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THE PROPOSED GEAWUTII) CORPORATION TAX The recent tax proposals of the Adainifltration include a tliat the principle of graduation or progression be applied to the corporation tax* It If proposed in this aemoraad'JB to discuss briefly the argua&nt;. for and against the adopt-* ion of this principle and to offer &n alternative! suggestion. Arguments for the Proao^*^ The theory underlying * graduated corporation t»x is that of taxing according to ability to pey and according to benefits received. It is claimed that the larger the corporation, the better able |fl it to pay and the more protection and athrant&ges it rseeives. Mere sisse gives the cor— poration an advantage over & &aaller concern, particularly la tfcaee of depression. Just &B incomes end states &r« subject to different tax rates according to else, so also should bt the iacoaes of corporations. Mor- over, the largtr the corporation th* aorf it engages in interstate coui.-rc« &na the lees subject It is to state taxation and regulation* Th#? differences in coapetitive power arising frojn differences in the sise of corporationa should be coaponsat <i for by differences in tax ratee or aet iacooaa* On general social grounds •bignass11 should be discouraged. Site begets aonopoly and cone atrate» vast economic gmmm la a few haads* It is believed that both on soci; 1 «.ad e«onoaio grounds it 1& desirable to discourage "bigness11 and to encourage the peractuation r.nd growth of saall concerns* against the Pro>:u.al» Although th<.- srgusv:-nt>- or progressive corporation tcx ajpe&r pl&u^iKLe, they will not bt&ad up tinder analy^i; . Lot uo f i r u t consider the a b i l i t y to pt*y a r g w a t * The weakness hire l i e s in the assist-d identity of tiu Incase or property of a veal thy indivi^-usl M9B the income of a *Ur|e corporation* The incos« of a wealthy Individual 1» eveilebl© for uac by hia, Th=. iacosKOf a lar^e cor;jor&tion, however, VtpMMSli UM incoae or vi.ry oany people, so ;e ve«ltlqr> some well-to-do, and soc.e coap*ratitrely poor, A eisal! cor..>or&tiont on Ifeg other h«nd, aay b« owned by wealthy individual • To tax the incoae accruing to th« wealthy «t & low n t c *»<•' the ineoa© of th's low* r ad<Mlo-clas3 a t a higher nste It obviously the ptve-rae of taxing according to a b i l i t y to ?®ym In order to tttx recording to reel a b i l i t y %o p»y, reco^rs© sao^l.- b« had to the ineonwj tax and to the estate tax. The argua*:nt that a l*rg<l corporation has special AdTeatages which justify a higher tax rate l i likewise «eak* mtmm6f§ Insofitr as %nm are those »ri«ia fc frosi the econo»iv.;> of lsrgo-^scela pro- duction they offer no Justification for special tc^jcatioji. In faet» i f a tax prev nted u t i l i s e i i o n wt such economiec:, i t would re^valt in an iaporeri^h» nl of tho whole co.ystiaity* Th«rc woulc !» J-astific« tion for higher taxation oi profits arising; from nonopoly an*; imfeir trade practices, but tht tax proposal under considoration »ikes no att«apt to aiscriainatc between profits ariaing froa efficiency, froa monopoly, or froa the »ere •ftgnitud« of the capital a^sct^ of the corporation* Tht f&ctf of course, that profits are large absolutely i indication of the profitability of «on^y invo?t,d in the concern. no a net lncoac of twenty ailllon dollars «ay represent a return of one percent on capital, or 8 return of fifty percent* I t is aoaeti^es said that a large corporation sngfcged MEinly in int rstfete caraaerce Ifl protected to £ considers hie extent froca the tax and regulatory powers of the State®, •ueh aubstuica in this contention* There does act a >pe&r to b«> A state may tax the re*l of a corporation doiag business within i t s borders, tmd *l«o portion of lneoae which is derivwd froa opeMkttMUi within the s Out-of—state corporelions aust J^ISO confora to the st&t« in health ^.nd. labor laws. I t If quit true tlist corport ticiw in so^ie •tatce «re subject to less tajoBtioa and r a f i i t t t l than corporations la other stet«8« But thi i:; clue to ifferenecs In state laws and not to differences l a sise of corpora tions* the aoci^l and ecoaoaic benefits to a cc.mt-ry NF&iiag froai a large nonber of aaall»r corpora tions i s a aatte-r of seise dispute •any writer- Maintain th&t# on the whole, Ittrfi corpor«tlone ar# better employerst and &r© easier to deal *ith MM) regulate, thaa ««all corporations. Alternative Su^freationP In place oi the graduated corporation tax i t la proposed that th« present tax be applied solely to net income which Ltf twdietributcd in ta^ fora of divid<>od8« The theory underlying this proposal i s as foliowsi Taxations 3ho.il. if far as possible be levied on indivldttbla accordint* to ability to p^.y* Th. inco.a? oi corpor.