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counting systems are maintained, calculation of net income is comparatively easy. Experience in the administration of federal income taxes has introduced certain standard notions of net income, with the result that net income for manufacturing and mercantile corporations can be computed with a fair degree of accuracy. In some states, the rates are progressive, and in others proportional. The Federal Act of 1924 imposes a rate of 121⁄2 per cent on corporate net income. Thus, the rate is made proportional rather than progressive. The tax on net income, where such income can be accurately computed, represents an attempt to adapt taxation to the ability of the corporation to pay. It also represents an attempt to apply the benefit principle to corporate taxation.

5. Privilege and occupation taxes are presumed to rest upon the opportunity granted by the state to engage in business. According to a West Virginia law of 1921, all firms in that state engaged in the extraction of natural resources must pay for that right a tax of two-fifths of one per cent of gross proceeds. Other lines of business are also taxed at varying classified rates for the right to engage in business. Arkansas and Louisiana impose a privilege tax on the material "severed" from the soil. Minnesota imposes an "occupation" tax on the value of all ores mined. Such taxes, whether under the term privilege, severance, or occupation, closely resemble both a sales tax and a gross profits or gross receipts tax. They are, however, levied under the guise of a general franchise tax on corporations, and require consideration under that heading. Taxes which are more avowedly of the nature of sales or commodity taxes are considered in the following chapter.

6. The word "franchise" is used so loosely and comprehensively that it would include any of the foregoing corporation taxes. New York, however, imposes a particular form of franchise tax, designated as the special franchise tax. The use of city streets, rights of way, and public property, is assumed to be of value to the corporations, and this value is treated as a special franchise. Such special franchises are designated as real estate, and the courts have upheld the legality of this classification. Consequently, franchise values are taxable at the same rates as any other real property. In New York City alone, such franchise values amounted to more than $400,000,000 in 1921.

In their many forms, corporation and business taxes represent the widespread endeavor of the government to find sources of revenue which can either supplement or supplant the general property tax. Such taxes have not taken their final form. They are still in the trialand-error or experimental stage. But underneath their tentative nature, they reveal a fundamental reform movement. They are one of the most important tendencies in present-day public finance.

CHAPTER XXXV

TAXATION AND THE PRODUCTIVE FUNCTIONS OF
GOVERNMENT (Continued)

The Sources of Federal Revenue.-The relative importance of the different sources of Federal revenue is shown in the accompanying diagram: 1

1

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1 Annual Report of the Secretary of the Treasury, The State of the Finances,

. for fiscal year ended June 30, 1924, p. 18.

Federal taxes may be classified chiefly under the following headings: 1. Internal excise and consumption taxes.

2. Customs' duties, or tariffs.

3. Income taxes.

4. Profits taxes.

5. Gift, estate, and inheritance taxes.

Most of these sources of revenue are utilized by state governments as well as by the federal. They are not, with the exception of the tariff, the exclusive field of any one unit of government. The import tariff is the exclusive field of revenue for the national government.

Internal Excise and Consumption Taxes.-Internal excise taxes are taxes on commodities for consumption, on certain financial and legal documents, and on certain domestic activities and transactions. The scope of these revenues may be illustrated by the following summary of federal internal excise duties collected during the fiscal years ending June 30, 1923 and 1924.

THE CHIEF FORMS OF INTERNAL EXCISE TAXES OF THE Federal GoveRNMENT

....

....

....

Distilled spirits and alcoholic beverages
Recerpts under national prohibition
Tobacco and tobacco manufactures
Oleomargarine, adulterated, and process
or renovated butter and mixed flour.
Bonds, capital stock issues, conveyances,
capital stock transfers, sales of prod-
uce for future deliveries, etc.
Telegraph and telephone
Excise taxes, manufacturers', including
automobiles, cameras, photographic
films, candy, yachts, etc. (sec. 900)..
Other excise taxes, including sculpture
and paintings; carpets, rugs, trunks,
and valises; jewelry, clocks, and
watches; nonalcoholic beverages, etc.
Corporations, on capital stock ..
Brokers, theaters, museums, bowling

alleys, billiard and pool tables, shoot-
ing galleries, riding academies, pas-
senger automobiles for hire, and use
of pleasure boats, etc.
Admissions to places of amusement and
entertainment and club dues

....

