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MICROCOPY RESOIUTION TEST CHART 
 
 ANSI end ISO TEST CHART No ? 
 
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 ^ APPLIED IM^GE Inc 
 
THE TAXATION OF 
 PUBLIC SERVICE CORI'ORATIONS 
 
 BV 
 
 PKOKESSOR ADAM SIIOKTT 
 
 gt-EKNS f.VIVKKSirv, KIM, -TON-. i.VT.: MKMHHR OK TAX 
 »l>MMI>SION. I'H..VI.V( K OK oSTAIilO. < ANADA 
 
 Kkprintkh krom the Apdrkssks and Proi frdings of the 
 
 NArioNAI CONKKHKN. K mN StATK AM. Lo. Al. TAXATION 
 IIKI.I. Al ( .il.lMHI<. Oliro, Nov. lJ-1.",, 1!((I7 
 
 NATIONAL TAX ASSOCIATION 
 
 COLUMBUS 
 
 --;tt-" -r- r--Tt -"•= - 
 
 -■.=-:fc.-nj •*■ 
 
Illl'l 
 
 Jil 
 
 ii 
 
 ilL. 
 
 PROVINCE OF MANITOBA 
 
 MANITOBA 
 
 CLASSIFICATION 
 
 - HIlja.T^ 
 
 KC-b-7. 
 
UBRART 
 
 Tin: TAX ATiox or 
 ri lujc sKijvin: coiiPoiiATioxs 
 
 BY 
 
 I'|{()FI>S()|; AK ' SIloKlI' 
 
 <jl I ►N» I NM I H-l n. klM.- .. CIS I : Ml Mill li UK I \X 
 
 ■ I'M \ii>M(i\. ii:ci\i\i HI ii\iAl;n(. < waha 
 
 l!iii:ivrn> H!c>M iiik \|.|ii;i--i- \m> J'ii.k h i>i vc- .>i iiii.; 
 
 N \ llciv \| ( I.NH-KIM I c,\ M X I I AMI I .( il A I I \ \ A I H i\ 
 IIKl.n Al (ullMlll^, OlIJii, N((\. ll'-l.'i. IIMI'; 
 
 NATIONAI, TAX ASS()( IATI()X 
 <■nI.l■.M l;rs 
 
I'loNS 
 
 llV l'l:>lKK-»nH \|>\M MliillTT 
 
 (Ju'.Mi- I'iii\ r-ilv, Kiiiir-luti. <tiil.. Mrriilxi- i.f Tax ('(iiiiiiii.->inii, 
 l'l(i\ lliri' III' ( tularin, ( 'aliaila 
 
 'I'lir. iinliiiarx- -v-tcin n\ Im-al taxal'mn. I>nlli a-- tn the ticcils 
 li, „■ -u|i|.iicil tnilii ihi' l.iM'-- ((illcctcil. ami a- In the l>a~i> 
 llfiDll wdlrh iIm' Ic\ ic^ arc lliaili- Upull lllC cnlll ril '111 or-, i- llic 
 natural ami iili\inu~ oulfniuc (if :■ cdlH rcic >ituatiiiii ilfail wilii 
 ill J jiiai-tii-al lnallll''r. 'i'lic -illlatioli i- (Hie ill uliirli tlic iinli- 
 iiai\ riii/cn lia- !ii~ [n'lniaiii'iil rc-iilriirc in (iiic Incaliiy, where 
 aUii nrai-lii-allv all (if lii- prii|iel'l v i- Idcatdl (ir iii\c-te(l. H 
 imlividiial-- -ell lUdiluce aiir(ia(l or iiii|Kirt >upplie- iVoiii uitli- 
 i,i|i. ihr e\p(irl- ami illip(ill~ noriliallN' halalire eadi (ither ill 
 ,'iiii.a'ele uiKiiN uiiliin a liiiiilel time, 'i'lie puMic services 
 ici|iiire(l \<y iIn' inlialiitaiil-. In fuitii-li wliidi i- l!n' (icca-ioii 
 fill I he le\\iiii: (if taxe-, are i-eijUiiiMl liv all the (■(iiiiiiiuiiit y, 
 iii(i are directls or indirectly in i he interc-i of the citi/eiis m 
 f III- proportioii to their wealth. SuW-tatitial ju-tice i.- iiKiiiitaiiied 
 rlicrefdi-c liy Ireatiii'j; all pnipcily owner- alike. 
 
 ill iii.inv rur.d >ecti(iti- tn-day, and for the majority of the 
 .■iti/cn^ in our town- am! viilaire-, ihi- prim iple may .-till apj'ly. 
 One ncc(l not touch upon all tlie intermeiliate .^tai^e- in the de- 
 velopment of property rii^ht-. in the formiim of corporation-, 
 the Teat ion of -hare capital and of niortiiaiie hond-. with the 
 I'l.'ilitie- for their exchaic^e. and the coii,-(( [Ueiit wide diffu-ion 
 and frc(|Ueiit -liifliiii: of owner-hip. l>ut it i- iplite ohvioii.- 
 lii.it in dealim: wiih -iich pulilic -ervice corporations a.- rail- 
 wi\-. -team or elect ric. teleiiraph, telephone and e.xpre.ss coin- 
 pame-, we haxc to deal with forms of pidiierty and plwise.s of 
 owner-hip which have little of the old relation-hip to locality, 
 a- M"_'afds the po— e— ion of properly, and t'V(>ii lo.s.s relation 
 to 'lie need for pulilic service, which fufiiislies, on llie one hand, 
 
