-^
m^^
Given By
U. S. SUFl^ Or DOCUlwfENTS
^
^^3d SessfJn^*} SENATE COMMITTEE PRINT
INVESTIGATION OF CONCENTRATION
OF ECONOMIC POWER
TEMPOEAKY NATIONAL ECONOMIC
COMMITTEE
A STUDY MADE UNDER THE AUSPICES OF THE DEPART-
MENT OF COMMERCE FOR THE TEMPORARY NATIONAL
ECONOMIC COMMITTEE, SEVENTY-SIXTH CONGRESS,
THIRD SESSION, PURSUANT TO PUBLIC RESOLUTION
NO. 113 (SEVENTY-FIFTH CONGRESS), AUTHORIZING
AND DIRECTING A SELECT COMMITTEE TO MAKE A
FULL AND COMPLETE STUDY AND INVESTIGATION
WITH RESPECT TO THE CONCENTRATION OF ECONOMIC
POWER IN, AND FINANCIAL CONTROL OVER,
PRODUCTION AND DISTRIBUTION
OF GOODS AND SERVICES
MONOGRAPH No. 9
TAXATION OF CORPORATE ENTERPRISE
Printed for the use of the
Temporary National Economic Committee
^^i5 ^'o^?^®^^! SENATE COMMITTEE PRINT
3d Session J
INVESTIGATION OF CONCENTRATION
OF ECONOMIC POWER
IK TEMPOEARY NATIONAL ECONOMIC
COMMITTEE
A STUDY MADE UNDER THE AUSPICES OF THE DEPART-
MENT OF COMMERCE FOR THE TEMPORARY NATIONAL
ECONOMIC COMMITTEE, SEVENTY-SIXTH CONGRESS,
THIRD SESSION, PURSUANT TO PUBLIC RESOLUTION
NO. 113 (SEVENTY-FIFTH CONGRESS), AUTHORIZING
AND DIRECTING A SELECT COMMITTEE TO MAKE A
FULL AND COMPLETE STUDY AND INVESTIGATION
WITH RESPECT TO THE CONCENTRATION OF ECONOMIC
POWER IN, AND FINANCIAL CONTROL OVER,
PRODUCTION AND DISTRIBUTION
OF GOODS AND SERVICES
MONOGRAPH No. 9
TAXATION OF CORPORATE ENTERPRISE
Printed for the use of the
Temporary National Economic Committee
w
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1941
FEB 2 1942 >^.^
TEMPORARY NATIONAL ECONOMIC COMMITTEE
(Created pursuant to Public Res. 113, 75th Cong.)
JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman
HATTON W. SUMMERS, Representative from Texas, Vice Chairman
WILLIAM. H. KING, Senator from Utah
WALLACE H. WHITE, Jr., Senator from Maine
CLYDE WILLIAMS, Representative from Missouri
B. CARROLL REECE, Representative from Tennessee
THURMAN W. ARNOLD, Assistant Attorney General
•WENDELL BERGE, Special Assistant to the Attorney General
Representing the Department of Justice
JEROME N. FRANK, Chairman
*SUMNER T. PIKE, Commissioner
Representing the Securities and Exchange Commission
GARLAND S. FERGUSON, Commissioner
*EWIN L. DAVIS, Chairman
Representing the Federal Trade Commission
IS AD OR LUBIN, Commissioner of Labor Statistics
•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics
Representing the Department of Labor
JOSEPH J. O'CONNELL, Jr., Special Assistant to the General Counsel
♦CHARLES L. KADES, Special Assistant to the General Counsel
Representing the Department of the Treasury
Representing the Department of Commerce
LEON HENDERSON, Economic Coordinator
DEWEY ANDERSON, Executive Secretary
THEODORE J. KREPS, Economic Adviser
•Alternates
Monograph No. 9
TAXATION OF CORPORATE ENTERPRISE
n
,OLJF^pRp J..«PYNNIN^;
.. Jh^Whti^ credit ae&t, .
ACKxNOWLEDGMENT
This monograph was written by
CLIFFORD J. HYNNING
Department of Commerce
in consultation with
GERHARD COLM
Professor of Economics, New School for Social Research
Assisted by
JOSHUA H. HOLLAND, HELEN TARASOV, JOHN COPELAND, FRED
KONEMANN, ELDON SWEEZY, AND BETTY BARNARD
The Temporary National Economic Committee is greatly indebted
to these authors for this contribution to the literature of the subject
under review.
The status of the materials in this volume is precisely the same as that of
other carefully prepared testimony when given by individual witnesses; it is
information submitted for Committee deliberation. No matter what the
official capacity of the witness or author may be, the publication of his
testimony, report, or monograph by the Cow.mittee in no way signifies nor
implies assent to, or approval of, any of the fads, opinions, or recommenda-
tions, nor acceptance thereof in whole or in part by the members of the
Temporary National Economic Committee, individually or collectively.
Sole and undivided responsibility for every statement in such testimony,
reports, or monographs rests entirely upon the respective authors.
(Signed) Joseph C. O'Mahoney,
Chairman, Temporary National Economic Committee.
m
TABLE OF CONTENTS
Fas*
Letter of transmittal xi
CHAPTER I
The problems of inquiry:
Authorization of the study 1
Scope of the stud}^ 2
Taxes, public receipts, and governmental expenditures 4
Federal taxation of corporate profits 6
Definition of corporate profit for tax purposes 13
i\Iagnitude of Federal taxes and corporate profits, 1916-37 17
CHAPTER II
Federal taxation of corporate income: Statutory rates, exemptions, and
deductions:
Industries exempt from Federal taxation of corporate i ncome 21
Statutory exemption of minimum net income 23
Statutory rate structures 25
Deductions from corporate gross income 2S
Definition of the accounting period: Deduction of prior years' losses. 3&
CHAPTER III
Federal tax treatment of holding companies and related forms of intercor-
porate affiliation (consolidated returns) :
The corporate world 39
Consolidated corporate income-tax returns: Origin and history 41
(a) Mandatory consolidation 41
(6) Optional consolidation 42
(c) Abolition of consolidated returns in 1934 44
Importance of consolidated returns, 1928-33 45
Deduction of losses by subsidiaries 48
Abolition of consolidated tax returns in 1934 49
CHAPTER IV
Intercorporate dividends and interest on governmental securities :
Federal taxation of intercorporate dividends — history 53
Magnitude of the tax credit for intercorporate dividends, 1926-37, by
corporate size and industries 56
Corporate investment in government securities 63
CHAPTER V
Federal taxation of "excess profits" and undistributed profits of corpora-
tions:
Excess-profits tax: Premium on the predictability of corporate profits. 67
Surtax on undistributed profits : Premium on the distribution of cor-
porate profits 70
CHAPTER VI
Federal corporate income taxes paid by corporations of varying size,
1931-37 _• 81
CHAPTER VII
Federal taxation of monopoly profits: A negative record 87
V
VI TABLE OF CONTENTS
CHAPTER VIII
Page
Equity versus creditor capital in Federal corporate income taxation 91
CHAPTER IX
Variable-cost taxes:
Pay-roll taxes 97
Federal excise taxes 101
State sales and gross-income taxes 105
CHAPTER X
Fixed-cost taxes:
Property taxes 109
Business-privilege and license taxes 110
CHAPTER XI
Conclusions 115
Federal corporate-income taxes in general 116
Normal corporate-income tax 117
Capital stock and excess-profits tax 118
Undistributed-profits tax 118
Pay-roll taxes 119
Other taxes 119
APPENDIX A
War-excess-profits taxation 121
APPENDIX B
Federal capital stock and excess-profits taxes 126
APPENDIX c
Oliphant's statement on history of undistributed-profits problem 130
APPENDIX D
Tax experience of 312 identical manufacturing corporations, 1934-37 132
APPENDIX E
Sources and methodology 134
APPENDIX F
Technical tables 146
SCHEDULE OF TABLES AND CHARTS
TABLES
Page
I. Sources of Federal revenue, 1930-40 8
II. Federal corporate income taxation, 1909-40; amount of tax,
statutory and effective rates, and specific credits 10-11
III. Deductions and credits from corporate gross receipts, 1917-37-- 14-15
IV. Importance of consolidated income-tax returns, 1928-33 45
V. Magnitude of intercorporate dividends, 1935-37 63
VI. Estimated distribution of tax-exempt securities bv classes of
holders, June 30, 1937 64
VII. Types of dividends distributed by corporations subject to the
surtax on undistributed profits, 1936-37 77
VIII, Number of corporations and amount of net before interest of
591 manufacturing and trade corporations in 1937 tax sample,
by profit rate classes 90
IX. Federal taxes on manufacturing industries, 1938 103
X. Federal excise and State sales taxes as percent of sales of 362
manufacturing and trade corporations, 1934-37 103-04
XL State sales taxes as percent of sales, 1936 106-07
XII. State corporate taxes as percent of gross margin, by profit rate
classes and industries, 1937 112-13
CHARTS
I. Changing revenue sources of Federal, State, and local govern-
ments, 1913-38 5
II. Federal corporate income taxes and corporate gross and net
incomes, 1909-37 Faces 13
III. Federal taxes and corporate income available for reinvestment
or distribution to individuals, 1916-37 18
IV. Effect of 1932 abolition of minimum income exemption by size
classes and major industries Faces 24
V. Statutory deductions from corporate receipts by size classes,
1937 29
VI. Interest paid as percent of corporate receipts, by size classes and
industries, 1936 Faces 30
VII. Depreciation and depletion as percent of corporate receipts, by
size classes and industries, 1936 - — 32
VIII. Cumulative effect of statutory deductions from corporate
receipts, by size classes and industries, 1936 — Faces 35
IX. Deduction of prior years' losses as percent of taxable net income,
by industries, 1926-32 ---- Faces 38
X. Deduction of prior years' losses as percent of taxable net income
by size classes and industries, 1931-32 Faces 38
XI. Role of consolidated returns in Federal corporate income taxa-
tion, 1929 and 1933 47
XII. Gross and net income on consolidated corporation income-tax
returns as percents of incomes of all returns by industries,
1928-33 Faces 49
XIII. Effect of abolition of consolidated tax returns in 1934 on cor-
porate taxable net income by industries ^ 51
XIV. Federal corporate income tax pavments and special credits from
net income, by industries, 1926-37 Faces 56
XV. Federal (normal) corporate income-tax payments as percent of
profits of corporations of varying size, 1931-37 58
XVI. Federal (normal) corporate income-tax payments and credits for
investment income, by size classes and industries, 1937 60-62
VIII SCHEDULE OF TABLES AND CHARTS
CHARTS — continued
Page
XVII. Federal (normal) corporate income-tax payments and credits
for investment income, by minor industries, 1937 Faces 62
XVIII. Interlocking operation of Federal capital stock tax and excess-
profits tax; excess-profits and capital stock taxes on cor-
porations of varying size, 1933-37 Faces 69
XIX. Federal excess-profits tax payments of corporations of varying
size classes and industries, 1937 71
XX. Federal excess-profits tax and undistributed profits-tax pay-
ments, cash dividends paid out, and credits for investment
income, by minor industries, 1937 Faces 71
XXI. Federal surtax on undistributed profits of corporations, by size
classes and manufacturing industries, 1937 Faces 77
XXII. Federal taxes and corporate income paid out as cash dividends
or available for reinvestment or industrial replacement by
small, medium-sized, large, and giant corporations, 1931-37- _ 83
XXIII. Federal corporate income taxes, distribution of dividends, and
retention of profits by corporations of varying size classes
and industries, 1937 85
XXIV. Federal corporate income taxes, distribution of dividends, and
retention of profits by corporations in 91 industries, 1937- Faces 86
XXV. Federal corporate income-tax payments as percent of net profit
before interest, by profit rate classes, 1934-37 Faces 88
XXVI. Federal corporate income-tax payments as percent of net profit
before interest, by profit rate classes and industries, 1937— Faces 88
XXVII. Federal undistributed profits-tax payments as percent of net
profit before interest, by profit rate classes and industries,
1937 Faces 89
XXVIII. Federal corporate income-tax payments as percent of net
profit before interest, by equit,y ratio classes, 1934-37 Faces 92
XXIX. Federal corporate income-tax payments as percent of net profit
before interest, by equity ratio classes and industries, 1937 93
XXX. Federal undistributed profits tax payments as percent of net
profit before interest, by equitv ratio classes and industries,
1937 '_ : 94
XXXI. Federal-State pay-roll taxes as percent of sales, by size classes
(based on sales) and industries, 1938 Faces 98
XXXII. Federal-State pay-roll tax payments as percent of gross margin,
by size classes (based on assets) and industries, 1937 99
XXXIII. Federal-State pay-roll tax payments as percent of gross margin,
by labor cost classes and industries, 1937 100
XXXIV. Federal-State pay-roll tax payments as percent of gross margin,
by profit rate classes and industries, 1937 Faces 101
XXXV. State and local property taxes as percent of sales by size classes
(based on sales) and by industries, 1938 Faces 110
XXXVI. State and local property-tax payments as percent of gross
margin, by profit rate classes and industries, 1937 Faces 110
APPENDIX A
TABLES
I. Federal wartime taxation of corporate profits 1917-21 125
APPENDIX B
TABLES
I. Calculated capital-stock tax on corporations of varving size,
1933-37 1 128-29
APPENDIX D
TABLES
I. Tax experience of 312 identical manufacturing corporations,
1934-37 132-33
SCHEDULE OF TABLES AND CHARTS IX
APPENDIX E
TABLES
Page
I. Number of corporations filing income-tax returns 134
II. Number of corporations in 1937 tax sample 141-142
EXHIBITS
1. Dunn & Bradstreet tax questionnaire 143
2. Department of Commerce tax questionnaire _ 144
APPENDIX F
TABLES
I. United States tax collections, 1860-1938 146
II. Changing revenue sources of Federal, State, and local Govern-
ments, 1913-38 148
III. Corporate gross and net incomes and Federal corporate income
taxes, 1909-37 149
IV. Federal taxes and corporate income available for reinvestment or
distribution to individuals, 1916-37__ 149
V. Effect of 1932 abolition of minimum income exemption by size
classes and industries 150
VI. Statutory deductions as percentages of corporate receipts by
size classes, 1937 150
VII. Statutory deductions as percentages of total receipts, by size of
corporations and industries, 1936 151
VIII. Deductions for prior vears' loss as percent of taxable net income,
by industries, 1926-32 158
IX. Deductions for prior years' loss as percent of taxable net income,
1931-32, by size classes and industries 158
X. Consolidated returns in Federal corporate income taxation;
number of returns, gross income, net income, and Federal tax,
by industries, 1928-36 159
XL Comparison of corporations filing consolidated and unconsol-
idated returns in 1933 and 1934 by industries 161
XII. Industrial trends in the operation of the Federal taxes on corpo-
rate income, 1926-36 163
XIII. Federal corporate income-tax payments as percent of profits of
corporations of varying size, 1931-37 165
XIV. Federal corporate income-tax payments and credits for invest-
ment income, by size classes and industries, 1936-37 174
XV. Federal corporate income-tax payments and credits for invest-
ment income, by minor industries, 1937 178
XVI. Federal taxes and corporate income paid out as cash dividends or
available for reinvestment or industrial replaceijient by
small, medium-sized, large, and giant corporations, 1931-37. _ 181
XVII. Normal and excess-profits taxes as percent of net before interest,
bjT' profit rate and equity ratio classes, 1934-37 183
XVIII. Federal corporate income-tax payments as percent of net before
interest, by profit rate and equitv ratio classes and industries,
1937 : 186
XIX. Tax payments of manufacturers, retailers, and wholesalers as
percentages of sales, by industries and size of firms, 1938 188
XX. Federal-State pay-roll as percent of gross margin, by size classes
(based on assets) and industries, 1937 201
XXL Federal-State pay-roll taxes as percent of gross margin, by labor
cost classes and industries, 1937 201
XXII. Federal-State pay-roll and property-tax payments as percent of
gross margin, by profit rate classes and industries, 1937 202
LETTER OF TRANSMITTAL
Hon. Joseph C. O'Mahoney,
Chairman, Temporary National Economic Committee,
Washington, D. C.