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Narcotics: Opium, coca leaves, etc., including special taxes of importers, manufacturers, and dealers

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* Annual Report of the Secretary of the Treasury, State of the Finances, 1924, p. 288. 2 The meaning of excise has been broadened in recent years to include the inheritance tax, the federal corporation tax of 1909, and the capital stock tax. These

The most productive forms of internal excise duties have been the tobacco and liquor taxes. The constitutional prohibition of liquors has destroyed the former importance of liquor taxes, but the tobacco taxes retain their position as a primary source of revenue. Some countries have derived large revenues from a tax on salt, but the United States has not seen fit to imitate the policy. An important form of taxation in the United States is the stamp tax, which applies to bonds, capital stock issues, conveyances of title, promissory notes, custom house entries, passage tickets, proxies, powers of attorney, and other financial instruments. Another form is the amusement tax, which applies to theaters, moving picture houses, circuses, bowling alleys, pool tables, shooting galleries, riding academies, pleasure boats, and club dues. A further form is a manufacturer's excise, which applies to automobiles, cameras, photographic films, candy, yachts, oleomargarine, and the like. Finally, the sales tax is important, and at present applies to telephone and telegraph messages, beverages, admissions, dues, and works of art and jewelry. Strictly speaking, the sales tax would include also the manufacturer's excise tax.

Consumption taxes have been a favorite resort of governments in time of war. In the World War, the United States imposed heavy rates on transportation, communication, insurance policies, soft drinks, and other objects. After the war, most of these abnormal levies were either abolished or greatly moderated. The taxes on soda fountain supplies and soft drinks received the epithet, "nuisance taxes." They were extremely difficult to collect, and were abolished in 1921.

Although the states have not used excise taxes to the same extent as the federal government, nevertheless they have made some progress in that direction. Particularly, they have found a sales tax on gasoline ideally suited to the raising of revenue for the maintenance and construction of highways. In 1923, thirty-seven states had adopted the gasoline excise tax.

When the proposal for a federal cash bonus was under consideration, numerous authorities advocated a general sales tax as the proper method of collecting the money. A general sales tax did not, however, appeal favorably to public opinion. This was because such a tax violates the principle of ability to pay, and in effect constitutes a regressive tax. Regressive is the opposite of progressive. It means that the greater the ability to pay, the less one is taxed. The people of high incomes would enjoy a tax which is graduated downward instead of upward. The poor man and the rich man, buying the same article and paying the same tax, are not paying in proportion to any reasonable conception of ability. And above all, a notion of equality of sacrifice is flagrantly violated. Owing to this regressive consequence, a sales tax should be applied but lightly to necessities of life. It should be confined mainly

newer forms of excise can scarcely be included under the head of consumption taxes. Most other excise taxes do, however, involve a levy on consumption, and consequently it is appropriate to group excise and consumption taxes together in this discussion.

to luxuries, or to articles whose consumption it is intended to discourage. The taxes on tobacco, liquors, and amusements affect articles of luxury. The tax on narcotics affects articles whose consumption is to be discouraged. When levied in accord with these considerations, the internal excise taxes rest upon sound fiscal principles, and are important sources of revenue. Their diversity in recent years has increased their significance as a major form of taxation.

Customs Duties, or the Import Tariff.-The tariff on imports yielded in 1924 only 13.6 per cent of the total federal revenue. Although now a minor source of revenue, the tariff was in the earlier history of the country the chief source. It is now superseded in importance by income, corporation, and excise taxes. The total duties collected in recent years have been as follows:

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The average ad valorem rates of duty on dutiable imports in 1923 were as follows for various classes of articles:

Article or Schedule

....

Schedule A, Chemicals, oils and paints ....
Schedule B, Earths, earthenware and glassware
Schedule C, Metals and manufactures of
Schedule D, Wood and manufactures of
Schedule E, Sugar, molasses and manufactures of
Schedule F, Tobacco and manufactures of ...
Schedule G, Agricultural products and provisions
Schedule H, Spirits, wines and other beverages

Schedule I, Cotton manufactures

Schedule J, Flax, hemp, jute, etc.

Schedule K, Wool and manufactures of

Schedule L, Silk and silk goods ..

Schedule M, Pulp, paper, and books

Schedule N, Sundries

All classes

Average Ad Valorem Rates on Dutiable Imports Per Cent 29.95

39.09

33.89

21.95

36.19

55.22

25.98

44.67

32.18

20.34

56.45

53.18

24.29

38.29

36.17

The purpose of the tariff in the United States has become chiefly the protection of domestic industry. The raising of revenue is incidental. Hence, the main test of the efficacy of the tariff is non-fiscal. In so far, however, as it serves a revenue purpose, it must be judged by the require

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