Tin; rwATloN or IMUI.K SLKVK I, < ( HU'i 'U \ I l< 'NS (iJ.T 
 
 tlic lociil basis for f;i\ali<)ii. ami on the other, ihi- local iirc<l for 
 the services which the ta\e> jtrociin'. If, then, the oMer >y>tein 
 ,,l" ;i»M'»iiii: ami levviim ta\e- and of expeinlin^ I hem was 
 ju-liheil nil the irrouinl of ilealiiii; uitli an actual ,-iliialion in a 
 pracliral inaiiner. have we nm tjcio.l rea-oii for a^kinii that :i 
 totally new >ituation in I he»e re-l>ects >houM ,ii-o he dealt 
 wilh in a praciical inaiine,' '.' It i- no ciiiici-in of either the 
 jii-tice «ir adei|Uacy of the older -y-tciii, uhen appiied to thi; 
 same conditions out of which it aio>e. to ^ay th.it it i> neither 
 ju-t nor adeipiate when applied to a tol.illy new >tate of alVairs 
 wiiich, without ili-placinu' liie older coiiclii ions, ha-^ heeii -iipcr- 
 adiled to them. The oiiji ction. therefore, to new dei>artiiies 
 in taxation wiiich result from the chaii^'im: >hapes and condi- 
 tion- of property and tlie diffusion of it- ownerdiip i- not .■om- 
 plimenlarv to lho>e who devi-ed tlu- older forms of taxation to 
 ■which the ohjectors commonly ailhere; for all that i- a-kel is 
 that we .-hould deal with the new conditions in the -ame -pirit 
 a> thev dealt with the older one-; in other word-, in a practical 
 maimer in the lifiht of e\i-tiii;i need-. 
 
 Wli.at. then, are the primary fact- with reference to |(ul>lii- 
 service corporation-, from the jioint of view of tiieir p(>— ii'le 
 taxation'.' Practically .all of the-e corporations have to do witli 
 transportation or transmission. Financial corporation-, .-uch 
 as iiaiik-, trust companies and insurance compmies. are dealt, 
 with elx'where in thi- pro^^ram. TakiiiL' the most t>|iical and 
 important of the transportation services, the tireat railway 
 (•omi>anies. wliat are their eh iracteri>tics? In a normal 
 ex.ample we have a corporation ttie mcmhers of which — the 
 stockholders — are, or may he. a chaii.ninj; body of individuals 
 or other corporations. Hut even these members do not coii- 
 (riimte all n- even a majority of the capital whi.h the corpora- 
 tion has invested; for modern railroads are financed chiefly 
 by means of borrowed capital, for which the projierty of the 
 corporation, either as a whole, or. more commonly, in specific 
 .sections of it. is formally pledged by mortiia.iie. The holders 
 of these mortiiaire bonds, like the holders of tlie >hares, are or 
 mav be a chaiijiinii body of imlividuals or other corporation.-, 
 such as banks and in-urance companies. I'tider modern sys- 
 tems of finance the capital which is contributed to a railw.iy 
 
<•,.»} 
 
 STATi: \M» l.<"\l I \\ MI'»N 
 
 i,v -miiliir puLlir s,.,vi.-.. .criM.riilK.ii .lillVr-. m- l..'t\\<-cii l-nii-U 
 
 ;,n,l -lurk-, .hwllv Ml I I .'f -<-(Uiii\. Thuiii:!! tin- Ixiii.l- 
 
 hu\>lr\- hav.' MO vuiir in llir liiana-<'rm'lil ..f .li.- . iiipurat i-.n. 
 vrt. ill arlual J-lart l.r, tin- inajuiilv nf thi' uplinar\ -loik- 
 Ih.M.t- liavc ju-t a- \U\\r \"U<- HI |in|lrv nr aiilllllli-l lal ml,. 
 
 llMiM llif I t nf \ir\s (it la\alinii liuii.l' alul >lnrk- inUM Im- 
 
 lakni Inii.-llirr a- ir|.n-riil nm cal'ilal iiivi-tnl in llir .m |..,i at«' 
 «'lltcr|.iiH. Tiiat laliirr of Ifiritniv. lu.u.'V T wi.lf it Mia' I.e. 
 iri.rc-.nliiiU al niirr llir iv-imi . .f in\ .-I iiirhl and nf ic\ .•iiuc. 
 nill-t III. 111.- n-inll <>\ taS.llinll all. I nnl III.' pL.iCnf nM.lflHC 
 nf th.' hnl.lcr nf ill.' -cUlil i.'~. Mnl.'nx.T. ill.' taS.'- -.linllM I..' 
 
 l,.si,.,| ,,|inn th.' ,niiiniati..ii< an. I imt uprni tli.' in(li\i.lual 
 
 M'ClllilN' linlil.'l-. 
 