My Dear Senator: The power to tax is the power to define the
character of our economic system. The present level of the fiscal
requirements of the Government increases the significance of the
tax structure as a positive factor in its impact upon business. Never-
theless, the present tax system is a patchwork put together over the
years, a residue of varying philosophies and shifting attitudes toward
different business practices. This becomes even more striking wheii
Federal, State, and local methods of taxation are all reviewed m their
state of unco ordination.
Whether so planned or not, taxes inevitably have a relationship to
the problem of the concentration of industry. They may favor
enterprises of differing sizes. They may encourage or discourage
growth. They may help or hamper such devices as the holding
company. They may influence the character of capital structures.
They may penalize enterprises in fluctuating industries. Such inten-
tions may not have been dominant in the minds of legislators; in
fact, the results may have been quite in the form of a byproduct of
some other purpose. Nevertheless, they may be important. It is
the purpose of this study to examine the record on these points.
It is exceedingly difficult to analyze taxes on an inductive basis.
The frequency of changes in tax laws and the continual fluctuation in
business conditions complicate the problem. Although this report
includes much new material, and new analyses of data previously
available, there still remain many dark spots in the picture. But,
at least, the problems are raised, and the report clearly demonstrates
the importance of particular tax provisions to business hfe and prac-
tice. The converse of this approach, taxes as sources of revenue^
has been regarded as outside the scope of this study.
Many individuals have contributed advice and counsel in this
undertaking. Although they are in no way responsible for the
analysis, we wish particularly to record our indebtedness to the
Department of the Treasury, Securities and Exchange Commission,
and Dun & Bradstreet, Inc.
WiLLARD L. Thorp.
September 16, 1940.
XI
CHAPTER I
TAXATION OF CORPORATE ENTERPRISE— THE PROBLEMS
OF INQUIRY
AUTHORIZATION OP THE STUDY
On April 29, 1938, President Franklin D. Roosevelt recommended
to Congress that it provide for —
A thorough study of the concentration of economic power in American industry
and the effect of that concentration upon the dechne of competition. There should
be an examination of the existing price system and the price policies of industry
to determine their effect upon the general level of trade, upon emploj'-ment, upon
long-term profits, and upon consumption. The study should not be confined to
tiie traditional antitrust field. The effects of tax, patent, and other Government
policies cannot be ignored.
After specif^dng various items for study, including improvement of
antitrust procedure, mergers, and interlocking relationships, financial
controls, trade associations, and patent laws, the President referred to
''tax correctives," as follows:
Tax policies should be devised to give affirmative encouragement to competitive
enterprise.
Attention might be directed to increasing the intercorporate dividend tax to
discourage holding companies and to further graduating the corporation incom^e
tax according to size. The graduated tax need not be so high as to make bigness
impracticable, but might be high enough to make business demonstrate its alleged
superior efficiency.
We have heard much about the undistributed profits tax. AVhen it was enacted
2 years ago, its objective was known to be closely related to the problem of concen-
trated economic power and a free capital market.
Its purpose was not only to prevent individuals whose incom^es were taxable in
the higher surtax brackets from escaping personal income taxes by letting their
profits be accumulated as corporate surplus. Its purpose was also to encourage
the distribution of corporate profits so that the individual recipients could freely
determine where they would reinvest in a free capital market.
It is true that the form of the 1936 tax worked a hardship on many of the smaller
corporations. Manj' months ago I recommended that these inequities be removed.
But in the process of the removal of inequities, we must not lose sight of original
objectives. Obviously the Nation must have some deterrent against special
privileges enjoyed by an exceedingly small group of individuals under the form, of
the laws prior to 1936, whether such deterrent take the form of an undistributed-
profits tax or some other equally or m.ore efficient method. And obviously an
undistributed profits tax has a real value in working against a further concen-
tration of economic power and in favor of a freer capital market.
The joint resolution establishing the Temporary National Economic
Committee provided for ''a full and complete study and investigation^^
of ''the effect of existing tax * * * policies upon competition,
price levels, unemployment, profits, and consumption." By formal
action of the Temporary National Economic Committee, the respon-
sibility of the making of the study of business taxation was delegated
to the Department of Commerce.
2 CONCEN-TRATION OF ECONOMIC POWER
SCOPE OF THE STUDY
''Taxation of corporate enterprise" is a phrase of confusing g:en-
erality. Confusion arises out of the many different kinds of corj^ora-
tions in existence and out of the many different types of taxes, vary-
ing in magnitude and economic effects. It is therefore necessary to
break the generahty down into its significant parts for analysis. At
least two questions are posed at the very beginning: What corpora-
tions? ^Vhat taxes?
The answer to the first question is one that must repeatedly be
made, since the instant studies are undertaken industry by industry
and also by size of corporation. It is possible at this point, however,
to indicate a few limitations. ''Business," as hereinafter understood,
primarily refers to corporate enterprise, particularly in the field of
manufacturing and trade, ^ except in chapters IX and X of this report,
where some tax data are presented on individual proprietorships and
partnerships. With the rapid spread of the corporate form into most
industries, this limitation of the study is not believed to be very
serious.
Taxes, taxes everywhere. The only properties they share in com-
mon lie in the circumstances that they are imposed by the lawmaker
.^nd collected by the tax administrator. Each differs from every
•other in the magnitude of its yield to the Government and in its
economic effect upon the taxpayer. These differences are so striking
in character that the use of a generic term — "tax" — is really nothing
more than a dumping ground of unrelated charges for governmental
services.
One form of tax is collected from the owner of something of value —
e. g., a factory or a corporate charter — a tax ho must pay without
regard to whether his factory hums with industrial activity or hes
idle. Such a tax is a "fixed cost" of the business that runs on year
after year. A second type of tax may be based upon a defined unit
of production or sale — e. g., a package of cigarettes, a bottle of liquor,
a gallon of gasoline, or a kilowatt-hour — or upon the dollar amount
of retail sales or the number of employees retained by the business.
The magnitude of such a tax rests directly upon the volume of in-
dustrial activity — in a word, it is a "variable cost" of the business
enterprise. A third type of tax is based on the profits of the business
enterprise — that is, it is payable only in the event that the operating
equation has been successfully solved and net income results.
The effects of taxes entering into the fixed or variable costs of
business enterprise do not leave off with the business that legally
pays the tax but are likely to extend to every person and agency
with which the taxpayer has any dealings, either directly or indirectly.
In the classical terminology of public finance such taxes are said to
be "shiftable" in character, in whole or in part, forward or backward.
It is very difficult, if not well-nigh impossible, to compute with pre-
cision where the "incidence" of such taxes finally comes to rest. The
difficulty arises not only out of the varying nature of the "cost taxes,"
viewed a priori, but also out of the complicated characteristics of the
taxpayer and the tax collector. Who is he? What does he do? Where
and when does he do whatever he is doing? And for what purposes
are the tax moneys spent?
1 Data on so-called "agricuUnral'" corporations, allhougli available in the source, have not been separately
presented because they are believed to be quite unrepresentative of agriculture.
CONCENTRATION OF ECONOMIC POWEB 3
The tax on profits or the income tax, as it is better known, cannot
according to prevailing opinion — and no empirical studies have proved
otherwise — generally be passed downward to the employees of the
taxpayer or backward to his supphers of raw materials, or forward
to his customers or the ultimate consumers of liis products and
services. The income tax is unlike and apart from all other business
taxes in tliis respect (death taxes and poll taxes excepted, neither of
which has any application to business enterprise) .
It is possible, of course, to improvise hypothetical cases in which
the income tax can, in principle, be shifted over a long period of time,
provided that the tax is either highly specific in character (having
application only to certain industries) or contains substantial exemp-
tions. But the taxes involved m the present inquiry are clearly of a
general character — in short, the Federal income tax applies to all
corporate enterprise that makes a profit, with proper allowance being
made for certain exemptions (e. g., agricultural cooperatives, etc.).
Although an income tax may over an extended period of time have an
effect on prices (e. g., by curtailing the construction of new facilities),
it would be true only in a period marked by the full use of resources
(i. e., existing plant capacity, etc.) and by a scarcity of capital for new
investment. Under existing circumstances, however, it is "noseplain"
that these theoretical possibilities of shifting are of so negligible a
jiature as to be disregarded with safety.^
The study has been divided into 11 chapters, 7 of which are ex-
clusively concerned with Federal corporate income taxation. The
size and industrial problem is discussed in terms of statutory rates
and exemptions (ch. II), deductions from gross income (ch. II),
facilitation of intercorporate affiliation via consolidated tax returns
(cli. Ill), credits for intercorporate dividends (ch. IV), corporate in-
vestment in governmental securities (ch. IV), the excess-profits tax
(ch. V), and the surtax on undistributed profits (ch. V). The aggre-
gate effect of Federal corporate income taxes upon corporate funds
available for dividends and reinvestment by various types of corpora-
tions is examined in chapter VI. Next, chapter VII, follows a study
of corporations with varying rates of profits (partially reflecting un-
perfect competition) and degrees of equity financing (ch. VIII). The
remaining chapters deal with size and industrial aspects of the '^cost'^
taxes, such as the pay-roil tax (ch. IX), Federal excises (ch. IX),
sales taxes (ch. IX), the property tax (ch. X), and State corporate
privilege taxes (ch. X). The concluding chapter simimarizes the find-
ings of the inquiry.
The principal sources of the study have been (a) income-tax data
of the Bureau of Internal Revenue and (6) data obtained by ques-
tionnaires received by the Department of Commerce from 800 large
manufacturing and mercantile corporations (for 1934-38) and by
Dun & Bradstreet from 27,000 small and medium-sized business
enterprises in manufacturing, trade, and service (for 1938). See the
appendix for a fuller description of the data.
