For the post-transition period the corporation income tax succeeds the excess-profits tax as the measure of greatest interest to the postwar tax planners. Perhaps the predominance of business men and their spokesmen in the planners' ranks accounts for this interest. What to do about the so-called double taxation of corporate profits is the principal problem raised in connection with the corporation income tax. At the present time corporate profits are taxed first to the corporations, then again to the stockholders when they are distributed as dividends. This means that distributed corporate earnings are subject to two taxes, while other kinds of income are subject to only one.

Is this double taxation or corporate profits real or only apparent? The answer turn on whether the corporation tax is borne by stockholders or is shifted to the consumers in higher prices, or, alternatively, to workers in lower wages, creditors in lower interest rates, and so on. If the tax is shifted, it is not borne by the stockholder, and he is not doubly taxes. /1/

Economists have traditionally taken this view that general corporation taxes which are measured by net income or profits are not shifted but fall on the stockholders. But many other people, most business men included, view corporation income and profits taxes as a cost of production to be recouped through price. For example, public utility regulating commissions in general allow Federal income taxes as an expense in determining a reasonable rate.

(It is also argued that even if the corporate tax does rest on the stockholders, its burden has by this time been largely removed by the process of capitalization as reflected in the prices of securities. Accordingly, a substantial tax decrease would give a windfall to present stockholders. If high levels of national income are maintained, corporate profits after taxes may rise to unprecedented heights, thus enlarging the windfall. Moreover, it is urged, this situation might lead to an unfortunate stock market boom. To a lesser degree the windfall point may be made even though the taxes are eventually shifted, provided that the shifting takes place gradually over a period of years. However, this point applies neither to new businesses nor to new investment in old businesses. In any event, its significance appears to be temporary.)

Whether double taxation should continue permanently on the ground that the corporate entity should be taxed as such without regard to the stockholders is another question. Some tax planners have maintained that the double tax system should be retained both because a corporate franchise is valuable and because corporate business receives a large volume of costly service from the Federal Government.

Whether views they hold on the questions of tax shifting and taxing the corporate entity, the postwar tax planners are virtually unanimous in maintaining that a large part of the corporation tax falls on the stockholder and that there is undesirable double taxation of distributed corporate profits. No method of eliminating double taxation, however, has gained common acceptance. Several competing plans are proposed. The advocates of each present strong arguments against the others.

[One proposed method of eliminating double taxation of corporate profits is to treat corporations like partnerships. The partnership is not taxed as such, but partnership income is attributed to the partners and taxed to them when earned, whether or not they have actually received it. Similarly, this method would impose no tax on the corporation but would tax the stockholders on their allocable share of the corporate profits when earned, whether or not distributed in dividends. In behalf of this method it is urged that there is minimum tax interference with corporate management and maximum equity among different businesses. However, the proposal is strenuously opposed on the ground that a stockholder frequently is not in position to secure control over the income on which he must pay taxes and in fact may never receive it. A share of stock might turn out to be more of a liability than an asset. Moreover, the technical problems and complications involved are generally agreed to be exceedingly great.

Some planners have proposed to meet the difficulties of the partnership method by requiring instead that corporations make their profits available to stockholders each year for dividends or reinvestment. They urge that this would promote tax equity among stockholders and a sounder relationship between corporation and stockholder. The proposal has been strenuously opposed on the grounds that it is a measure of corporate reform rather than a tax measure and that it would destroy corporate growth and expansion.

Unlike these two methods of eliminating double taxation, other proposed methods make it advantageous taxwise to retain earnings rather than to distribute them as dividends. This is also true of existing law.

Repeal of the corporate income tax, leaving only the individual income tax on the dividends received by the stockholder, is another method of eliminating double taxation. It is universally recognized that this procedure, in the absence of other measures, would make the corporation a tax-free haven for the accumulation of income by stockholders who did not need the income for current expenditure. Strengthening of the present tax on the unreasonable accumulation of earnings has been urged as a method of meeting this problem, but there is little faith in its efficacy and it does not go to the heart of the problem of tax-free accumulation of income.

The imposition of a tax on undistributed profits has also been urged. A rat of less than 20 percent has been suggested as sufficient to prevent accumulation of earnings in the corporation without unduly penalizing corporations which had to rely on earnings as a source of capital for expansion.

A somewhat similar proposal is to continue a tax on corporate profits but to allow the corporation a deduction for dividends paid similar to the deduction now allowed for interest paid. This method would eliminate the preferential tax treatment which existing law grants to bond financing over stock financing. Because it is in the form of a reduction of present taxes on distributed profits, this deduction is considered by many to be more acceptable than a reduction in corporate tax rates accompanied by a special tax on undistributed profits.

All of the arguments of earlier years have been leveled against the proposals which involve heavier taxes on undistributed profits than on distributed profits. It has been urged that such taxes would coerce corporate management into undesirable distribution of profits and would penalize growing corporations. The carry-over of a given year's profits for distribution over a period of several years in one of the measures suggested to meet this type of objection.