 In what tniiii, then. .In.'- tli.' i-mpi'it v nf -udi a .m iMiiat imi 
 cvi-t? 'rakiii- il> .liif'f t.'riii>. it i- n'l.r.'-.'iH.'.l I'.v hmi: -t iip-< 
 ,,f iaiMl. .'sp.iiuh"! li.'iv :i'i.l llu'iv fnr (h.- In.Miinii .,f -wiicli.'-^. 
 .-t,-,tinii \n(l-, .itv i.Tiuinai-, .'t.'. On ihi- hnni i- ...n-ti lut.'.l 
 til.' rna.|i..'.i witii il> .ultiii--, .'iiilKinkni.'iit-. \ia.liirt-, hri.l-K's 
 :,n.l tunn.'l-. and tlw-.' .any I h.- tia.k with it- ti.'-. r.iii-. >uitrh- 
 in- aii.l -i'.:nal >y>l.'ni>. .'t.'. Thrw arc al-n th.' -tatinii l.iiihl- 
 lU'A-^. ficiiiht >h.Mis. .•i.'vat..i>. nia.hin.' -Imp-, rnuii.l ImuM'-, 
 .•naiinn statinns ainl th.' .n-liy .itv l.Tininal- ainl .illi.'.'s. 
 Th.'ii lli.T." i> th.' va-t amount nf mlliii;: >to.k nf all kin.l> aii.l 
 il, .'.luipnicnt. Tn inaiiitaiii an.l ..|..'ral.' this -r.'at ainiy ..f 
 prnpcitv th.T.' i~ .'iiiploy.Ml an army nf ni.'ii. fmiii -.'lu'ial 
 Mianaii.Ts tn poit.'i-. involvini: a heavy payroll. 1 h'av.' nut nt 
 .„.,.,„„. t all th.' M'lnmlary .'iitiTprix's in whi.h a railma.l cniii- 
 panv iiiav lu' inv..lv.'il. in the way ..f hott'ls. park>. iiiin.'-. tinil..M' 
 limit-, mills, l.'iii.ls, .'t,'.. as li.'iiiii "ot -tri.tly .-M'lilial tn the 
 fuiiftinii- nf a railw.'iy as a j.uMic -crx ir.' rorpnr.itinii. 
 
 Here. then, i- a \ ast nr,L'ani/.al ioii eNteiulini: .iver scores .if 
 taxing units, -tat.- ami municipal, an.l -erviiri maiiv iii.ire 
 whi.'h it may not a.-lually .'liter, luit from which it ii.'vcn h.'l.'ss 
 (lerivs revenue. 4"lie extent .if lc;.;tnry .-nv.'re.l and tlio 
 capita exp.'inlitur.' inv.ilvcl in aiiv irixi'ii t;i\ini: miit has 
 fr.'.|Ue itlv litlli' nr no relation tn th.- amount nf -er\ ice ren.l.'icd 
 within that ai'ca. the .-imnunt of r.'vcmi.- .I.'rixcd from it or 
 the lien.'tit obtain. '.1 l.y the cnriioraiinii from tlie ex|ien.liture 
 (if the taxes. Consider, for in-tan. c. the .'.luity uf taxl.i- a 
 
TIIK I\\M1"N «•' I'l lU.K SI.KVK K mul't .11 \ 1 1< 'NS (IJa 
 
 r.iihvuv .uiporalinii. uithin ii jrivcii t..\vn-l.i|.. or. ilu- l.i.-i.s 
 „f ii v.TV n.r.lly l.ii.|.4«' Hii.l M'vcnil n.'.tly <iitiiiiy:> at,.! .-lu- 
 l.at.kiii.M.I. whirh may liupiMMi tn l- lu.atcl ■.villiih it. whiU' 
 :ui iiniH.aulflv ailj..iiiiiin tnsvnshi|., llimuuh vvlu. Ii ihc n.ilsvi.v 
 ,|i.l „„, happen t.. pa-«>. n.ilM liul ^h:.^• in the laxaliuh, tlmifj. 
 
 p,.|li;.ps itiiliiitiMt: a inii.h nival. t ainouni >A Iratlir an. I 
 
 lu.ii.i'uf ••ainin!.'-...uit nf ulii.li ta\.-s inii.-t Im- I'ai.l. ()i>viuM-ly. 
 Mirl. a .nrpuiati.m >tan.U r.'lat.'.l t.. tl..' wIh-Ic prnMnn uf l..,,,l 
 r.-vcnu.' aii.l .Apcndiiurc, >Iatc ur iniini.ipal. nn a totally 
 .litT.Mvnt l.a-l> fruMi tl.at of privat.- property and its n-i.l.nt 
 oxMHTs. Uiit wo may U-avc a>i.l.' for tlu- prcM-nl tin- .im-t.on 
 us to tlu- prop<'i- jiirisdi.lion uiulcr wlu.l. tl.o taxation of llic>e 
 ,.nrp..ratinns >!ioul.l ••..m.-. ami the i.n.per ^y.tem for the 
 .liMiil.ut.on of the taxes levied upon th.'in. A primary .pies- 
 tion for .■on>i.lerati..n is the primii.le or princii.les ui...n whi.h 
 the value of a public service corporation may l.o (ietermmeil 
 f .r p\iri)oses of taxation. 
 