Such, in outline, is the agenda of the instant inquiry on the taxation
of business enterprise. The nonagenda of the study needs specifica-
2 Theie is also ihe case of Government price regulation of business "affected with a public interest" — e. g.
railroads under the Interstate Commerce Commission— where, in determ.ining "reasonable" rate of return
on investment, income taxes are actually considered as a charge on that operating income which the ^us^
ness is deemed worthy of earnina under the Constitution. Galvtaion Electric Co. v. Gaiie&lon, 258 U. S.
388 (1922^. Also see C. E. Troxel, "Shifting of Public Utility Taxes," Bulletin of the National Tax Associ-
ation, 25: 101-110 (1940).
4 CONCENTRATION OF ECONOMIC POWER
tion. The study is not concerned with the effect of taxes upon
natural persons — their consumption and investment habits.^ Nor is
the study concerned with the tax advantages and disadvantages of
corporations in contrast to those of partnerships and proprietorships.
In the latter case available data are so sparse and insubstantial that
it was not believed feasible to attempt any empirical analysis.
TAXES, PUBLIC RECEIPTS, AND GOVERNMENTAL EXPENDITURES
Nor do these studies purport to ascertain whether taxes have been
or are excessive. The volume of total tax collections — of the Federal
Government, 48 State governments, and some 175,000 units of local
government — has been steadily rising in recent times (except immedi-
ately following the Great War and during the depression years
1931-33). This increase is a fact, whether tax cohections are meas-
ured in total dollars or in per capita dollars, or adjusted to the
changing values of the dollar. The per capita tax jDayments in the
United States amounted in the aggregate to $23.42 m 1913, $84.41
in 1920, $84.69 in 1930, and $114.09 in 1938. The Federal taxes per
capita amounted to $6.87 in 1913, $53.77 in 1920, $29.45 in 1930, and
$46.48 in 1938.^ (See Table I in appendix F, infra, pp. 146-47.)
But governmental functions and services — financed in major part
out of tax collections — have also been rapidly increasing, frequently
at a more rapid rate than tax collections. The excess of govern-
mental expenditures over receipts reflects, in a not inconsiderable
part, capital outlays for physical improvements that add permanently
to the wealth of the Nation, and is appropriately financed by borrow-
ing. In other cases the coincidence of declining tax revenues and the
dire need of governmental aid, especially during the depression,
results in substantial budgetary deficits for particular years.
To speak of taxes as a ''burden" without taking into account the
productive use to which government puts such taxes — national
defense, police and fire protection, highways, schools, sanitation, con-
trol of disease, relief, social security, to name only a few — is obviously
a distortion of fact. Taxes are not collected and then dumped into
the ocean. Like the sales of business, taxes are operating income out
of which the Government finances its manifold activities.
The textbooks frequently contrast taxes and prices in terms of the
compulsion-volitional elements involved. Yet it is obvious that one
can refuse to pay the prices of necessities only at the expense of star-
vation, death, or imprisonment — with respect to many things there
is no real choice. Likewise a person can refuse to pay the tobacco
tax by not smoking. The dift'erence between taxes and prices cannot
be sharply drawn, and in fact they may frequently overlap, espe-
cially as business ceases to be a wholly ''private" function — as if it
ever were — and becomes affected with "public interest" and as gov-
ernment assumes functions formerly performed by private individuals
and, institutions (e. g., education, relief, etc.).
3 See Temporary National Economic Committee monocraph No. 3, Who Pays the Taxes? by Gerhard
Cohn and Helen Tarasov. 1940.
^ The most rapid rise of sjovernmental expenditures occurred during the first Great War of 1914-18, the
economic and political consequences of which have colored povernmental expenditures ever since^ — in the
form of vast Army and Navy expenditures, pensions and soldiers' bonuses, debt services, aericultural
relief for farmers whose lands and markets were disorganized, etc. For a study of the efTect of the Great
War upon taxation, see Clarence Heer, "Taxation," Recent Social Trends, pp. 1354-57.
CONCENTRATION OF ECONOMIC POWER 5
The clianging tax sources of the Federal, State, and local govern-
ments are shown in chart I. In 1913, the earliest year for which
reliable data b}^ tax sources are available for all three levels of gov-
ernment in the United States, the property tax (56.7 percent) and
Chart I
CHANGING REVENUE SOURCES OF FEDERAL, STATE & LOCAL
GOVERNMENTS, !9I3 - 1938
PERCENT OF TOTAL REVENUE
20 40 60
80
/9.'3
/930
/938
/9/3
/930
/938
PAYROLL TAXES
Hi
CUSTOMS
/9/3
/930
/938
HIGHWAY TAXES
/9/3
/930
■ ' '"'I
193/
S888? i
f9/3
I930
1938
PROPERTY T^XES
ALL OTHER REVENUE
LEGEND
^ f£D£ML
V7\ STATE S LOOiL
Source: U. S. Treasury Department's Annual Report and Bulletin, Recent Social Trends.
Department of Commerce.
consumption taxes, including customs and liquor and tobacco taxes
(30.5 percent), furnished the principal mainstay of the public reve-
nues— in fact, they contributed 87 percent of the total receipts of the
Federal, State, and local governments. The relative yield of the
262698— 41— No. 9-
g CONCENTRATION OF ECONOMIC POWER
property tax has since been steadily declining, until in 1938 it fur-
nished less than one-third of the public revenues, in contrast to the
pre-war era when it furnished more than one-half. The one-third
produced by the property tax, however, is nonetheless more revenue
than that raised by any other tax and is, of course, still the fiscal
m.ainstay of most local governments. Customs has likewise been
declining in relative yield, falling from 13.7 percent in 1913 to 2.3
percent in 1938.
In 1930, before the full effects of the depression had been felt by
the tax system, the principal public receipts came from the property
tax (45.7' percent), income taxes (24.1 percent), and highway taxes
(7.6 percent). These three taxes in the aggregate accounted for 77.4
percent of total public receipts. Both the income tax and the high-
way taxes are relatively new taxes which were only nominally in evi-
dence in 1913. The income tax on corporations and individuals is of
primary importance to the Federal Government — the extensive areal
jurisdiction of which makes it the best collector of taxes related to
mobile wealth and income — v/hile the highway taxes (motor vehicles
and gasoline) have been largely collected by the States.
During the course of the depression and the consequent atrophy of
income taxes as producers of revenue there occurred a striking resur-
gence of taxes on articles of mass consumption. The States widely
enacted taxes on retail sales, while the Federal Government renewed
its reliance on liquor taxes and manufacturers' excises. The tax pat-
tern was again changed. As in 1913, consumption taxes contributed
a major share of public receipts — in 1936 they accounted for more
than one-fifth (21.7 percent) of total public receipts and more than
equaled the yield of the income taxes (15.5 percent). That year also
saw the enactment by the Federal and State Governments of a new
tax on pay rolls as a part of the social-security program.
In 1938 the relative importance of consumption taxes had declined
somewhat, but such taxes continued to account for a major share
(18.6 percent) of total public receipts. Taxes on income (19.3 per-
cent) and wealth (3.5 percent) increased relatively, although they
still lagged considerably behind the 1930 figures. The pay^^oil tax
has emerged as an important revenue source (9 percent) to both the
Federal and State Governments.
FEDERAL TAXATION OF CORPORATE PROFITS
In this study the Federal corporate incom.e tax has been examined
in terms of its effects upon the corporation paying the tax. The
industrial unit of the study is the corporation as such, artificial creature
of the law though it be. The individual stockholder is considered
only insofar as his return on dividends may be diminished by taxes
on corporate profits. This Hmitation of the study involves no dis-
tortion of analysis, except possibly in the case of the surtax on undis-
tributed profits, where the full story cannot be told without taking
into account individual stockholders whose surtax payments varv
with the magnitude of corporate dividends paid out.
The corporation is theoretically owned by the stockholders who, as
natural persons, ultimately (though paradoxicallv not necessarily ever,
at least in practice) reap the successes and suffer the failures of the
corporation. The corporation, it is said, is a mere les:al conduit
CONCENTRATION OF ECONOMIC POWER 7
erected for the benefit of the stockholders. But these general state-
ments are hardly applicable to all types of corporations, of which
there is a confusing variety. The small corporations, which are nu-
merically very large (at least 350,000 of the 500,000 corporations
annually reporting to the Bureau of Internal Revenue), are essentially
like partnerships except for the legal form of organization.
But in many walks of American life it is the large corporation which
has attained a state of dominance, producing the lion's share of the
national output, its plants and activities located throughout the
length and breadth of these United States, and its stocks trading on
the national and international exchanges. It is of this latter type
that it can be said that the corporation is ceasing to be merely an
artificial aggregate of individuals and is emerging as a very real
institution of vast social and economic importance in the modern
economy. "The usual securit}^ holder in America," say Berle and
Means, with particular reference to the investors in large corporations,
has become a mere "petitioner for the wages of capital."
The larger the corporation and the more widely distributed the stock, the more
easily can an existing management retain its position through control of the
proxy machinery. Such a management becomes virtually a self-perpetuating
body. Such control without appreciable ownership has already been attained
in many large American corporations, such as American Telephone & Telegraph
Co., the General Electric Co., the Pennsylvania Railroad, and the United States
Steel Corporation, and it appears to be the form toward which the modern cor-
poration is tending. In such a corporation the separation of ownership and
control is well-nigh complete. The stockholders no longer hold the position of
partners in an enterprise; they have joined the bondholders as suppliers of capital.
They are merely lenders of capital with a return which is not fixed but contingent
upon the will of those in control. Their right to vote has become a right to
revolution rather than a niethod of control. -^ * * ^
These statements of course do not deny the fact that there are
stockholders Avho play important roles in the management and control
of corporate policies and activities. Though numerically few, there
are usualty in the case of each corporation some large stockholders
who either participate directly in the management through member-
ship or representation on the board of directors or periodically influence
the management by specific suggestions which cannot be cavalierly
ignored.^
The corporation frequently commands larger resources, employs
more persons, and exerts greater power than several States of the
Union, even assuming at times the attributes of sovereignty itself.
Walter Rathenau in Von kommenden Dingen * * * suggested that cor-
porate enterprises had reached a stage where they were almost nameless, soulless,
and without any individual objective; he suggested the logical possibility that a
corporation might even own all of its shares, continuing as a self-perpetuating
organization of men working for an idea as abstract as the concept of the Nation.'
The corporate income tax's central dominance in the Federal fiscal
system will grow readily evident from an inspection of table I. In
1940, the latest fiscal year for which collection figures are available,
the corporate income tax accounted for approximately one-fifth of all
Federal revenues. In actual dollars the corporate income tax in 1938
gave a yield of $1,337,000,000 — a more m-ountaiiious revenue than
has been raised b}^ any other tax or in any yenT save during the war
period alone.
5 "Corporation," Encyclopedia of the Social Scienr-es, 4: 419-421.
' See "The 30,000 Mr.nagors," Fortune, February l&iO.
" Berle and ^Means, op. cit., pp. 419, 421.
COXCENTRATIOX OF ECONOMIC POWER
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B2
COXCENTEATION OF ECONOMIC POWER 9
The relative importance of the Federal corporate-income tax, how-
ever, has not been notably on the increase. For though in 1931 it
accounted roughly for one-third of the total Federal revenues, it ac-
counts at the present time barely for one-fifth. The explanation for
this disparity lies in (a) the high sensitivity of income taxes to the
fluctuations of the business cj^^cle — in the depression years its revenue
yield declined disastrously, and only recently has it begun to approxi-
mate the position it previously occupied — (6) the adoption of Federal
taxes on liquor following the repeal of the eighteenth amendment,
(c) the expansion of manufacturers' excises, and (d) the development
of new^ taxes on pay rolls as a part of the social-security program.
In spite of all these recent changes the corporate-income tax remains
one of the principal keystones of the structure of Federal revenues.
