed and serving only under the merit system.
(b) 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) 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.
(d) Taxation of interstate enterprises only in due proportion to the whole business, by mileage or other rules; inter-state comity to be further developed in this matter.
(e) 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) 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) Exemption of the holders of securities and evidences of indebtedness of corporations.{15}
(h) 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.
[Footnote 1: For example, the constitution of Alabama declares: "All taxes levied on property in this state shall be assessed in exact proportion to the value of such property," etc. And the constitution of Indiana declares: "The general assembly shall provide, by law, for a uniform and equal rate of assessment and taxation of all property, both real and personal, excepting," etc. Similar statements occur in most state constitutions.]
[Footnote 2: The general property tax in the United States constitutes:
Of the revenue receipts of the states 38 per cent.
Of the revenue receipts of the counties 76 per cent.
Of the revenue receipts of the incorporated places. 60 per cent.
The total amount collected in this way in 1913 was over $1,083,000,000.]
[Footnote 3: See above, ch. 2, secs. 2, 3, and reference there to Vol.
I.]
[Footnote 4: See above, ch. 2.]
[Footnote 5: See Vol. I, pp. 116, 117, 145, 445-455.]
[Footnote 6: See Vol. I, pp. 117, 146, 453.]
[Footnote 7: See above, sec. 4.]
[Footnote 8: No reference is made in what follows to fees payable but once for the incorporation of new companies or at times of increasing the capital stock of an old one, variously called taxes on corporate charters, license taxes, incorporation fees, organization fees, and charter fees.]
[Footnote 9: See above, sec. 3.]
[Footnote 10: E.R.A. Seligman, "Essays on Taxation" (1895), p. 156.]
[Footnote 11: Seligman, op. cit. p. 136.]
[Footnote 12: See above, sec. 7.]
[Footnote 13: See above, sec. 5.]
[Footnote 14: The assessment feature of this proposal is exemplified more nearly than anywhere else, tho still imperfectly, in the "Indiana plan," in which, however, the true concept of property is recognized only in so far as the shares of corporations of which all the wealth is taxed are not assessed to the shareholders.]
[Footnote 15. This need not prevent a supplementary system of graduated taxation on incomes. See below, ch. 18, sec. 10.]
CHAPTER 18
PERSONAL TAXES
-- 1. Inheritance tax laws. -- 2. Fiscal importance of inheritance taxes.
-- 3. Income taxes; general nature. --4. Income taxation by the states.
-- 5. History of federal income taxation. -- 6. Events leading up to the law of 1913. -- 7. Main features of the law. -- 8. Exemptions and stoppage at source. -- 9. The graduation principle. -- 10. A system of taxation.