 Can we aiM'ly t" 'I"' j'n.pnMy of l.ul'li'- M-rvico corporations 
 the i.rimii)les which are commonly employo.l in the a>.-c-s- 
 iMent of privat.' an.l business properties? !n the case of onli- 
 narv proi.ertv the two mo>t pertinent Mueslions are. what did 
 it co^t and what will it sell for? In ev.>ry ca>e. however, the 
 ,p,.-Mi..n. what will it sell for".' is of much jircater practical 
 i,„por,ance than the que.sti.m. what <lid it co>t ? In <.ther 
 words, the n.arket value, where it is ascertainable, is the value 
 which ultimatelv .letermines what anythiiiji is worth. Hut. 
 unfortunatelv. we cannot ai-i-ly this test of value ..r wortli to 
 public .service corpurati.)ns. There is no market f(.r railn.a.ls, 
 ' tclep-aph. tol<M)hon.. or express systems. It is true that they 
 ,l„ occasionallv chan-i- their manatiements, an.l, where their 
 shares are a.'tivelv .lealt in. they are .-onstantly varying m 
 ownership. Hut these chan-cs .1.. m.t orvuv .)n the baMs of 
 the market value of e.a.-h system as a whole. The .■hai.fie in 
 nianasiement ..r .'..ntrol is etTecte.l either thr..u-h a partial 
 financial break.lown an.l ihe .'on.se.iuent app..mtment of a 
 re.'eiver. or thr..u-h a .•hanire in the c.ntrol of the majority 
 of the votimr l)..wer of the st...'k. either by a .•..alitmn of inter- 
 ests ai.led. if ne.-essarv, bv the pur.'hase ..f a certain number ..f 
 shares, or by any of tl.e varied forms of agreement which have 
 '2 s 
 
G2n 
 
 STATi: AN!) LOCAL TAXATION 
 
 hrcii (Icvi-iMl t(. secure coiitn)! without tlie necessity for pur- 
 c!i:iMiii; stoi-k. I'.ul cNcii wliere control i- secured throuiiii tlio 
 purcliase of >lock, tlie actual otulay represents hut a small 
 p.iriion of ilie capital value of the system as a whole, inasmuch 
 as it takes no accouiU of the ca|.ilal repre.-eiiteil hy homls. 
 It is evident then that theic i> no opportunity for determ.iun.m 
 tlie real worth or assi-sahle value of puMic service corporations 
 hy the usual standards of market valae for complete systems. 
 Still less is it po~>il)le to determine in this way the \alue of any 
 aihitrary sections of such -yMems which happen to lie within 
 the area of this or that taxinii unit, he it state, proviiu'c or 
 minor niuniciinility. The i)ortion of a railway or t.-h-raiih 
 system wliich i)a-ses through a i:iven municipality, or even a 
 State or province, almost invariahly derives a lar-e proportion 
 of its value, and sometimes almost the whole of it. from its 
 comiections heyond that area, or from it> hein^ hut a link \n 
 a systeni whose chief revenue is derive.l fn.m throu-h trallic 
 or transmission. 
 
 Neither is cost of prodm'tioi\ a fair test of value. Mar' I 
 value is the test which determines whether, in view of its cost, 
 production should or should not he undertaken. It is. indeed, 
 seldom proi)osed as a hasis of valuation for puhllc service lor- 
 porath)ns other than railways, and in their case it is prop, d 
 only hecavrse of the lar^v jiroportioii of tanjiiiile property 
 reiiuired in their construction and operation. Hut e\en tho 
 mo-t faithful advocates of cost of production, as a hasis for 
 as-e^sment. admit that it may exceed or fall short of the full 
 value of a system as a whole. How tlu-n is this variation from 
 ii-t of production to he determined? The usual answer is, 
 as liiven in Micliijran. hy ascertaining^ the licneral earning 
 power of the system, fnun which is deduced the net earnings, 
 which are then capitalized at some selected i)ercentage. and 
 this, it is claimed, will give the true capital value of the system. 
 If now we deduct the cost of production from this true value, 
 
 where it e\c Is cost of production, we sh.-dl find what amount 
 
 must he <i(l<l<(l In the cost of prodm'tion in ord<M- to liive the true 
 value, which, however, was just the point from which we 
 M.iited. r.v a complementary iirocess. where cost of produc- 
 tion exceed- true value, we shall .liscover what must he de- 
 
Tin; TAXATION OF PLBLR SHHVICE .H.UI'. .UATH'Ns (VJ? 
 
 .lurtc.l fn.n: .•.,.-t ..f pnulurtini, i.. ..nlor to -H hack to tnu- value 
 „„,.f luorc. Hut win- we >lu.ul.l UM.lntak.. tlio onorinous out- 
 lay it. tin,., an.l .uoi.oy ..(>a.>sary to ainvc at n-M ot pnuhu- 
 j,;,,, ,,,,,,„. ;.,•„.,■ all, it is .•apitali«-l earni..;i im.w.t whi.'h pv.-.s 
 u. the true valu.. is l.v no nu-ans obvious ,.m ti... Muta.r ot the 
 proposition at least. When wo penetrate helow the .urtarr. 
 ,1,0 expla>.ation is .-onunonly foun,! either in the .leMie to ioive 
 ,1k> {..Hs ,o eonfonn to >on,e preeonceive.l th..>ry. or m the 
 neee-itv, fan.'i.-l or real, of .•onforn.in- to so.ne popular preju- 
 ai..e,e.Hl..Hliea it nmy i.e in a state ..on>titut.on, >ueh as that 
 all corporate property >halll.e value.l a.ul taxe,l on the san.e 
 
 basis as onlinarv private property. 
 