Corporate profits have been continuously subject to Federal tax-
ation since 1909, when the tariff act imposed a 1-percent excise tax
on corporate incomes in excess of $5,000. Prior to that year corpo-
rate profits had been wholly free of Federal taxation except during
the brief Civil War interlude.^ The ill-fated Incom.e Tax Act of 1894
contained provisions applicable to corporations, but it foundered — in
a constitutional sense — as a direct tax levied without apportionnient
as w^ell as by its effort to tax corporate profits derived from holdings
in State and local obligations.®
The excise tax on corporate profits w^as essentially a compromise
and makeshift measure. The Democrats had desired a progressive
income tax; President Taft, on constitutional ground, had preferred
an inheritance tax; while the States objected to Federal trespassing
upon their tax reserves. A great many people had become persuaded
that, because of the unhappy experience with the 1894 act in the
Supreme Court, a general income tax was impossible without a con-
stitutional amendment. Pending its passage it was widely believed
that an excise tax on corporate profits — a tax clearly constitutional,
since the right of Congress to tax sugar-refining corporations ou gross
income had recently been upheld ^^ — was much to be preferred to no
tax at all.^^
In transmitting his recommendation for an excise tax of 2 percent
(reduced by Congress to 1 percent) on corporate profits, President
Taft called attention to one important aspect of the tax:
Another merit of this tax is the Federal supervision which must be exercised
in order to make the law effective over the annual accounts and business transac-
8 Income taxes collected from corporations during; and following the Civil War (i. e., 1863-73) were rela
tively small in magnitude, amountine to $68,000,000 out of the total of $347,000,000, or less than one fifth
See F. C. Howe, Taxation and Taxes in the United States under the Internal Revenue System, 1791-1895
pp. 98-99.
e See Pollock v. Farmers' Loan and Trust Co., 157 U. S. 429 (1895). At least three of the colonies taxed
income (Massachusetts starting in 1634, South Carolina starting in 1701, and New Hampshire startmg in
1719) and Virginia in 1786 tried to tax income, but these incomes were predominantly those of natural per-
sons, as was naturally to be expected for those days of the precorporate era. See National Industrial Con-
ference Board, State Income Taxes (1930), I: 5. 19, 94, and 100. Also see the Board's study of State and
Local Taxation of Business Corporations (1931), ch. I, citing temporary taxes on corporate income in
Pennsylvania (1864). Virginia (1870), and Tennessee (1871). The first State attempt at taxing corporate
profits in recent times came in 1911 when Wisconsin adopted an income tax applicable both to individuals
and corporations. Also see the extensive survey by the U. S. Bureau of Corporations of Systems of Tax-
ing Manufacturing, Mercantile. Transportation, and Tran.-mis.-icn Corporations (1909-15).
ic SpreckeJs Sugar Refining Co. v. McClcin, 192 U. S. 397 (1904). The 1909 act was upheld as a "tax upon
the particular privilege of doing business in a corporate capacity" by the Supreme Court in Fhnt v. Stone
Tracy, 220 U. S. 107 (1911), at p. 151. even as applied to income from State and municipal bonds. uhere
a tax is lawfully imposed upon the exercise of privileges within the taxing power of the State or Nation, the
measure of such tax may be the income from the propertv of the corporation, although a part of such income
is derived from property in itself nontaxable." At p. 163. To this extent the Pollock case. op. cit.. was
modified. The Court also adverted to the fact that "the posses-ion of large assets is a business advantage
of great value: it may eive a standing which shall facilitate purchases; it may enable the corporation to
enlarge the field of its activities and in many ways give it business standing and prestige; it may give credit
which will result in mere economical business methods." At p. 166.
11 The total yield of the 1909 corporation excise tax amounted to approximately $129,000,000.
10
CONCENTRATION OF ECONOMIC POWER
tions of all corporations. While the faculty of assuming a corporate form has
been of the utmost utility in the business world, it is. also true that substantially
all of the abuses and all of the evils which have aroused the public to the necessity
of reform were made possible b}^ the use of this very faculty. If now, by a per-
fectly legitimate and effective system of taxation we are incidentally able to possess
the Government and the stockholders and the public of the knowledge of the real
business transactions and the gains and profits of every corporation in the country,
we have made a long step toward that supervisory control of corporations which
may prevent a further abuse of power. ^2
As passed by Congress, the Tariff Act of 1909 imposed an excise
tax of 1 percent upon ''the entire net income over and above $5,000
received by every corporation, joint stock company, or association,
organized for profit and having a capital stock represented by shares"
less dividends received from other corporations subject to the tax.
Following the adoption of the sixteenth amendment, Congress passed
the general income-tax law of 1913 which, in addition to a graduated
tax on the income of individuals (ranging from 1 to 6 percent), imposed
a tax of 1 percent upon ''the entire net income arising or occurring
from all sources" of "every corporation." The revenue acts of 1916,
1917, and 1918 successively raised the rate of the corporate mcome
tax to 2, 4, and 12 percent, respectively. Since 1917 the corporate
tax rate has exceeded the normal rate for individuals and the differ-
ence between the two rates has in fact been steadily growing. The
1917 act also introduced a new tax on corporations — the famous excess-
profits tax, ranging from 20 to 60 percent of the corporate profits in
excess of the average pre-war return on invested capital (not less than
7 percent nor more than 9 percent). The operation of this tax and its
subsequent modifications by the 1918 and 1921 acts, as w^ell as the
special war profits tax of 1918, is described in appendix A. In
1919 the regular income tax applicable to corporations was reduced
from 12 to 10 percent. Following the abolition of the excess-profits
tax at the end of 1921, the tax rate was increased from 10 to 12}^
percent, at which point it remained roughly throughout most of the
roaring twenties. (See table II for details.) In 1932 the rate was
raised higher still to 13% percent where it rested until the close of 1935.
Table II. — Federal corporate income taxation, 1909-40; amount of tax, statutory and
effective rates, and specific credits
[All tax figures in millions]
Normal tax
Excess-profits tax
Amount
of tax
reported
Statutory
rates
Effective
rates
Specific
credits
Amount
of tax
reported 1
'tory* h««<^^^^<^
Specific credits
1909
21
34
29
35
43
39
67
172
504
653
744
637
366
775
937
882
Percent
2
2 2
12
10
10
10
12.5
12.6
12.6
0.6
.9
.8
.8
.9
1.0
1.1
2.0
4.7
7.8
7.9
8.1
8.5
11.1
11.3
11.6
$5, 000
5,000
5,000
5,000
None
None
None
None
None
2,000
2,000
2,000
* 2. 000
* 2. 000
<2,000
*2,m
Percent
1910
1911 ..
1912_..
1913 .-
1914
1915
1916
1917....
1918..-.
1919....
1920..-.
1921....
1922
1923....
1,6S9
I 2, 606
1,432
989
335
8
20-60
30-65
20-40
20-40
20-40
1 15.3
130.0
1 15.2
1 12.5
1 7.7
.1
$3,000 + 7-9 per-
cent.3
$3,000+8 percent.3
Do.
Do.
Do.
1924
...I..--
See footnotes at end of table.
" Messages and Papers of the Presidents, 17 : 7391.
eONCENTRATIOX OF ECONOMIC POWER
11
Table II.
-Federal cor pot-ate income taxation, 1909-4-0; amount of tax, statutory and
effective rates, and specific credits — Continued
Normal tax
Excess-profits tax
Amount
of tax
reported
Statutory
rates
Effective
rates
Specific
credits
Amount
of tax
reported
Statu-
tory
rates
Effective
rates
Specific credits
1925
1,170
1,230
1,131
1,184
1.193
712
399
286
416
688
710
1,025
1,057
(»)
(«)
Percent
«13
«13. 5
4 13.5
12
11
12
12
8 13. 75
6 13. 75
« 13. 75
6 13. 75
"8-15
«8-15
161^-19
16H-19
14. 85-24
12.2
12.7
12.6
11.2
10.2
11.1
10.6
13.3
13.9
13.8
13.8
14.9
14.6
(«)
(»)
(«)
*■ $2, 000
4 2, 000
4 2,000
3,000
<3,000
3,000
3,000
None
None
None
None
None
None
None
None
None
Percent
1926
1927
1928
1929_.-.
1930
1931
1932
.........
1933..--
1934..--
1935..-.
1936-.. .
1937....
1938.-.-
1939
1940....
7
8
25
22
43
(8)
(»)
(8)
5
0
5
6-12
6-12
6-12
6-12
f 6-12
\ 25-50
.2
.2
.5
.3
.6
} (')
12^ percent.?
Do!'
10-15 percent.7
Do.?
Do.?
Do.?
f Do.?
\$3,000."
War-profits tax
Surtax on undistributed profits
Total corporate
income taxes
Individual
income tax
Statu-
tory
rates
Specific
credits
Amount
of tax
reported
Statu-
tory
rates
Effec-
tive
rates
Specific credits
Amount
of tax
reported
Effec-
tive
rates
Statu-
tory tax
rates
Effec-
tive
rates
1909
PercerU
Percent
21
34
29
35
43
39
57
172
2,142
3,159
2,175
1,625
702
784
937
882
1,170
1,230
1,131
1,184
1,193
712
399
286
423
596
725
1,191
1,276
(«)
(«)
0.6
.9
.8
.8
.9
1.0
1.1
2.0
20.0
37.8
23.1
20.6
16.2
11.3
11.3
11.6
12.2
12.7
12.6
11.2
10.2
11.1
10.8
13.3
14.2
13.9
14.2
16.8
17.3
(»)
(«)
(8)
Percent
1910..-
1911
1912.-..
1913 .-
1-6
1-6
1-6
1-13
1-63
1-68
l-GS
1-68
1-68
1-50
1-50
1-40
1-20
1-20
1.20
1.20
1-20
1-20
1-20
1-55
1-55
4-59
4-59
4-75
4-75
4.75
4.75
4.75
0.7
1914..-.
1.0
1915
1.5
1916
2.S
1917
5.1
1918....
»80
?$3, 666+io
\ percent. 3
j
7.1
1919....
J
6.4
1920 ..
4.5
1921....
3.8
1922
4.0
1923—.
2.7
1924....
2.7
1925 ..
--
3.4
1926-.-.
3.3
1927
3.7
1928..-.
4.&
1929....
4.0
1930
2.6
1931—-
-
1.8
1932
2.8
1933---
3.4
1934-..
4.0
1935 --
4.4
1936.—
145
176
(«)
(»)
(8)
7-27
7-27
2H
1.6
2.1
Dividends paid.
do--
do.io
6.3
1937
5.4
1938....
6.1
1939-.-
(8)
1940-.-
r's)
"■-
I Includes the war-profits tax.
* Additional tax of 1 percent on dividends.
» The percent represents the rate of return on "invested capital" that is exempt from tax.
4 Available only to corporations with net incomes less than $25,000.
5 Insurance companies taxed on 12.5.
« Consolidated companies taxed at higher rates (14.5 percent in 1932; and 14.75 percent in 1933; and 15.75
percent in 1934-35).
' Of capitalization as declared in the corporation's return under the Federal capital-stock tax.
8 Unavailable (September 1940).
' Applicable to income from government contracts in excess of $10,000; the amount of the excess-profits
tax may be claimed as a pro rata deduction from the war-profits tax.
" Inapplicable to corporations with net incomes under $25,000.
II Plus a special credit equivalent to either (a) 95 percent of the average earnings in prior years (1936-39)
or (6) 8 percent on invested capital.
Source: Computed from Statistics of Income for respective years. Note that these figures are based on
unaudited returns (since 1916) which are usually for calendar years, and hence may not agree with figures
based on collection reports (usually for fiscal years) .
]^2 CONCENTRATION OF ECONOMIC POWER
The Revenue Act of 1935 (applicable to 1936) introduced a slight
graduation into the corporate-income-tax rate structure for the first
time in the history of the Federal revenue acts,^^ ranging from 12}^ to
15 percent. But before this provision of the 1935 revenue act could
be made effective in 1936 a new revenue act was enacted. The slight
graduation from 12)^ to 15 percent was increased to run from 8 to 15
percent, and a new surtax at severely graduated rates (7 to 27 percent)
was imposed on that portion of corporate profits which were not dis-
tributed to stockliolders in the form of dividends. Tiiis new surtax
had been origmally designed as a tax to supplant instead of to supple-
ment the existing corporate income taxes. In 1938 the surtax on un-
distributed profits was repealed in substance (leaving a mere remnant
of 2K percent), and the graduated rate structure of the normal tax
was modified, ranging from 12}^ to 16 percent for corporations with
net incomes under $25,000. Corporations with net incomes in excess
of $25,000 were tentatively taxed at the rate of 19 percent with a
possible credit of 2K percent for dividends paid.^'^ The remnant of the
surtax on undistributed profits was completely repealed by the 1939
Revenue x\ct (applicable to 1940). A flat tax of 18 percent was im-
posed on corporations with incomes over $25,000. As under the 1938
act, corporations with less income were subject to a graduated rate
structure ranging from 12^ to 16 percent. ^^ In consequence of the
two revenue acts of 1940 the normal tax on the smaller corporations
has been raised to 14,85 percent and on the larger corporations to
24 percent, with special provisions covering the border-line cases.
The disparity in statutory rates, is now 9.15 percent, greater than
it ever has been.
The trend of the statutory tax rates applicable to corporate incomes
has been steadily upward, except for a plateau period during the
twenties. Throughout most of this term the statutory rate was flat,
with the notable exception of the war period. Yet it would not alto-
gether be correct to conclude that small corporations were taxed at
the seif-same rate as large corporations. A special factor frequently
came into play in the form of a specific credit varying from $2,000 to
$5,000 against net income. A credit of that description was avail-
able to all corporations for the years 1909-12 and 1918-20, while only
corporations with incomes under $25,000 could take advantage of the
credit for the years 1921-31. No such credit was available to any
corporations for the years 1913-17 and 1932 to date. The slight
graduation of the rate structure since 1936 has operated in an equiva-
lent manner to favor small corporations.^^
Passing from a statement of tax rates found in statute books to the
dollar and cents reported by the Treasury, these trends over a period
of time may be graphically underscored. The outstanding fact of
13 Since the turn of the century there have been proposals in Congress for progressive taxation of corporate
profits. During the consideration of the 1924 Revenue Act the Senate made a substantial attempt to impose
a steeply graduated rate structure on corporate incomes. At least six States (Arizona, Idaho, Mississippi,
North Dakota. Pouth Dakota, and Wisconsin) had graduated corporate income taxes by 1935. The largest
range in the statutory rates occurs in the South Dakota tax ffrom 1 1-^ S percent).