Another method of eliminating double taxation is to apply a withholding tax to the corporation profits as the time they are earned and to grant the stockholder credit for this tax at the time the dividends are distributed. The dividend to be included in the stockholder's tax return would exceed the cash received by him by the amount of tax withheld by the corporation, just as at the present time the individual is taxed on his gross wage or salary without allowance for the tax withheld at source. However, the stockholder would be allowed a tax credit for the amount of tax paid at source by the corporation, and if this credit were in excess of his tax liability he would be granted a refund. This method has long been used in Great Britain.

An objection which has been made to the withholding method is that individuals with low incomes and tax-exempt organizations would receive refunds of tax. This would involve administrative difficulties. Moreover, some people would like to reach tax-exempt organizations indirectly through the corporate tax.

Still another method of eliminating double taxation is to allow the individual stockholder an exemption from the normal individual tax with respect to dividends received by him. The normal tax would be imposed at the rate necessary to reduce double taxation to the extent desired. This method was in operation prior to 1936, although double taxation was only partially eliminated. The dividend credit is supported as giving investment incentives to individuals by reducing the rate of tax on dividends below the level possible under other methods of eliminating double taxation.

A disadvantage of this method is that its effective operation requires a fixed relationship between the corporation tax and the individual normal tax. Flexibility and adaptability of the taxes is thus impaired. Moreover, this method eliminates double taxation more completely for stockholders subject to high income tax rates than for those subject to lower rates, and offers no relief at all to stockholders not subject to individual income tax.

This method is criticized also on the ground that it envisages a high rate of corporate tax, which would have a restrictive impact on corporate managers. It is pointed out also that if the corporate tax were entirely shifted to consumers the dividends received by the stockholder would be subject to a total of less tax than any other form of income, thus discriminating in favor of income earned through corporations.

A variant of the method of allowing an exemption from part of the individual tax would be to allow dividends to be included in individual income at some fraction, such as 60 percent, of the amount of the dividend. While this method has the advantage of simplicity, the relief it grants from double taxation is much more strongly weighted in favor of the higher income brackets than the other methods of reducing double taxation.]

In addition to proposals regarding double taxation, the postwar tax planners have made recommendations regarding rates and exemptions of the corporation income tax. Spokesmen for small business urge that a lower-than-standard rate be continued for corporations with incomes of less than $50,000, with an even greater rate differential than exists at present. Some sentiment has developed for a reintroduction of an exemption of $2,000 or more to eliminate the smallest corporations entirely. Proposals have been made also to combine the normal tax and surtax in order to simplify the tax structure.

There is almost unanimous agreement that a long period of loss carry-over should be provided for businesses generally. Such a period might extend for about five years and would take the place of the present combination of a two-year carryback and a two-year carryforwards of losses. The carrybacks have introduced complications and their permanent retention has not generally been favored.

Some emphasis has been placed on relaxing the rules regarding depreciation. Two points of view are reflected. The first would relax the administration of the depreciation provisions so that the taxpayer might have more flexibility in determining the rates to be charged. The second would provide greater flexibility and, in addition, would accelerate depreciation in the early years of the life of the asset. An extreme example of such acceleration would be the continuation of the five-year amortization provision employed during the war to encourage the construction of plants and equipment for war production. A more flexible depreciation policy is unanimously favored but some questions have arisen as to the desirability of the departures from standard accounting procedures which would be involved in an acceleration of depreciation.

CAPITAL STOCK AND DECLARED-VALUE EXCESS-PROFITS TAXES

Minor elements in the corporation tax structure are the declared-value capital stock tax and the declared-value excess- profits tax; the latter is not to be confused with the wartime excess-profits tax. [An earlier capital stock tax based on the "fair" value of capital stock was repealed in 1926, in part because of difficulties of valuation. In the search for revenues during the depression of the thirties a capital stock tax was again imposed in 1933, but to avoid the necessity for valuation the taxpayer was permitted to declare once and for all any value he desired. To prevent undervaluation a declared-value excess-profits tax was imposed on all profits in excess of 10 percent of the declared value of the capital stock. The taxes did not stand as originally passed; taxpayers who had made unfortunate declarations prevailed upon Congress to grant a succession of new options to redeclare. Existing law permits annual redeclarations.]

The combined amount of the two taxes is at a minimum when the declared value is ten times the profits which are realized during the year. Corporations with unpredictable earnings will pay more than the minimum, either through a higher-than-necessary declaration of capital stock or through payment of the declared-value excess-profits tax. The taxes are thus a sort of guessing game bearing most heavily on corporations which cannot accurately forecast their earnings. This group is likely to include a disproportionate number of small companies, new companies, and companies in fields of relatively great risk.

The capital stock tax has been defended as a method of taxing deficit corporations for benefits received. While some other form of capital stock tax might have achieved this result, the present tax does not. The deficit corporation pays only when it has failed to anticipate the deficit.

That the capital stock and declared-value excess-profits taxes should be repealed as soon as possible is unanimously agreed. Since the taxes are deductible from income subject to income and excess- profits taxes, the loss of revenue under present rates would be largely offset by higher income and excess-profits taxes.