 Hut it nmv besahl. Nvhih- it is true that i.tiblie service corpora- 
 
 ,y>teins, yet t h(> 
 have market 
 
 tion- have no market value a> cofTiplele 
 .(■rurities which make up their total <-apital 
 
 av we not arrive at their 
 
 line a 
 values, an.l by aihlini: these toii.'ther ni: 
 
 total values as corporations 
 
 '1'^ 
 
 rtain (extent the 
 
 „f these .securilio represent the capitalized mcom. 
 
 col 
 
 rei 
 
 • aliie 
 if Ih 
 
 corporations, ami tlu.y are therefore a much mon- accurate 
 
 cprosentation of what a corporation is really worth than any 
 a,„.,„pts to e>timate physical pro,.ertv or fnimhise va ues. 
 lUu carniim power is by no means the only ..onM-leral ion affect - 
 i„.. the values of stocks an.l b.m.ls. an.l parth'ularly the fonn.-r. 
 The values of stocks, whether representing: bona Juir mvotment, 
 p,.Hn..ters- inteivsts, or merely an aqueous b.mus .listr.laUe.l t., 
 i,.„„lh.a.lers or ..tl.ers, may be manipulate.! for purely spe,.u a- 
 tivo purp..ses ..ver a c.n.i.lerable perio.l of .hue. until u.iloa.le.l 
 up..n an ea^er but unwary publi... Certain .s>ues of bomls, 
 ^,;, „„.„„,,, ,,,,,,,1. an.l even some of the be>t preferem.- stock, 
 are s., ..ompletelv hel.l by private invest..rs. or by various 
 ,„,,,.,a....ns. su..h as insuran.-e ompani.^s. that t.,r years t u-y 
 mav n..v..r app..ar up.m the market. Kven where stray ot. 
 1 ,i„,e to time, they cann.a be saul t.. establish 
 
 .1.1, 
 
 Ir.iin 
 
 anv r..,ular mark.-t values for these se.-urit.es. A^am, the 
 adoption, in varvin. .lejzrees, ..f the p..li.'V ..f emph-ymir <'arn,n^> 
 f.,r lapital expen.liture will .-..rre.p.m.lin.ly afle.. divi.len.l. 
 over Uvj: peri.Hls, ami ,...nse,,uentlv the value of the sto.O.. 
 There is further, a verv .■..mm.,n .litli.'ultv .■.>nne,.te.l with the 
 attempt to tax b..mls in particular. While there is im .l.mb. 
 
(L'S 
 
 SIATK AM) l.dCAI. TAX AT ION 
 
 tli:it they rci)n'>ciu ;i larirc proixntiDti nf tlic capital of public 
 MTvii'C coriKH'atioiis aiiiotii; otlicr.-. >till in |M)iiit uf law thoy 
 rcprest'tit no special intercut in the coipoiatiitn-. imt arc simply 
 >('ciiritios for money loaiicil mi tlic pl('(lu;(' of the corporato 
 piiipcrty. Hence, wiiere they are lieid l)y foreign investors 
 thev are usually not HaMe to taxation. We iiuist conclu-le 
 tiieii that tlie attempt to value corpctrations as a whole throimh 
 a summation of their stock and i)on<l values will i)ro(luce 
 very uiiceitain results, ami with much ine<iuality as between 
 cdi-porat ions. 
 
 it would api)ear to lie more reasonalile. therefore, to employ 
 earninii power openly and directly as the basis for corporato 
 taxation. While private property is held for (piite a variety 
 of rca.sons, in addition to finainMal i>rofit, i)ractically the sole 
 reason for the existence of economic corporations is jiecuniary 
 irain. Therefore, tluMr value to their owners ami oix'rators, 
 a|)art from speculative maiu|nil:ition and tr.idinn in stocks, 
 is represented by their earnini: power. Hence, it may be laid 
 ddwn as a broad prim'ii)le that the earnint; power of a corpora- 
 tion represents its true value. Can that earniii<: power or 
 income be directly determined? In the case of private in- 
 dividuals, personal income is admittedly one of the most 
 dillicult facts to discover. With the ever increasing: ran^e and 
 varietv of investments and sources of ini ome, it is iiu'reasinijly 
 dillicult to axertain. without the most incpii-itorial methods, 
 what may be the private income of most citizens, iiut , in 
 virtue of the very nature of economic corporations, and of the 
 character of the ri.L'hts and oblifxations vested in the share- 
 holders and oflicers. it is necessary that all the business transac- 
 tions, includimr the income and expi-nditure. should be matters 
 of definite record. It i- im])ossible for a corporation of any 
 magnitude or standinsi to dispense with an accurate system of 
 botikkeepinu: which will record its entire income and outlay. 
 There mav, indeed, be much variety in the classification or 
 iletinitioii of the items of income and expenditiu'c, which will 
 lead to obscurity and variation in the distinctions between 
 <;ross and net income or between o|)eralim!; exp(>n-es and 
 eajiital expenditure, but there is no dilliculty in arrivinu: at 
 what is sross income ami gros.> expenditure. It is true that 
 