14 The rate mechanics of the 1938 act were not overly clear to an uninitiated reader. Instead of permitting
the deduction of 85 percent of intercorporate dividends from corporate profits in determining net income for
normal-tnx purposes and calculating the normal tax therefrom separately, as under the 193G pct, the law-
provided that a tentative tax at the rate of 19 percent should be calculated from net income and that against
such tax should be credited (a) 16i/^ percent of the credit for 85 percent of dividends received and (b) 2li
percent of the dividends paid out.
15 The specialized treatment of banks, insurance companies, China Trade Act corporations, and domestic
corporations operating in United States possessions was abandoned and the regular provisions of the 1939
act were made applicable to the same. Mutual-investment companies continued to be credited with divi-
dends paid out rather than with dividends received.
" Infra, pp. 26-27.
wirnon8
Jtwrtt^r^iH+mr
OONCENTRATION OF ECONOMIC POWER l^
chart II is the stupendous soaring of the income taxes during* the war
period. The peak was of course furnished by the special excess-profits
and war-profits taxes, but it remains noteworthy that the regular tax
on corporate income also soared and substantially remained on the
high level of productivity set by the war period (save for an exceptional
drop in 1921 which was rapidly recovered).
In spite of a lowering of the statutory tax rates in the bountiful
twenties the Treasury continued to report large taxes. With the
advent of the depression in the thirties the income tax dipped sharply
downward, reaching a low point in 1932 which was only slightly above
the figures for 1916. The recovery in income taxes has been almost
as sharp as the preceding decline, and in 1936-37 the tax returns more
than equaled even the peacetime peak set in 1926. A not unimportant
portion of the 1936-37 figures was contributed b}^ the special surtax
on the undistributed profits of corporations (shaded on the diagram).
DEFINITION OF CORPORATE PROFITS FOR TAX PURPOSES
The Federal Government may constitutionally tax corporations on
their gross incomes. Deductions from gross income are consequently
matters of ''legislative grace." That is, the Constitution does not
require them, although sensible economic policy may dictate them as
inherent to the concept of an income tax as contrasted with other
taxes. But Congress, as Professor Magill pointed out in his study of
Taxable Income, has displayed "increasing liberality in granting
deductions, except in the case of losses on sales of capital assets." ^^
The increasing complexities of modern taxation of individual and
business enterprise alike, about w^hich there is much complaint, is
indeed an inescapable consequence of higher tax rates. The higher
the tax rates the greater the necessity for defining income as closely
as possible to ''economic income" in order to avoid inequities and
hardships of individual taxpayers. Moreover, the tax administrators
are faced with magnified problems of enforcement of the tax laws in
order to prevent evasion. The interests of equity and revenue needs
coincide in requirmg detailed accounts and definitions of what legiti-
mately goes in and out of gross receipts before "taxable income" can
be determined.
These deductions at present include prixicipally (1) cost of ma-
terials and labor (commonly referred to in statistical sources as
"cost of goods sold" and "cost of operation"), (2) compensation of
officers, (3) rent, (4) repairs, (5) bad debts, (6) interest, (7) taxes,
(8) contributions or gifts, (9) losses by fire, storm, shipwreck, or other
casualty, or theft, (10) depreciation, (11) depletion, and (12) net losses
for prior years. Interest on Government obligations is included only
partially m gross income and from a nontechnical point of view could
be regarded as a deduction to this extent. Similarly, 85 percent of
the intercorporate dividends are taken as a "credit" from gross income
and in this respect might be regarded as a "deduction." The relative
importance of these various deductions, measured as percentages of
total corporate receipts, is shown in table III for the years 1917-37.
17 P. 319.
14
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The most important deductions — and increasingly so in recent
years — are naturally those for cost of goods sold and cost of operations
which have constituted approximately two-thirds of total corporate
receipts. The most important single deduction remaining — aside
from the miscellaneous group — was that of taxes paid in 1937; in 1936
it was that of depreciation; and in 1935 and prior years (as far back
as 1917) it was that of interest. The tax deduction has been increas-
ing, rising from a low of 0.9 percent in 1919 to a high of 2.6 percent in
1932 and 1937. The deduction of interest has been steadily declining
since 1932 from a high of 5 percent in that year to 2.1 percent in 1937,
lov/er than it has been in any previous year for which data are avail-
able. The deduction for depreciation has likewise been declining
since 1932, although not so rapidly as that for interest, falling from a
high of 4.5 percent in 1932 to 2.3 percent in 1937 (which is equivalent
to the period 1926-29), nor has the depreciation deduction reached
the low point of the pre-war and the immediate post-war years (1917-
20) when depletion and wartime amortization were reported
together with depreciation.
Next in importance has been the deduction for compensation of
officers, which also has been declining in recent years, falling from a
high of 2.6 percent in 1932 to 2 percent in 1935-37, which is lower
than for any other year except 1916. The deduction for rent paid
has been steadily declining during the short period for which data are
available, decreasing from 1.7 percent in 1933 to 1.1 percent in 1937.
The deduction for bad debts is substantially at the same percentage
in 1937 as it was in the late twenties, one-half of 1 percent or slightly
more — it reached a high of 1.6 percent in 1932. The drastic drop
in the relative importance of capital losses reflects the limited deducti-
bility (not exceeding $2,000) for this item that was introduced by the
Revenue Act of 1934, falling from 2.1 percent in 1932 to 0.3 percent
in 1934 and to 0.1 percent in 1937. The Revenue Act of 1938 (sec. 212)
has relaxed the limitations upon the capital losses deduction. The
only deduction showing substantially no change in the period for which
data are available (i. e., since 1925) is depletion, which has amounted
to approximately one-third of 1 percent of the total receipts of all
corporations. It is a deduction of very major significance to extrac-
tive industries and of no import to the vast number of corporations.
The credits (in the nature of a deduction) for specific sources, of
investment income — e. g., intercorporate dividends and interest
received on governmental obligations — have been steadily growing in
importance, reaching a peak in 1935, when they amounted to 3.2 per-
cent of corporate receipts. The relative decline of the credit for
intercorporate dividends since 1935 reflects presumably the changes
in the revenue acts of 1936 and subsequent years under Vvhich 15
percent of intercorporate dividends must be included in taxable
income.
The excess of receipts over the foregoing deductions and credits
results in net income for tax purposes. Tak>'ng net income (excluding
deficits) as percentages of total corporate receipts, it is apparent that
net income was largest during the war years (1917-19) and during
the prosperous twenties, when it varied from 6 to 12 percent of total
receipts. Both the absolute and relative amount of net income de-
clined catastrophically during the depression, amounting to 2.7
percent of total receipts in 1932. "While the figure has been steadily
CONCENTRATION OF ECONOMIC POWER I'J
rising from the low in 1932 to 5.2 percent in 1937, net income still
remains considerably lower than the high points reached during the
roaring twenties. ^^
The relative decline since 1932 in substantially all deductions—
except cost of goods sold — has naturally reflected itself in a relative
rise of the amount of taxable net income, increasing from 2.7 percent
of total corporate receipts in 1932 to 5.2 percent in 1937. But the
latest figure (1937) is still relatively lower than those for years prior
to 1930, with the single exception of 1921 (a depression year).
MAGNITUDE OF FEDERAL TAXES AND CORPORATE PROFITS, 1916-37
Any examination of the effects of Federal corporate income taxes
upon corporate profits obviously depends upon the coincidence of two
factors — taxes and profits. Corporations without net income clearly
have no profits and likewise pay no income taxes. They have, there-
fore, been excluded from the study of the relationship of income
taxes to corporate profits, although they have been considered in the
studies of statutory deductions from gross income, without which
deficits could not be legally established.
To deduct the deficits or losses of one group of corporations from the
profits of another group of corporations is to assume that the corporate
universe is a closed system in which the operating profits of one group
of corporations — profits which may be used for industrial expansion —
may be diminished, canceled, or converted into deficits by the losses
of another group of corporations. This assumption is hardly realistic,
for the successful corporations still have their profits. The losses of
the unsuccessful group, of course, fall upon the equity owners and
may, of course, if continued over a long time, fall upon creditors,
workers, and the community at large (e. g., if the plant is closed).
The amount of Federal income taxes paid by corporations and the
amount of corporate income available for reinvestment in or by cor-
porations and for distribution to individual investors is shown graph-
ically in chart III for all corporations reporting net income in the years
1916 through 1937. The length of the bar for any given year shows,
in billions of dollars, the amount of (1) Federal income taxes, (2) cor-
porate profits paid out as cash dividends (unavailable prior to 1926),
(3) corporate profits after taxes and dividends, (4) charges for depre-
ciation and depletion, and (5) interest payments.
In 1937, after paying $1,276,000,000 income taxes (including the
excess-profits and undistributed-profits taxes) to the Federal Govern-
ment, corporations had at their disposal for plant replacement and
industrial expansion and for distribution to investors (as natural
persons) some $10,700,000,000. This sum consists of $6,100,000,000
profits after all charges, $2,900,000,000 depreciation and depletion
additions to reserves, and $1,700,000,000 interest payments to bond-
holders and other nonequity investors.
The magnitude of Federal taxes in 1936-37 compares fairly closely
with the amount of Federal taxes collected from corporations during
the later tv/enties, when corporate profits were considerably larger
than in 1936-37. Taxes on corporate profits were largest during the
war era, reaching a peak in 1918 of $3,159,000,000, when the volume of
profits was more comparable to that prevailing in the later thirties.
1- Betwetn 1918 and 1932 not inccme was subject to 2 additional credits— one for net operating losses in
prior years and the other for a specific amount of net income— $2,000 to $3.000— available to corporations with
net incomes under $25,000. The effect of these provisions are examined, infra, pp. 23-25, 36-38.
18
CONCENTRATION OF ECONOMIC POWER
Chart III
FEDERAL TAXES AND CORPORATE INCOME AVAILABLE FOR REINVESTMENT OR
DISTRIBUTION TO INDIVIDUALS, 1816-37 (NET-INCOME CORPORATIONS ONLY)
a
LEGEND
Federal Corporate Income Taxes (Inc.
Excess-Profits Taxes for ISIY-ai and
1933-37 AND UNDfSTRtBUTED PROFITS
Tax FOR 193^37)
CORPORATE PROFITS (EXCLUDING INTER-
! CORPORATE DIVIDENDS) AHER PAYMENT
OF FEDERAL !NCO?«E TAXES & DIVIDENDS
DEPRECiATION AND OEPLfciTICN
(INCLUDING AMORTIZATION)
S
INTEREST PAID
CACH DIVIDENDS PAID OUT TO
lNDIVIOU;i,S (.UNAVAILABLE
PRIOR TO |^2b)
UNAVAILABLE
SOURCE": STATISTICS 0" LMCOME FOR RESPECTIVE YEARS
DEPARTI.1ENT OF COfl'ERCE
CONCENTRATION OF ECONOMIC POWER IQ
As it is to be expected of an income tax, the volume of Federal
corporation income taxes varies closely with the volume of corporate
profits. Profits (after taxes) fell from 10.9 billion dollars in 1929 to 2
billion dollars in 1932, or a decline of 89 percent. In the same period
taxes dechned from l^o billions to 400 millions, or a fall of 67 percent.
Meanwhile the revenue act had been changed, increasing the tax rate
from 11 to 13% percent and eliminating the specific credit of $3,000,
available to corporations with small incomes. Between 1932 and 1937
profits (after taxes) rose from 2 billions to 6Ko billions, an increase of
205 percent. Taxes increased in the same period from 400 million to
l^io billions, or an increase of 224 percent, somewhat greater than the
increase in corporate profits.
To sum up: During the depression the volume of corporate profits
dropped more rapidly than the reported yield of Federal corporate
income taxes. With the improvement of business conditions, Federal
corporation income taxes tended to increase somewhat faster than the
surge of corporate profits, although the lag between taxes and profits
was much narrower during the later period than during the depression
drop.
CHAPTER II
FEDERAL TAXATION OF CORPORATE INCOME: STATUTORY
RATES, EXEMPTIONS, AND DEDUCTIONS
Size has emerged in recent years as one of the cardinal problems of
Federal corporate income taxation. Do the corporate income tax
laws favor big business or discriminate against it or do they play the
role of a neutral? Is small business accorded different treatment
from big business under the revenue acts? Is medium-sized business
shown favor or discrimination? In what measure are existing size
differences in the operations of the Federal tax on corporate profits
the reflections of statutory language and legislative policies or the
somewhat inadvertent results of administering tax laAvs in a com-
plicated economical world? How do different industries fare under
the tax laws?