-; tions ii: really the incowft of the owners of tlte corpora tionxi, or in other words the stockholders. Hence, to tax the income of corporations by th« corporation tax* «nd the dividends p&lc its stockholders by the surt&x, naans taxing iocosaes twice with little r«f©r€«ee to ability to pay. This asy be avoided \rj exempting from the corporation tax the ineorse of corporations peld o??t In dirid*«.iis» Th.i income which is not pt id out la dividends llkeviav belongs to the owners of the corporations* Thooretieally, it should be included in the total incoae reported lay fcad taxed accordingly, Thiaf hovever9 is difficult acaiia# It is pr©po&€Kit therefore, thet a flct rate of taxation, •ay tw«aty porc€«it, be levied oa tatdistributed e&raijig;: Q£ corporation** Tixta,ftdsitedly, no aid be sore then most, *ur: less than a few, stockholders pay o& their received Incomes. It if expected, however, that this fora of Inequality will be ainlalsed ay th« ine«ntlv® for corporations to pay out & larger proportion of their incosne in tha f o m of dividends, 8oa* wealthy iadividuslg who control corporatioat* now p«y only ISf p^rceat on the largfe part of tkelr income which is left with the corporations. Under the proposed changes the rate on undistributed earnings eould be comparatively high* In this way the tax burden would be distributed nore equitably* Three eonpanies controlled by Mellon, IMP Gulf Oil, 1 » ric&n Aliainun, and the (talon Tru-t Cottony, — retftiaed $117 niUioa of their earning;; of |X46 all lion in the years 1927-&9, or 80 percent. The bulk of Fordfs income in the past hat* probably been subject only to ta« coap&ratively low corpor«t4or. tax* Hot only would the adoption ->£ this proposal *ork toward greater ^u*3tic>;? in taxation, out i t ••old al»o e: ford otner e.£es# In llM I ' l r t plhL':9 i t Kho .Id lead to «. batter allocation of the eoajsmaity*; e&pitnl r iourcv?&. Although legally the: cor>or*tio:i belongs to its. stockholders »iia &r?s r*rt>rs«eat^d toy sleeted directors, &etuftlly tho a&nA£&a&nt ^o^ P-OJI. in control • » / b« »otiv«.tef:i b;- tiMHUI^Hltiwin othtr tht^n these of sirring the be*t iatereiits ©f the O'.mvr---# £&l&rit-d execatiTea v lor oxuplo f »»y be aore intereetcd in T rnnT<lii1frg tii« absolute groi:« and net return in UMtHMMdUll •' r&tc o rettira oa imrcot^c e»pltbl« It is very easy for t^*3« to do t a i s b/ hilling b»ck « r.-ubtt&ati&l portion of tha fccruin^w WPMTjr yssr Aid by reinvesting them in siaat f e c i l ltias# Thare woula be a sweh closer c<iilatloti of probable tMVtl and rcturtt« on &«iy ne« iavestJMKfc If tfec: •eais.g^msat hsm alvnys to borrow or to euk the etocldiolderi directly for mem «onf>y. tiife •tpftMrtlG; SJjdlArly 9 o i}. "-;-hip «awd control f a c i l i t a t e s the buil«i!;^ up of l&rge U^ptfJ resources 9 p«.rticuLi rly i a the form of c*i?h« The imposition of «r fairly hit;)* tax on u»oietribut d etf.raing« would Ai»oo'ir»£c uaeconoaic •bigne^e11 resulttng trosa th« exc*e«lrti e*#« of reiareetiag earaingK t ^ i wo-..Id *lso diseo^Jregft thm Acc»ul«iion of larg* l i t bal&acee aad of large aurplua accounts. From 19J?6 to 19£9 t h l r t y s i x or thv largest iatiusiapl^l corporations h^ld buck $2*2 b i l l i o n of their ©cjriiing;-. «fTeil£ble for tfei Thin amounted to 42 pero«nt of the COMMA ctocldioldcirs. The u of a l l oorpoxv.tions from 1924 to 1929 MMBlMl io billion. This wae 26 percent of thr earning* &yailablf> lor preferred * ad comon stockholders* It ie often urgtnS that the practice of distributing only a portion of earnings peraits aV:adlae 3 In the dividend rate* which la eo;s*?idered desirable. There &rof howcrr, objection* to a eteady rate of return on tqpltiesu Expert^nev,-4 iaveetora realise, of coarse, that the currcat *nd pvotvy eiivt *fcrnlng2 ere the important tkiafs in appraising the worth of a stock* Inexper- ienc.d inveetoriG, however, my be Misled Into givirig too ouch weight to the divideac rather than the e&ralngs. If dividend* were f&ried frequ^itly in accordance with v&rlatlomi in atrain*; , th<^ ljiporttace o:' the trend of e*.raing3 wotild be w>r£ generally appreciated. This, iacid«nt£lly f is ht VLW 1 practice la FfegXaad* If corporations regularly diabursad thoir earnings ia the fora of dividends, on-, ssuree of wisturbaace to general bu.-ineas conditions would be leeseatd* I t I- probatile that the flow of •oaey woald b*; «ort re ,ulfcr &»•; thsre would he fewer obstruction* to th* t flow due to tlic leaseaed TEriabilit^ in cash bal&ncei thfct •ight be axriecti'Ki to x'ollow tht- penalising of uncistributrd *>= . mint Goriiorf.tioas co ila$ i t If tmm$ s t i l l build up li?rg© cash holdings by borrowing, by the is.iue of < toek, and by not Uding dfepreci^ tion rd0crraa for repairs and aew tnipa^ nt, but th^y would be sore reluot&nt to acquire balances in such ways tn&n bv holding back At the present tins© the reaoval of taxes on distributed earnings e.ml th iapo^ltion of a tax oa w&distribtrUd earnings would -7- aid ia the process of recov ry, since i^ wo .Id probably lead to the d«tlar*tior* of hi-hf-r dlviconds aad thua discourage the piling wp of lar£* iul* cor.?oratlors b&lraces that has be^i takinig place since 19..-5. Th aet effMl **o ;ld b« a cealreblr increase in shading, Since H u re^trictioa of U H corporatlon "teat to undistributed efimings wo^^ld be in the a ture of G B unexpected windfall to present stoekhol xiv, it i ! suggested th^t aot only should diridends caace to be ex mt>t from the normal tax but th&t the surtax be higher then originally cont«aplatud« LC:em July 23, 1935
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