''.,<^T" •', 
 
 
 ^^f 
 
 Tin; TAXAlKt.N" <»1- ITIU.K SKKVICK < ( tHI't •!{ \l I< )NS (;2(» 
 
 
 certain sums, amountinji, it may he. to cutisidcralile items in 
 the a.<i<:re;:ate, may come temporarily into the possession of 
 the>e corporations and l)e paid out airain witliout representin<: 
 either income or exiM>nditure. Tims one pulilic service cor- 
 j)(>rati()n may act merely as anient for another, as in accei)tin<r 
 nionevs for services to lie remlered l)y one or more companies 
 lieyond its own. But these sums can 1)(> easily ascertained as 
 they are all matters of record in the hooks of the corpoT'ations, 
 Where net income can he ascertained it is in many res|M'c1s 
 the hest hasis for taxation. Net income, however, is very 
 (liflicult to determine from year to year with suliicient accuracy 
 for purjjoses of taxation. landless discussion and disput(> is 
 certain to arise, and many ojtport unities for evasion are ])re- 
 .sented in coiuiection with attempts to define what may or 
 may not he letritimately deducted from j:ross income in ordt-r 
 to arrive at true net income. No douht if a uniform system of 
 accounting: can he estahlished for puhlic service cor])orations, 
 toward the accomplishment of which the statistical department 
 of the Interstate Commerce Commission is makintr laudahle 
 etTorts. a fair apjiroximation to net income would he pos.~ihle. 
 Althoufih it is demount raiily ahsurd to in>ist that corjxirations 
 must neces.sarily he taxed on the same hasis as private individ- 
 uals, it is not unreasonai)le to maintain that corporations should 
 eontrihute their eipiilahle share to the jjuhlic revenue. If, 
 therefore, the jirivate individual does not escai)e taxation on 
 ])roperty on which he may derive no net revenue, neither can 
 the corporation which has no net revenue escai)e taxation any 
 more than it can avoid payiiifi customs duties on its im])orts. 
 And what ai^itlies where there is no net income will apply with 
 !nuch the same force where there is ver\- little net income. 
 Kven, therefore, if we could determine with jierfect accuracy 
 what the net revenue of a corporation was it niisjlit not he an 
 admissihle hasis for taxation, or perhaps, more accurately, for 
 the escapin.ii of taxation. 
 
 It has heen jjroposed as a sort of compromise lietween net 
 ami ^ross income, as a hasis of taxation, that jiuhlic service 
 corporations should he taxed on the hasis of the comhined 
 dividends ])aid on stock antl interest paid on honds. it lieiiiff 
 assumed that these returns represent hetween them what i?i 
 
(i:;u 
 
 ;r.\ri; and local taxation' 
 
 Iiractically tlic net incnuic of a corporation. It may lie oh- 
 s(r\('(l. Iiowcxcr, tliat if no div iilcmls arc paid the iiitcrot on 
 l)nnil> iiia\' not rcprocnt a n\' corporate income, l)Ut , to a certain 
 extent at lea-t. an element of capital exiienditure, undertaken, 
 it ma\ lie. for a numlier of years, to prevent the corp<irat ion 
 from pa--ini;' out of i h<' hand-- of the stockholders, who may 
 ha\c fait h in it ^ ultimate .-uci-ess. If, on t h )ther haiul, it do(S 
 jiav a moderate dividend, ihi-. in aildition 'o the interest on 
 tile lionds, may not rejiri'sent its full net income, as a larucr or 
 smaller portion of it may !)e diNcrted to oihe; Mirposes, such, 
 for in-tance, .a- an inxcstment in the properly a • a whole, or in 
 sniiie collateral or suh-idiary enterprise, having tax relation- 
 ship- (piite different , it may he. from tho.se of the i)arent corpora- 
 tion. Here the ar,<:umein has heen advanced that income 
 which escapes taxation by hein.ii reinvested instead of hein^ 
 paid in divid<'nds, hy iiu'reasiim the value of the property will, 
 in turn, lead to increased dividends, and thus eventually replace 
 the taxes evaded. This view of the matter, however, overlooks 
 .several important facts. In the first i)lace, tlu> taxes on the 
 capitalized income are undoubtedly lost for a more or less 
 leimthened ])eriod. When they reai)i)ear t h(>y an> not taxed 
 in the airiireirate. as they should ha\(' been, but oidy on the 
 extra dividends which may arise from them. Thus, supi)ose 
 the net prolits which are recajtitali/tMl should amount in five 
 years to81,00t),()(HI, and sujjpose the tax rate which was esca[)ed 
 to be '2\ jier cent, then the taxes lost in the five years would 
 amount to at least §■_'.'),('()(). Suppo.se the subsetpient dividends 
 jiaid on this new invest meiU of >*],()( )(),()()() to be ti per cent, then 
 the dividend on the ])roportion of the taxes escajMul will bo 
 SL')(Ht, and the taxes on that at '_'\ per cent will be S^m.oO 
 amuially. Btit tliis will obviously nMpiire a very lonii' period 
 to make up for tiie ori.iiinal evasion of S-5, ()()() in taxes. 
 