Size and industry differences in the operation of Federal corpora-
tion income taxes may arise in several ways. The Federal revenue
acts may —
(1) Exempt from corporate taxation (a) specific industries, thus
favormg corporations engaged in such industries, or (6) a minimum
amount of net income, favoring corporations with small incomes.^
(2) Adapt the rate structure to specific types of corporations,
taxing at higher rates corporations in specific industries or with rela-
tively large net mcomes or earning relatively high return on invest-
ment.
(3) Authorize deductions from gross income which may be more
important to corporations of certain sizes and industries than to
others.
(4) Define the accounting period by allowing or prohibiting the
deduction of prior years' losses, favoring or discriminating against
corporations with fluctuating income.
(5) Authorize credits against (or deductions from) net income for
intercorporate dividends and interest on Government obligations
(generally held by the larger corporations).
(6) Further size variations may result from the interaction of a
complex system of different types of Federal taxes applicable to
corporate profits.
INDUSTRIES EXEMPT FROM FEDERAL TAXATION OF CORPORATE INCOME
The present Federal revenue act (as of January 1, 1940) exempts
the following types of corporations from income taxation: (1) Labor
organizations; (2) agricultural or horticultural organizations (includ-
ing county fairs); (3) mutual savings banks without capital stock;
(4) fraternal beneficiary societies, orders, or associations; (5) domestic
building and loan associations, substantially all of the business of
which consists of making loans to members; (6) cooperative banks
21
262698— 41— No. 9 3
22
CONCENTRATION OF ECONOMIC POWER
without capital stock organized and operated for mutual purposes
(including credit unions); (7) cemetery companies owned and oper-
ated exclusively for the benefit of their members; (8) corporations or
organizations (including community chests, fimds, and foundations)
organized and operated exclusively for religious, charitable, scientific,
literary, or educational purposes, or for the prevention of cruelty to
children or animals, no substantial part of the activities of which is
carrying on propaganda or otherwise attempting to influence legisla-
tion; (9) business leagues, chambers of commerce, real-estate boards,
and boards of trade; (10) civic leagues or organizations for the promo-
tion of social welfare; (11) local associations of employees; (12) social
clubs owned and operated exclusively for pleasure and recreation; (13)
local benevolent life-insurance associations; ^ (14) mutual ditch or
irrigation companies; (15) mutual or cooperative telephone com-
panies; ^ (16) farmers or other mutual, hail, cyclone, casualty, or fire-
insurance companies;^ (17) cooperative associations engaged in mar-
keting the products of farmers, fruit growers, livestock growers, dairy-
men, etc.;* (18) cooperative associations engaged in purchasing sup-
plies and equipment for farmers, fruit growers, livestock growers,
dairymen, etc.;^ (19) corporations organized to finance crop opera-
tions and operated in conjunction with marketing or purchasing asso-
ciations; (20) corporations organized for the purpose of holding title
or collecting income and turning same over to a tax-exempt organiza-
tion; (21) corporations chartered by Congress and exempted from
Federal income taxes by the act of incorporation; (22) voluntary
employees' beneficiary associations; (23) local teachers' retirement-
fund associations; and (24) religious or apostohc associations or
corporations.^
This list of exem.pt corporations represents the cum.ulabive results
of approxim.ately three decades of tax legislation. The trend of this
exem.ption legislation is quite clear — the types of exemptions have
grown 3^ear by year more num.erous. The initial 1909 tax exem.pted
only corporations falling in types 1, 2, 4, and 8. Substantially each
following revenue act has enlarged the num.ber of exem.ptions or
broadened existing types. Thus the 1913 act added types 3, 5, 7, 9,
and 10, and added the clause ^'scientific" to type 8. The 1916 act
added types 6, 12, 14, 15, 16, 17, 18, and 21. The Revenue Act of
1924 added types 11 and 13. The Revenue Act of 1928 added types
22 and 23. In only a few instances have efforts at specific exem.ption
1 At least 85 percent or more of their income must be collected from members for the sole purpose of
meeting losses and expenses.
2 Ibid.
3 This provision, coupled with the special deduction allowed by sec. 207 (c) (3) of the Internal Revenue
Code, has been so broadly construed by the courts and tax administrators as to afford complete tax exemp-
tion to all mutual insurance companies other than life. See Commissioner v. National Grange Mutual Lia-
bility Co., 80 F. (2<\) 316 (1935), holding exempt from Federal tax a company insuring in 10 States the mem-
bers of the National Grange against liability arising from the use of automobiles.
* "An association which has capital stock will not for such reason be denied exemption (1) if the dividend
rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 percent
per annum, whichever is greater, on the value of the consideration for which the stock was issued, and (2)
if substantially all of such stock * * * is owned by producers who market their products or purchase
their supplies and equipment through the association." Nor is the exemption precluded by "the accu-
mulation and maintenance of a reserve required by State statute, or the accumulation and maintenance of
a reasonable reserve or surplus for any necessary purposes, such as to provide for the erection of buildings
and facilities required in business or for the purchase and installment of machinery and equipment or to
require indebtedness incurred for such purpose." Regulations 103, art. 101 (12)-1.
« The foregoing footnote also applies to this exemption. It should be observed that "cooperative organ-
izations engaged in occupations dissimilar from those of farmers, fruit growers, and the like, such as mar-
keting building materials, are not exempt." Op. cit.
6 Internal Revenue Laws (1939), sec. 101. Also see generally art. 103 of Regulations 101. The above list
may superficially appear numerically more extensive than the exemptions listed in the code, since each
type of exemption was listed separately, although a single code paragraph may cover several types.
CONCENTRATION OP ECONOMIC POWER 23
been defeated, as an attempt in 1921 to exempt corporations organized
to promote cooperative hom.e ownership/ an attempt in 1926 to
exempt mutual dairy loan associations,^ and an attempt in 1936 to
exempt water-users' associations operating Federal reclamation proj-
ects.®
The surtax on undistributed profits imposed by the Revenue Act
of 1936 specifically exem.pted from its provisions banks, insurance
com,panies, joint-stock land banks, China Trade Act corporations^
corporations in banki'uptcy or receivership, foreign corporations, and
corporations operating in the Territorial possessions of the United
States.
Obviously not all of these exem.ptions are of equal importance.
Sonae exemptions are found in substantially every tax law, for exam.ple,
the exem^ption in favor of religious, charitable, scientific, literary, and
educational institutions. Other exemptions reflect the strong pressure
of special interests. The m.ajor exem.ptions are probably the agri-
cultural m.arketing and purchasing ' 'cooperatives" and m.utual insur-
ance com^panies other than life.
STATUTORY EXEMPTION OF MINIMUM NET INCOME
The original Corporation Excise Act of 1909 applied only to cor-
porate net incom.es above $5,000. This exemption of the initial
$5,000 of net income rem.ained in eftect during the life of the excise tax,
expiring in March 1913, when the first income tax under the sixteenth
amendm.ent was adopted. The 1913 Revenue Act contained no
proA'ision exempting a m.inim.um, amount of corporate net income,
although such an exemption was allowed in the case of natural persons.
The excess-profits tax of 1917 reintroduced the concept of a mjnimum
amount of corporate net incom.e free from Federal taxation by ex-
em.pting the first $3,000 of corporate profits from its provisions. The
1918 Revenue Act contained an exemption of the initial $2,000
corporate net incom.e from the ordinary income tax. In 1921 this
exemption of $2,000 was restricted to corporations having net incom.es
under $25,000. In 1928 the amount of the exem.ption was raised to
$3,000, at which level it remained through the taxable year 1931.
The Revenue Act of 1932 repealed this provision and since that time
all corporate profits in excess of statutory deductions and credits have
been subject to Federal tax without any fiat exem.ption.
At the tim.e of its original introduction into the 1909 act the ex-
em.ption was severely ciiticized by Senator Elihu Root, whose view in
this respect was essentially reiterated by Secretary of the Treasury
Ogden Mills during the consideration of the 1932 Revenue Act by the
House Ways and Means Comm.ittee.^^ That this exem.ption of a basic
minim.um. of corporate net incom.e was designed to favor small enter-
prise— insofar as identified with corporations having small net income —
is fairly clear from legislative record and from, such statistical data
as are at hand on the operation of the exemption. Obviously the
factor of adm.inistrative convenience (eliminating the num.erous tax
returns of corporations with small income) was a relevant considera-
7 See Cong. Rec, 61: 7184-7186.
* 69th Cong., 1st sess., House report, p. 36.
» See Cong. Rec, 80: 9098.
5" "I never knew of any justification in principle for that exemption." Hearings on Revenue Revision
1932, p. 22. The remarks of Senator Root maj- be found in Cong. Rec. 44: 4004.
24 CONCENTRATION OF ECONOMIC POWER
tion, but this factor certainly did not account for the exemption
originally, nor is it believed to have played any important role since
1921, when the exemption was limited to corporations with net
incomes under $25,000.
The Blakeys in their history of The Federal Income Tax cite a
contemporary and dire warning by Senator Hale that —
if amendments did not provide for exemption [of small corporations], representa-
tives of hundreds of small corporations would swoop down on Washington and not
only make things miserable for Senators and Representatives but get up such an
agitation against the corporation tax that general tariff legislation itself would
stand in danger of defeat. ^^
An amendment relieving all corporations with net incomes under
$5,000 (the specific amount of the exemption) from submitting detailed
tax returns to the Bureau of Internal Revenue, upon the filing of
an informal affidavit stating that net income was less than $5,000,
was decisively defeated. ^^
Statistical data on the operation of this specific exemption are
unfortunately available only in a rather indirect manner and for only a
single year (1931). These data permit computations by size classes
and industries of the effective rate of the Federal corporation income
tax (i. e., tax as percentage of net income after all deductions, including
prior years' losses and credits for interest on Government obligations
and intercorporate dividends). The precise number of corporations
claiming the $3,000 exemption can, unfortunately, not be laiown by
size classes, since size of assets and size of net income are not invariably
correlated.^"' Since the statutory income-tax rate on corporations in
1931 was flat, lower effective tax rates for certain size classes indicate
that corporations in such size classes made substantial use of the
specific credit of $3,000 and the difference between the eft'ective rate
and the statutory rate of 12 percent can be taken to show the quantita-
tive significance of the exemption to corporations of varying size
classes.
From these data it is apparent that the specific credit for $3,000
operated to reduce the statutory tax rate on manufacturing corpora-
tions with assets under $50,000 by approximately 300 percent (effec-
tive rate of 3.4 percent, as compared with the statutory rate of 12
percent). See chart IV. In other industries the role of the exemp-
tion was even greater, as in trade, construction and finance, while the
exemption was of slightly less importance to public utilities and
service, and was of least importance in mining where the exemption
operated to reduce the statutory effective rate by one-half. Among
the manufacturing industries the exemption played a very important
role in depressing the statutory tax rate on the smallest corporations
in stone, clay, glass, textiles, forest products, printing, and metals.
The effect of the exemption was largely limited to corporations with
assets under $250,000 (except in finance and forest products where
corporations with assets from $250,000 to $500,000 were visibly
affected). No substantial depressing effect can be noted in the case
of corporations with assets over $1,000,000.
The 1932 repeal of the exemption of the initial $3,000 resulted in
very substantial increases in the effective tax rates on small corporate
II p. 46n.
>2 Cong. Rec, 44: 4235-4236.
IS For a frequency distribution of corporation income-tax returns classified by size of net income (or deficit)
and total assets in 1936, see Statistics of Income for 1936, pt. 2, pp. 42-43, 167-183.
EFFECT OF 1932 ABOLITION OF MINIMUM INCOME
EXEMPTION
BY SIZE CLASSES AND MAJOR INDUSTRIES
1931 - 1932
(NET- INCOME CORPORATIONS ONLY)
TAX AS % OF
TAXABLE NET
INCOME ,.
ASSET S/ZE Cl./kSSE'S
PtRCtNT TOTAL MANUFACTURING
CONSTRUCTION
PUBLIC UTILITIES
FOOD a BEVERAGES
FOREST PRODUCTS
STONE. CLAY 6 GLASS
SOURCE:- Computed raoM the SouficeaooK oa Tua St/it/stical Section op the Sune/tu o/^ //VTEfiNAi /?£i/£/iu£
2G2698— 41— No. 9 (Face p. 24)
m-nr^
CONCENTRATION OF ECONOMIC POWER 25
enterprise, in many cases the effect being very drastic. Any com-
parison of the effective tax rates for 1931 and 1932 must take into
account the change in the statutory rate between the 2 years, which
was raised from 12 percent in 1931 to 13% percent in 1932, an increase
in 1932 of 14}^ percent over the 1931 statutory rate. This shght
increase in the statutory rate is substantially mirrored in the 1932
increase in the effective tax for corporations with assets over $250,000.
The effective tax rates of the small corporations (i. e., with assets
under $50,000), however, more than quintupled between 1931 and
1932, in the case of manufacturing, trade, and finance. The rate on
minmg doubled, while the rates for construction and public utilities
increased more than fourfold. In other words, the heaviest increase
in Federal corporate income taxation during the course of the de-
pression fell on the smallest corporations.
