§ 10. Defective theory of corporate income taxation. There is apparent in all this legislation the attempt to treat corporations and individuals on the same principles, especi ally in applying to both of them alike exemptions and pro gressive rates. There is much confusion of thought here, for (1) "income taxes on individuals" and (2) "income and ex cess profits taxes on corporations" are very different in their nature and their sources. The term "net income" as applied to individuals is charged with psychological meaning. The whole modern theory and justification of progressive rates as applied to income taxation assumes that the income on which the rates are imposed is a total of the various income items (real and monetary) of an individual. His net income within the year is available for spending and enjoyment, or to add to his capital as a net addition. If this net income total is small, it should not be taxed at all, for that would take away part of what is conceded to be necessary for the minimum of comfort. Hence, exemptions are granted not only to the poorer citizen, but to all citizens, for even the richer taxpayer should not be taxed on that portion of his income necessary to existence or minimum comfort. Hence, also, progressive rates on larger incomes, since the sacrifice, the psychic cost, of giving up the marginal portion of in comes is assumed to become progressively less to the indi vidual as his income increases. The second reason for pro gressive taxes, namely, the social benefit of leveling somewhat the larger fortunes, is likewise applicable only to individuals, or at most to large corporations owned by one or by few men.
In truth, the concept of income is not applicable at all to corporations without confusion of thought. Only indi viduals have net incomes, enjoyable or available for rein vestment. Corporations have receipts and expenditures, have net profits (or losses), at the end of the year, the equitable title to which belongs to various individuals, as evidenced by the securities they hold. But a moderately small cor poration may have virtually but one owner, and• he very rich, whereas an extremely large corporation may have many par tial owners, most of them with very modest incomes. Ex emptions and progressive rates, varying in accordance with the total of the profits ("income") of corporations, have therefore no relationship in principle to those in the ease of individuals.
Nor can taxation of corporate profits at progressive rates in accordance with the ratio of profits to invested capital be justified on the same grounds as progressive income taxa tion. "Invested capital" is a term that in practical busi ness has a wide range of meanings, and the excess profits tax, when first imposed, caught the corporations with the most varied book values of capitalization. In general, the more recklessly they have been financed and the larger the amount of watered stock they had issued, the smaller the rate of profits on which they were taxable, and vice versa. The im perative necessities of war finance may relatively justify any measure of taxation that produces the results immediately desired; but the fundamental defects soon produce grave abuses and widespread protests, and will compel revision of our federal corporate taxation. The income tax is here as a
permanent feature of our tax system. Eventually it should be reconstructed on the sound principle that only individuals have incomes. In various ways increments in capital value and undistributed profits of partnerships and corporations might be periodically assessed as income to the individual owners, thus verging into one simple whole the many diverse elements in our present complex of income and excess-profits taxation.
§ 11. A system of taxation. The task of reforming and developing the various kinds of taxes and of uniting them into a just and consistent plan for each of the divisions of government in the United States is a vast and difficult one. There are many conflicting interests among states, between states and nation, among the various minor political divisions, and among individuals and classes. There are also conflicting opinions regarding many features of the possible practical plans. Because of these it is safe to predict that progress will not be made quickly, steadily, nor always directed toward a clear ideal. If progress is to be rapid, the public must, how ever, have consistent principles by which its steps may be guided. In the foregoing kinds of taxation are the various elements that may be united into a system of taxation. It is useful to consider how this might be done.
At the basis of the whole tax structure is taxation, by value, of concrete wealth at the place where it is situated (in situ). This should be regardless of the distribution of owner ship or of the residence of the owner. The present misnamed "general property tax" already presents the main outlines of this form of taxation, and the general changes necessary in law and method of assessment have been indicated Cor poration taxation may be adjusted to this either by separate treatment and assignment to state purposes only, or more sim ply for most states, by assimilating it with the general taxa tion of wealth and allotting due shares of the proceeds to the various taxing divisions." The national government can, be cause of its exclusive power of levying tariff duties and also because of its exclusive control over interstate commerce, reach the tax-paying ability of the nation effectively by a combina tion of tariff and internal duties levied upon business acts. These mostly become merged into business costs, and are diffused over the whole population through general prices.il This system of impersonal wealth taxation may then be supplemented by personal taxation, applied through inherit ance and income taxes. These forms of taxation extend over and reach many of the same persons and incomes as do ulti mately the impersonal taxes. But the summation of personal incomes gives the necessary condition for applying the prin ciple of progression as far as this is, by public opinion, deemed desirable either for fiscal or for social reasons.
9 See above, ch. 18, 4 5.
is See ch. 18, § 15, and § 16.
ii See eh. 16, 12 and § 14, first paragraph.