 There are many other dilliculties atteiidinij: this anions other 
 attempts to determine and tax net earnings so as to ])rovide a 
 fair amuial revenue. The alternative is of course, to take 
 ufoss ea miners as a basis fof taxation. This method of taxation, 
 il Is true, is not without its own defects, but they are nuich 
 fewer and much less serious than those at tending: any other 
 sNstein, There is, as we have .seen, little or no dispute as to 
 
llli; TAXATION {)[■ ITIiLIC S1;K\ ICK (uUI'uKa 1 1" ).\s (i;]l 
 
 what aro gross oaniiims, and as taxatimi lias as lc;ritiiiiatc u 
 olaiiii a,iiaiii.-t tlic j;n)>.> cariiiiifis of a corixiratioii a- aiiv ilctu 
 of oixTatiiiii; cxiiciiscs, it is not inijiist to ilcduct tlic laxo fn>m 
 gross cariiiriss, cvcii wlicre no net ("ariiiiig> remain. \o ijoiilit, 
 as lu'twccn coriioratioris which arc ])rospcrous and iho~c which 
 arc not, tiic taxes will he felt with uiic(|ual pressure, hut >o will 
 every other necessary item of operating expeii-es. I'.iit while 
 it is legitiniatc to tax the gro>s earnings of corporations having 
 little or no net earnings, it is doirahie to have a graijed rate, 
 so thai the taxation may hear more lightly on those haxing 
 little or no net income, and more heavily upon the more pro< 
 jK'roiis corporations. In lixiiig the rate of taxation on lii-oss 
 earnings according to ahilhy to i)ay, the net income of corpora- 
 tions, so far as it is ascertainal)le. may he employed as a guide. 
 In practi<(', however, it is found that the great majority of 
 normal puhlic .service corporations will fall within one. or at 
 inixt two classes, leaving oidy exceptional ca>cs as rc(|uiring 
 separate treat ment. 
 
 Once it is admitted that the earning power of a corporation 
 is its true hasis of value tlic chii-f (lue-tion which remain- is as 
 to the rate at which the income, whether net or gro>s. is to i)c 
 taxed. In the case of railway companies, net income i< nor- 
 mally ahout one third of gross income. So that approximatelv 
 a tax of 1 per cent on gross earnings would he c(|uivalent to a 
 tax of '.i per cent on net earnings. When, however, we attempt 
 to compare a tax on the income of puhlic .service corporations 
 with the various taxes paid on jirivate property, we are imniedi- 
 ately confronted with the dilliculty of finding any .-ati.-factorv 
 ba.-is for comparison. The only fair basis of comparixni would 
 he to take the gross or net earnings of both corporation.- and 
 individuals, lint here we are met with the fact that, while we 
 <an ascertain with reasonable accuracy the gro>- earnings of 
 a corporation, it is almost impo.'<sible to discover the gross 
 income of the ordinary business man. If we turn to specilic 
 forms of property and compare a tax of, say. '■) per cent on t he 
 gross earnings of railways, with the common tax on the 
 gross earnings from real estate, we should probably find that 
 the railways wer(> paying too little. Hut if we took the taxes 
 l)aid on most other kinds of property as a basis for compari-on, 
 
 LIBRARY 
 
«;:{• 
 
 ST ATI: AM) l.dCAl, TAXATION 
 
 \vf >li(.ul.l pn.hal.lv find that the railways w(T»> puying too 
 iiuicli. It is iiiipn^iliic hcR' to p) into details on tiicsf iiiattfi-s, 
 hut a carcrul study of the siihjcct will prove, 1 think, that no 
 v<'ry sati>fai-tory practical conclusion can Ik' reached in atteinl>t- 
 in^ to fix an e(iuitai.le rat<' of taxation for railways i hroujrh 
 c(.ni|)aris(.n witli the taxation of ordinary private property or 
 the income derived from il . As juihlic service corjiorat ions 
 must he valued on a special l)asis. so their rate of taxation nnist 
 !).• fix.'.! upon a special basis. The attetnjM, in the interest of 
 a sui)erficial and mechanical e(iuality. to value, rate and tax 
 puhlic service corporations on tiie same hasis as tl>e proiH-rty of 
 l)rivate individuals cannot fail to re.sult in very real ineciuality 
 in taxation. 
 
 One very imi)ortant reason for the sjiecial treatment of i)ul)lu- 
 service corjiorat ions, as rejiards taxation, lies in the fact that, 
 under modern conditions, the i)ul)lic is ever more insistent on 
 reuulatiny: the rates and char^'es of these corjiorat ions, and 
 otlierwise closely suixTvisiiif: their services and their ohliiia- 
 lions to the community. These public refrulations naturally 
 restrict wiihin very definite limits the opportunities of the 
 corixirations to aujiment income, or even to maintain it. If, 
 therefor(>. tlu> pul)lic insist upon havinji cheap rates, they must, 
 in ah fairness, corresixindinsly moderate the taxation of the 
 forjiorations: for re^rulatinu; rates is levying; taxes in kind. 
 
 .\fter a careful survey of tlie various aspects of the subject 
 and a comparison of views with repn-sentatives of tax-gatherers 
 an<l taxi)ayers. I have been led to believe that a tax of :^ jier 
 cent on <rross income is a sufliciently hiilh tax f^r railways, 
 witli not m.ire than l' per cent for other corporations. Lower 
 rates, however, should be ])rovided for exceptional eases where 
 there were obviously few or no net ])rofits; but, as already indi- 
 eated. the a!)sence of net income is no valid argument against a 
 certain nit\inuim of taxation. 
 
 Some diliiculty has been met with, on technical constitutional 
 -rrounds, as regards the taxation of public service corporations 
 wliose operations extend, as most of them do. beyondthe limits 
 of state or provincial taxing areas. It is even yet apparently 
 somewhat of a moot question as to whether it is constitutionally 
 admissible for a State to tax a corporation upon its earnings. 
 