STATUTORY RATE STRUCTURES
Throughout the larger period during which the Federal Government
has taxed corporation profits, the statutory rate structure has been
flat and not graduated, in contrast to the rate structure of the indi-
vidual income tax which has been graduated since its inception under
the sixteenth amendment. There have been, however, proponents of
a steeplj^-graduated tax in corporation profits ever since 1900 and
possibly before. When the 1909 act was passed a valiant attempt
was made to graduate the rate structure on corporate tax v/ithout
success. ^^ The war excess-profits tax of 1917-21, the purpose and
effect of which was entirely different from the ordinary corporate
income tax,^^ contained a steeply graduated rate structure consisting
of five brackets ranging from 20 to 60 percent of the income in excess
of the presumed norm. The Revenue Act of 1924 as it passed the
Senate contained a steeply graduated rate structure, but this provision
was eliminated by the House.
The imposition of a slight penalty tax in 1932 on inter affiliated
corporations filing consolidated income tax returns may perhaps be
cited as an indirect attempt to penalize one sort of bigness, since the
corporations making use of the consolidated returns device tended to
fall in the larger-size classes. But this discriminatory tax, wliich was
ver}^ slight in character (three-fourths of 1 percent in 1932 and 1 per-
cent in 1933), was designed primarily to offset the undoubted tax
advantages of corporations making use of the consolidated returns
device. From one point of view, the whole technique of permitting
consolidated returns, with or without a penalty tax, may rather be
cited as a tax device for favoring large and complex corporate systems
by specially adapting tax procedure to their needs. This last observa-
tion, however, is a controversial point and need not be insisted upon
in this connection, ^^ although it was clearly pointed out by Mr.
Robert Jackson, then of the Bureau of Internal Revenue, during the
congressional hearing on the 1935 Revenue Act.^^
" Cf. a proposal by Senator Hitchcock for "an additional graduated income tax of 5 percent on all corpora-
tions having $100,000,000 capital or more, provided they control 25 percent of the production of any article
in the United States," and a tax of 15 percent where the control exceeded 33J.ij percent. See Cong. Rec,
50: 2020.
" See appendix A.
^6 See the following chapter.
" See Hearings on the Revenue Act, 1935, before the Senate Finance Committee, 74th Cong., 1st sess.,
pp. 223-236.
2G CONCENTRATION OF ECONOMIC POWER
It was however, during the consideration of the 1935 Revenue Act
that corporate size emerged as the focal problem of Federal tax reform.
A special message was transmitted by President Franldin D. Roosevelt
on June 19, 1935, calling attention to the advantages possessed by
large corporations,^^ and recommending the enactment of a graduated
tax rate structure ranging from 10% percent on the net incomes
of smaller corporations up to 16% percent on the net incomes of the
largest corporations. The President also recommended the imposition
of a tax on dividends received from domestic corporations, a source of
corporate profits which had previously been exempt of taxation,
except during a short period under the income tax acts of 1913-16.
The resulting Revenue Act of 1935 introduced two new features into
the Federal corporation income tax system: (a) A slight graduation
of tax rates (ranging from 12}^ to 15 percent) according to the size of
corporate net incomes which where made subject to tax and (h) the
partial taxation of intercorporate dividends (equivalent at most to
1.5 percent tax on all dividends received). Neither of these provisions
became effective in this precise form since the Revenue iVct of 1935
was not scheduled to become operative until 1936 and by that time
a new revenue act had been adopted.
Size continued to be a focal feature of the 1936 Revenue Act. As
originally conceived in the President's message sent to Congress on
March 3, 1936, and to a substantial extent as drafted in the House bill
the new tax plan contemplated the outright abolition of all existing
Federal taxes based on or related to corporate profits — i. e., the
normal tax, the capital-stock tax, and the excess-profits tax — and the
substitution therefor of a new tax of a graduated character on that
part of ''corporate income (including dividends from other corpora-
tions) which is not distributed as earned * * *."
The Senate, however, was reluctant at one stroke to abandon
existmg Federal taxes on corporate profits — the normal tax on cor-
porate income being highly productive from a revenue viewpoint.
The House bill was therefore drastically amended by the Senate:
All existing taxes on corporate profits were retained with some motii-
fications (as noted below) and superimposed thereupon was a new
surtax on the undistributed profits of corporations. The new surtax
contained a severely graduated rate structure, ranging from 7 to 27
percent of that portion of corporate profits which was not distributed
durmg the year as taxable dividends.
The normal tax was modified by (a) limiting the credit for inter-
corporate dividends to 85 percent instead of the 90 percent allowed
by the 1935 act and the 100 percent credit allowed under previous acts
(equivalent at most to a tax of 2.25 percent on all dividends received)
18 Mr. Robert Jackson, as Assistant General Counsel of the Bureau of Internal Revenue, listed these ad-
vantages as follows:
_ "(1) As buyers of commodities and services, the large volume of their purchases gives the larger corpora-
tions a bargaining power that often results in price concessions which smaller concerns do not share.
"(2) Through widely distributed branch plants and warehouses they are able to effect important savings
in transportation costs and to sell in a Nation-wide market.
"(3) Their large resources enable them to buy up important patents, often to pool these patents with those
obtained by other large enterprises, and to carry on research programs, the fruits of which, while of public as
well as private benefit, accentuate their competitive advantages over their smaller rivals.
"(4) In many cases large concerns have become of such dominating size that they are able to control the
markets for their products, enabhng them to maintain prices that protect their profit margins.
"(5) Large corporations possess distinct advantages over their smaller competitors in the facility and cost
of financing, for they arc able to tap the large reservoirs of capital that are made available through the or-
ganized financial markets."
Ibid., pp. 216-217.
CONCENTRATION OF ECONOMIC POWER 27
and (b) increasing the range of the graduated rate structure from
8 to 15 percent instead of the narrower range specified by the 1935 act
from 12K to 15 percent. (The actual efficacy of this sliglit graduation
in the rate structure of the Federal normal corporation income tax
will be examined in detail in chapter IV.) Tliese provisions remained
in effect through 1937. The rate structure of the excess-profits tax
was also modified by the 1936 act, which changed it from a fiat rate
of 5 percent on that portion of corporate income wliich exceeded
12)^ }xnxent of the declared value of capital stock, to a tax at 6 percent
and 12 percent of income in excess of 10 percent and 15 percent, re-
spectively, of declared capitalization. It should be pointed out that
the Senate amendment of the President's tax plan and tiie House bill
completely defeated one of the major purposes claimed for the undis-
tributed-profits tax — the equalization of business-income taxes be-
tween corporate and noncorporate enterprise.
The accumulation of criticism against the tax on undistributed
profits led Congress to all but repeal the tax in 1938, retaining only a
small stump of a tax at 2}^ percent of the undistributed profits of
corporations with net income in excess of $25,000. In the 1939 act
(applicable to 1940) the surtax on undistributed profits was com-
pletely abandoned.
The graduated features of the normal tax under the 1936 Revenue
Act were also relaxed to some extent by the 1938 act. A flat-rate tax at
16/2 percent was imposed on all corporations with net income over
$25,000, wliile corporations with net income below this amount
were subject to a tax ranging from 12}^ to 16 percent of net income.
Under the 1938 act the range in the graduated rates under the normal
tax was only from 12}^ to 16 percent, or a variation of 3^ percent,
while the rate graduations under the 1936 act ranged from 8 to 15
percent, or a 7 percent variation. With the abandonment of the
surtax in the 1939 act, the flat-rate tax of 16^ percent of the 1938 act
w^as raised to a flat rate of 18 percent on all corporations with net
income over $25,000. The graduated range from 12}^ to 16 percent
for corporations with net income under $25,000 was retained by the
1939 act. The degressive rate structure of the normal tax of the 1938
and 1939 Revenue Acts is somewhat comparable to the exemption
of the initial $3,000 of net income allowed corporations with net
income under $25,000 prior to 1932.
Before the Revenue Act of 1935 the Federal corporate income tax
applied to all industries at the same statutory rate, wdth a single
exception during the late twenties when insurance companies were
taxed at lower rates. Provided that the corporation was not tax-
exempt (supra) and had taxable net income (infra), it was subject to a
Federal tax on its taxable net income at a flat rate, irrespective of the
nature of its industrial activities. The advent of a graduated rate
structure, however, did not aft'ect insurance companies, banks and
trusts, and China Trade Act corporations, which were taxed at the
niaximum rate (15 percent), irrespective of the magnitude of net
income. This policy of imposing the maximum normal tax rate
(which thus became a flat rate) on certain members of the financial
group of corporations has continued under the Revenue Acts of 1938
(16K percent) and 1939 (18 percent).
28 OONCENTRATION OF ECONOMIC POWER
DEDUCTIONS FROM CORPORATE GROSS INCOME
The profits upon which corporations are required to pay taxes to
the Federal Government are essentially residual figures, being the
amount remaining out of corporate gross income after the statutory
deductions have been taken by the taxpayer and allowed by the tax
collector. These deductions vary in amount and in their relative
significance to difierent types of corporations, reflecting differences in
the cost and capital structures of corporations as well as in the account-
ing skill and the adequacy of corporate records. Methods of valuating
inventories pla;^ an important role in determining the scope of ''cost of
goods sold" claimable in various industries and therefore the amount
of taxable net income remaining out of gross income. ^^
In the case of certain deductions (e. g., percentage depletion and
the special 4 percent reserve deduction of life insurance conjpanies)
the primary purpose has been to favor or specially adapt the ^x laws
to the needs of particular industries. In other cases the deductions
have shown distinct tendencies to operate differently for corporations
of various sizes and in different industries. So far as the record shows
there has been no conscious design of adapting the amount and types
of deductions to the needs of corporations of varying size — aside from
the specific credit of $2,000 to $5,000 noted above in this chapter.
But this negative fact does not gainsay the fact that in practice what
may have been intended as a uniform deduction has operated quite
differently in the case of small corporations than in the case of large
corporations, and vice versa.
Chart V shows graphically statutory deductions claimed by cor-
porations of various sizes in 1937. Each pyramid is divided into 10
sectors, 1 for each corporate size class (identified as Nos. 1-10), with
the small corporations on the left, the large corporations on the right,
and the medium-sized corporations in between. The height of any
given sector indicates the relative magnitude of the deduction,
measured as percent of total corporate receipts. A pyramid sloping
downward to the right indicates an inverse relationship between the
magnitude of the deduction and corporate size, while a pj^ramid
sloping upward from the left indicates a direct relationship between
the deduction and corporate size. A fairly even pyramid sloping in
neither direction indicates that there appears to be no relationship
between the relative magnitude of the deduction and corporate size.
An initial upward slope from the left and a final downward slope to the
right — forming a hurnp in the middle of the pyramid — indicate that the
deduction was most important to the medium-sized corporations.
Taking all corporations as a group (including net income and deficit
corporations) in 1937, these primary expense items — tabulated as
cost of goods sold and operations and including primarily the costs of
materials and labor — took approximately 72 to 75 percent of the
total receipts of corporations with $1,000,000 or less, 66 to 69 percent
of the receipts of corporations with assets between $1,000,000 and
$10,000,000, 64 percent of the receipts of corporations with assets
from $10,000,000 to $100,000,000, wliile the corporations with assets
" Of. Internal Revenue Laws, sec. 22 (c) and (d). No empirical data appear to be available on this sub-
ject. Prior to the 1939 Revenue Act the "last-in-first-out" method of determining inventories was available
only to farmers and producer-processors of certain nonfcrrous metals. Internal Revenue Code, sec. 22ji(d}.
Also see Regulations 103, art. 22 (c) and (d), citing specific rules for dealers in securities (5), livestock raisers
and other farmers (6), miners and manufacturers (7), and retail merchants (8). Section 219 of the 1939 act
made this method generallj- available, irrespective of industry.
CONCENTRATION OF ECONOMIC POWER
Chart V
29
STATUTORY DEDUCTIONS FROM CORPORATE RECEIPT BY SIZE CLASSES, 1937 (ALL
CORPORATION INCOME TAX RETURNS WITH BALANCE SHEETS)
i 2.345678 310
Cost of
SALES
OPERATIONS
HB& MISC.
I Z34567Q9I0 12345676910
Taxes
PAID
Deprecia-
tion GB
Depletion
'2345676910
Interest
paid
deductions
ASSET SIZE CLASSES
UNDER ^50.000
^50,000 TO $100,000
100,000 TO 250,000
250,000 TO 500,000
500,000 TO 1,000,000
.000,000 TO 5,000,000
5,000,000 TO 10,000,000
10,000,000 TO 50,000,000 -
50,000,000 TO 100,000,000
OVER 100,000,000
0D-4O-/22
12345676910
COMPENSA-
TION OF
OFFICERS
/Z34Se769/0
RENT PAID
/23456789I0
BAD .DEBTS
Source: Computed from Statistics of Income.
Department of Commerce.