INDIVIDUAL INCOME TAX

It is almost a tax axiom that since taxes must generally be paid from income, they should, insofar as possible, be imposed directly on income. This principle is supported by the fact that, although not perfect, income is the best single measure of taxable capacity which has thus for been developed, with few exceptions the postwar tax planners are assigning the individual income tax the most important role in the postwar tax structure. Necessarily, this role involves rates far above the prewar levels.

Few basic changes are proposed in the individual income tax. Some people have urged the introduction of averaging, but their proposals involve very substantial complications. Retention of the withholding and current payment features is generally assumed, and discussion centers mostly around rates and exemptions. There is growing recognition that such heavier taxes on the bulk of the population will be necessary after the war than before, and that an income tax with low exemptions and a relatively high starting rate is preferable to heavy reliance on sales and excise taxes. However, it is being extensively debated whether reductions at the bottom to protect consumption, or reductions in the brackets above about $5,000 to encourage investment and risk-taking, are more important to the health of the postwar economy.

Those who would introduce flexibility into the tax structure by increasing taxes in boom periods and reducing them in depression periods consider the individual income tax, especially in the lower brackets, the best place to apply the technique. Some would accomplish the result through raising and lowering personal exemptions, others by adjusting tax rates.

CAPITAL GAINS TAX

The treatment of capital gains has long been a source of controversy in Federal taxation. It is worthy of note that tax planners generally have recommended that the present treatment of capital gains and losses be retained until there is an opportunity for more through study or until other postwar adjustment have been made. The view that the present law is not too bad a compromise of the various viewpoints is generally supported.

However, a few planners call for substantial revision of capital gains taxation. Some would tax capital gains at full income tax rates, although averaging the gains over a period of years, and would tax accrued gains at the time of making a gift or passing property at death. At the other extreme are those who would eliminate completely the capital gains tax and the deduction of capital losses.

ESTATE AND GIFT TAXES

The estate tax and its companion gift tax are minor revenue sources, yielding less than alcoholic beverages or tobacco. Yet throughout the years there has been widespread interest in these taxes, indicating that much more important matters are at stake than the mere amount revenue involved. The estate and gift taxes apply in only about one percent of the adult deaths in the United States, and a relatively small fraction of the estates involved pay a large part of the total yield. Although top rates are high, reaching 77 percent, the tax base contains numerous avenues of tax reduction and avoidance through such devices as life estates and trusts.

Wartime adjustments in estate and gift taxes have been less sweeping than in the case of any other important tax. This is not inappropriate since the estate tax is not well adapted to emergency modification. However, if other taxes remain at permanently higher levels, recommendations to enlarge the yield of the estate tax and its accompanying gift tax might be expected. In general, however, the estate and gift taxes have commanded little attention in plans for the immediate postwar period. The planners appear to consider these taxes a long-range problem to be taken up when other more pressing postwar adjustments are completed. However, technical committees have given considerable attention to the coordination of the estates, gift and income taxes.

EXCISE AND SALES TAX.

The functions which excise taxes are generally believed to perform in the Federal tax structure are to keep down the rates of income tax and to reach classes of taxpayers not touched by the income tax. The principal objections voiced to excises are that they burden consumption, fall inequitably on lower income groups, and discriminate against the industries producing the taxed goods and services. The excises in use by the Federal Government are imposed largely on items of optional expenditure. Thus the taxes are somewhat less objectionable than a general sales tax would be because, to the extent that they fall on the poor, they fall in an optional way and thereby mitigate the sting of the tax burden.

Postwar tax plans would in general continue use of some of the excises. Liquor, tobacco and gasoline are the most frequently mentioned commodities recommended for continued excise taxation. However, some plans propose a large excise tax program. Many of the programs condemn a general sales tax because of its adverse effect on consumption and its regressive incidence, but a few recommend its adoption.

PAYROLL TAXES

Postwar tax planners have generally avoided the subject of social security and payroll taxation on the premise that they are outside the regular tax structure. However, a strong sentiment to hold down the payroll taxes is shared by groups which desire to limit social security expansion and by groups which maintain that the social security program should be financed by general rather than by payroll taxation.

CONCLUSION

No one will deny that the Federal tax structure is an intricate one. Obviously, in a short space it is impossible to set down all of the issues and problems involved in postwar tax readjustment. Some of those which appear uppermost in the minds of postwar tax planners have been briefly discussed. If undue emphasis appears to have been placed on corporation taxes, that emphasis is but a reflection of the fact that the postwar tax planners have concentrated most of their proposals for modification in this area.

An over-all view leads to the conclusion that the problems of postwar tax adjustment will be more difficult to solve than any tax problems heretofore faced by the Federal Government. More emphasis than ever before has been placed on the difficult problem of the effects of taxation on the operation of the economy. Despite this fact, it appears that current differences of opinion over tax policy in the main follow the lines which are familiar to students and observers of tax history.