THE TAXATION oF PlIU-IC SKUVlL'l:: CDUroilA ITONS (VMi 
 
 whcro tliosc ;irr dcrivfil fnnii iiitcrstuto services. Hut wliere 
 tliis position is i:ii<eii witli rclVreiice to eariiiiijis, it is fonunoiily 
 iield to he (|uite collet it utioiial to tax interstate corporations 
 upon tile l)a>is of ilieii' i)ro|H'rt y or I licir l'ranclii.-e>. a.> within i In- 
 State, ^'et 't i- perfectly well known thai the value of t he 
 properly or the franchise within the State is really (leterniined 
 hy the relation of tlie-ie to the whole sy>t(ni. Moreover', t he 
 value of the property as a whole is chiedy dependent upon the 
 extent of the inter.-tate trallic Taxes also, on whatever l)asis 
 levied, are ohviously paid out of inter-tate e;irnin;;s. The 
 di^tuictioii therefore lietween a properly tax a- coti>l il ul ional 
 and a fax on earniiifrs as unconsiiiutional is a lei:al tictio/i of a 
 very inarti-tic character. Hut like so ni;iny other dilllculties 
 ari^inji from lii-toric conditions it ari-es from the fai't that a 
 .ser\ice which was at one time purely local has enormou-ly 
 expanded in importance and ran^e, and has become the function 
 of interstate corporations many of which are now of (piito 
 national character. This ex])an>ion of s«n"ral interests from 
 local to national importance is leadinji many of those who full>' 
 respect state or pro\incial ri<:hts, to recognize that a ser\ice 
 wiiicli has |)asse(l beyond the ranjre of slate or )iro\incial terri- 
 tory and Ix'come national in its character, should, if necessary, 
 be(lealt with by national law>. The normal line of escape from 
 the absurdities born of constitutional interpretations based on 
 more elemental}- conditions which are rai)i(lly pas-ini; away, 
 would be for the various ."states or provinces to arrange ])eriodic 
 conferences lo determine the fair amount of the earning power 
 of each system as a whole which should be assij;ned to the indi- 
 vidual Stat(>s or provinces. Should they lind it imi)o>'sible to 
 airree \i])on such an apjiort ionment , they miudit either call upon 
 or permit the f(>d;'ral or nation.al ;:overnmeiU to assess — not to 
 tax —the earninjrs of jxiblic servii'c corporal ions, di>t ributinii 
 the values anioufi the different States or province^ upon an 
 (•(piitable basis. Kither method would avoid the increasinir 
 confu>ion, injustice and ine(iuality which result from leavimi 
 the taxation of interstate public ser\ice corpoi-ai ions to the 
 c.iprice of individual States. Hy purely ariiiirary systems of 
 valuation, ind'vidual States and provinces have been .able 
 to levy more than their ju>t >hare of taxation upon the cori)ora- 
 
(i:u 
 
 SI \Ti: AM) l.o(M. rWAIloN 
 
 tiuii- whci-c line- n|' t r;tri>|i(irtalinii nr I r;iti>tiii~>inn pit-s tlinmyli 
 I luir lfniiiii-\ . 
 
 Ill ili-liilMitiii^ within caili State the asscsstiictit iifipiiitinticcl 
 ti' il !>>■ niiililal airrcciiK III aiiniiiii the States or liv tlie iiatidiiai 
 ;iii\ eiliiiielit . the l!illliic||)alit le- liii^ht >tiil lie aliiivcij to a>.-e.-,-, 
 the \ahie of the laiuN ami luiihliims owned li\- a |)!il)lic »er\ ice- 
 (■oi|)oiatioii within liieir liiiiit> on the same l'a>i> a> ailjoininn 
 laihl- ami I'Uihliim-. At'ler the-e taxes were .lediiele.l from 
 the m-o>-. aiiioimt allo\\C(l to earli State, the reliiailhler could 
 lie a|i|ilied to -late or iiiuniri|)al purposes, as determined In' 
 the Iciii-lalure >pf eacli .Stativ 
 
 It is uiineres-arv in connection witii this lirii'f >tateinent 
 to -|)ecify all the advant,ii:es, practical ;itid -cieiitihc. which 
 would re-ult from a uniform asse»ment and dist i ilml ion of 
 the taxation of puMie service corporation- upon the lia-is of 
 their earniim-. it i-. howcxcr. oli\ioUs that e\-er\- stej) in tlu! 
 cxpan-ion of the eciiiiomic interests of the I'liited States and 
 oi C.'inada inxiilves the iiicre.asiiiu' im|iortaiice. alike from a 
 loi-.d and from a natioii.d point of \ iew. of i\io services of tr.aiis- 
 |>ortation and tr.Jismis-ion and the corporal ioti.> which sup|)lv 
 them. 'I'hi- exp.insioii involves the investment of n(>w volumes 
 of n.itioiial wealth with increasim: aiiirreirale return- in the way 
 of income, and. coiisecjueiitly. of tax-|)ayin<: ])owor. i5ut as 
 tlie-e forms of wealth cannot ho ilealt with ailequately or justiv 
 li\' the older methods of loc;d taxation, it is iinperatixc that 
 .some movement should, he made toward devisiiiii a method of 
 !iss(.s<iiient ami dist rihution on :i wider liasis and in accord.aiice 
 with their true economic \alue. Onlv in thi.s way can we meet 
 actual conditions in a practical manner. 
 
' lp™.„„ w 
 
 gw f jt ^" ■ 
 
 ~?0i