3Q CONCENTRATION OF ECONOMIC POWER
over $100,000,000 claimed only 62 percent of their receipts as deduc-
tions for cost of goods sold and operations. Substantially this same
pattern of an inverse relationship between the deductions for cost of
goods and operations and corporate size was found for substantially
all industries in 1936 except in service and construction where the
larger size classes reported the peak percentages. As cost of materials
becomes less important, the sales-operating cost deduction declines
in relative magnitude — for example, mining and public utilities where
the deduction (largely labor cost) accounted for 50-60 percent of
total corporate receipts. In service, where the deduction consists
primarily of labor cost, it constituted only one-third of total receipts
and m fact was less important than several of the other deductions.
The specific deductions for interest paid, depreciation and depletion,
and taxes paid — all in the nature of ''overhead costs" — tend to vary
directly with corporate size and thus offset in part the inverse size
tendency for the primary expense items. The relative amount of
interest paid on borrowed capital rises from one-half of 1 percent of
the total receipts of corporations with assets under $50,000 and reach-
ing 4 percent of the total receipts of corporations with assets over
$100,000,000. It is obvious, then, that this deduction for interest
paid, which largely consists of payments to bondholders (i. e., creditor-
investors in contrast to stockholders or equity investors), is a very
important deduction to the large corporations.^^
When these size variations of the interest deduction are analyzed
industry by industry (see chart VI) however, the neat pattern of a
step-by-step graduation with corporate size tends to disappear in
several industries. In manufacturing industries (except forest
products, paper, and printing), trade, and construction, the size
variation is so slight in magnitude that it is difficult to observe any
association of the relative magnitude of interest payments with
corporate size.
The size variation of the interest deduction is more pronounced
among public utilities and mining where the largest corporations
claim the relatively largest interest deductions. The service indus-
tries exhibit a somewhat erratic size pattern, with the interest deduc-
tion tending to increase rapidly with corporate sizes up to and includ-
ing the seventh size class (assets $5,000,000 to $10,000,000)— which
includes manj^ hotels, office buildings, and theaters whose debt
structure has been notoriously heavy — and then tending to decline
sharply in magnitude among the largest size classes. The interest
pattern for finance is similarly erratic, being very important to cor-
porations in the fourth and fifth size classes (with assets from $25,000
to $1,000,000) and in the tenth size class (assets of $100,000,000).
The hump in the pattern caused by the fourth and fifth size classes is
explainable partly by the fact that these size classes probably include
a large number of real estate holding corporations somewhat similar
in debt structure to the service corporations already noted.
The charges for depreciation and depletion, like the deduction for
interest, vary directly with corporate size when all corporations are
viewed as a group, ranging in relative magnitude from 1.2 to 3.7 per-
cent. See chart VII. The higlily specific character of the depletion
" The statutory vicissitudes of this deduction are related, infra, pp. 91-92.
CONCENTRATION OF ECONOMIC POWER ^l
deduction ^^ makes it of substantial importance only to the extrac-
tive industries — mining, forest products, petroleum and stone, clay,
and glass — and of very negligible importance in the remaining indus-
tries. A special 50 percent depletion allowance -^ may be claimed by
the discoverers of oil and gas wells. The direct variation between
the charges for depreciation-depletion and corporate size may be in
part a reflection of the nature of the masurement of size which is
based on assets, including, to an increasing degree as corporate size
increases, capital equipment upon which depreciation i? customarily
charged.
Wben these figures are broken down industry by industry the
general pattern is verified except in trade, where no size variation is
apparent, and in construction where the pattern is very erratic.
Depreciation is shown to be of primary importance to public utilities,
and, in close succession, service and again mining, with finance,
manufacturing, construction, and trade trailing behind. Manufac-
turing industries closely parallel the depreciation percentage shown
for manufacturing as a whole, with the notable exception of petroleum
and clothing, where depreciation is respectively more and less impor-
tant than in manufacturing as a whole. It is interesting to observe
that in several cases the peak deduction tends to come in the eighth
and ninth size classes (assets from $5,000,000 to $50,000,000) rather
than in the largest size class. The same pattern is also found in
most manufacturing industries except for beverages, tobacco, leather,
and printing, for which little or no size variations were noticeable.
The deduction for taxes paid ^^ as cost factor is relatively more im-
portant to the larger corporations than to the smaller or medium-
sized corporations, in keeping taxable net income at a minimum.
Taking all corporations together, the pattern exhibits a nice step-by-
step graduation ranging from 1.2 percent in the smallest size class
(assets under $50,000) to 3.5 percent in the largest size classes (assets
over $100,000,000). When figures are broken down industry by in-
dustry, this same pronounced pattern is found for public utilities
among the major industries and for rubber, forest products, paper,
printing, and metals among the manufacturing industries. In man-
ufacturing the peak rates are still contributed by the larger size
classification, although not by the very largest. In finance the
medium-sized corporations reported the highest percentages, while
substantially no size variation could be found for trade and construc-
tion corporations. The high percentages for beverages, tobacco,
rubber, and petroleum corporations reflect the special taxes to which
these manufacturing industries are subject.
21 Depletion was not originally allowed as a deduction until 1913 when the first revenue act under the
sixteenth amendment specifically listed depletion. See Stratton's Independent Ltd. v, Hawbert, 231 U. S.
399 (1913). Of. Doyle v. Mitchell Bros. Co., 247 U. S. 179 (1918).
22 See Internal Revenue Laws (1939), sec. 114b. This special depletion deduction was introduced by sec.
234 (a) (9) of the 1918 Revenue Act (actually enacted in 1919) to encourage the discovery of new oil and
gas wells. All discoverers of oil and gas wells on or after March 1, 1913, may claim an "extraordinary basis"
for the depletion deduction, predicated "upon the fair market value of the property at the date of the dis-
covery" instead of original cost. In 1921 the discovery basis of depletion was so limited that the deduction
could "not exceed the net income computed without allowance for depletion" and in 1924 the special deple-
tion deduction was further limited ("not exceed 50 percent of the net income").
23 The content of this item is not accurately known at present, although property and pay-roll taxes are
believed to constitute a major portion of the deduction.
32
CO^X'ENTRATION OP ECONOMIC POWER
Chart VII
DEPRECIATION AND DEPLETION AS PERCENT OF CORPORATE RECEIPTS, BY SIZE
CLASSES AND INDUSTRIES, 193G (ALL CORPORATION INCOME TAX RETURNS WITH
BALANCE SHEETS)
i*oe Service Cohstruc- Public Finance Petroleum Stone- Wetals Voto.^
TiON Utilities Clay-Glass Vehiclts
i6
14
z
ASSET SIZE CLASSES
UNDE?) SSOOOO
^50,000 TO '(00 000
250,000 TO 500 000
500,000 TO :, 000 000
1,000.000 TO 5.000 000
5,000,000 TO 10,000.000
10
50,000,000 TO 100,000,000
OVER 100 000.000
10
8
G
4
2
i^
k
^ J ..i
r . i
pn 1 i
r 'r 1
0
■
■ /^j-«,.
,0 ,,3*%C799
■0 /sj.ts'sresio ii3*ie7esio iimerasio ig^'tsereiio /^j-isersi '^ust
llJ^SSraSia 113*5673910 IS3tSS7e9IJ
Food Beverages Tobacco Textiles Clothing leather rubber Forest Paper Printing Chewicals
Products
O O40U4
Source: Computed from the Sourcebook of the Statistical Section of the Bureau of Internal Revenue.
Department of Commerce.
CONCENTRATION OF ECONOMIC POWER 33
Complementary to the deduction of taxes paid is that for rent,
which is a necessary expense item for all corporations that do not
own their premises and therefore pay no real property taxes (pre-
sumably an important ingredient of the ''taxes paid" deduction).
The rent deduction bears an inverse relationship to corporate size,
steadily decreasing in relative magnitude as corporate size increases.
This general pattern for all corporations is found for substantially all
industries except trade (highly erratic). The rent deduction is par-
ticularly important to the service industries, with finance and trade
trailing in third place. Rent is obviously unimportant in mining
and of oiAj minor importance to public utilities, construction, and
manufacturing — for the simple reason that these industries are
characterized by high degrees of ownership of operating properties.
The complementary relationship of the deduction for rent paid to
the deduction for taxes paid was probably greater in the past when
propertj^ taxes Avere the main component of the tax, but this relation-
ship may be expected to diminish as nonproperty taxes (e. g., pay
rolls) increase in importance.
The most important specific deduction to the small corporations is
that for compensation of officers. This deduction shows a most
marked size pattern of an inverse character, ranging from 6.3 percent
for corporations with assets under $50,000 to less than one-third of
1 percent in the case of corporations with assets over $100,000,000.
This step-by-step graduation downard in the relative magnitude of
the deduction as corporate size increases is characteristic of all indus-
tries except finance (where corporations with assets from $250,000 to
$1,000,000 report relative high percentages). The importance of the
deduction to the smaller corporations, however, can be easily over-
emphasized, if it is measured only in relative terms (as percentages of
total corporate receipts) and without reference to the actual dollar
amounts involved. The average dollar amount claimed per corpora-
tion as a deduction for compensation of officers is very small — $3,000,
$5,500, $7,300, and $9,600, respectively, for corporations in the four
smallest size classes. Assuming two or three officers per corporation,
it is apparent that the amount of compensation of officers claimed as
a deduction is more like wages than a hidden return on capital.^^
The deductions for bad debts and capital losses are ver}^ minor in
amount, appearing relatively larger for the medium-sized corporations
than for either the largest or the small corporations. The deduction
for bad debts is of substantially no significance to mining, manufac-
turing, and public utilities, and of only minor significance to service,
construction, and trade. In this respect the deduction for bad
debts parallels the deduction for depletion — it is adapted to the special
operating characteristics of a particular industry — namely, credit and
its failure. The reason for this particular size variation of the deduc-
tion of capital losses lies in the essentially artificial or limited character
of the statutory deduction, which may not exceed $2,000.^'^ In most
industries other than finance and construction the deduction for
capital loss is very negligible, and if foimd at all (usually not more than
2^ In the absence of a frequency distribution of the amount of compensation claimed per officer per cor
poration, it is not possible to characterize the deduction in more detail.
" This restriction has been substantially relaxed by the 1939 Revenue Act, sec. 212. which permits the full
deduction of "long-term capital losses," while "short-term capital losses shall be allowed only to the extent
of short-term capital gains," with a carry-over of the same to the succeeding taxable year. "Short term"
loss or gain had been previously defined in the Internal Revenue Code (see 117 (a)) as referring to the loss or
gain "from the sale or exchange of a capital asset held for not more than 18 months • * *."
34 CONCENTRATION OF ECONOMIC POWER
one-tenth of 1 percent of total receipts) was usually claimed by the
small- and medium-sized corporations.
The residual content of ''other deductions" deprives this item of
much of its importance standing by itself. As defined in Statistics of
Income, it presumably includes (1 ) repairs (including labor), (2) losses
by fire and storm, abandonment of property, etc., (3) labor costs not
elsewhere deducted, (4) worthless stock, and (5) a miscellany of other
deductions claimed (irrespective of their final validity under the law).
This miscellany may include advertising costs, commissions, profes-
sional services, heat, light and power, telephone and telegraph, etc.
A substantial part of the residual deduction in finance, especially in
the largest size class, reflects the special 4-percent reserve deduction
allowed insurance companies. ^^
\Yhen the Corporation Excise Tax Act of 1909 was passed and also
when the general income tax of 1913 was under consideration, valiant
attempts were made completely to exempt insurance companies from
Federal taxation," and were quite successful with respect to mutual
companies other than life.'^ Life-insurance companies, however,
were granted by the 1909 act (sec. 38 (2d)) a special deduction for
*'the net addition, if any, required by law to be made within the year
to reserve funds." No deduction or credit, it should be pointed out,
was originally permitted for interest received on governmental obliga-
tions, although such income was made tax-exempt as of March 1913.
Failure to specify the nature and extent of this special insurance
deduction led to constant litigation, the consequences of which were
satisfactory to neither the tax collector nor to the insurance companies.
''After much consideration. Congress, upon consultation with the life
insurance companies and with the approval of at least most of them"^®
(including the Association of Life Insurance Presidents), specified a flat
percentage (4 percent) reserve deduction m the Revenue Act of 1921,
subject to a very important proviso — namely, the 4-percent reserve
deduction should be reduced by the amount of the credit claimed for
interest received on tax-exempt securities. This proviso was declared
unconstitutional by the Supreme Court in a 6-3 decision in National
Li/fe Insurance Co. v. United States. Mr. Justice McReynolds, speak-
ing for the majority, declared that such a proviso —
would destroy the guaranteed exemption. One may not be subjected to greater
burdens upon his taxable property solely because he owns some that is free. No
device or form of words can deprive him of the exemption for which he has lawfully
contracted. 3''
The minority, which consisted of Justices Brandeis, Stone, and Holmes,
defined the issue somewhat differently:
* * * the objection is not that the plaintiff [insurance company] is taxed on
what is exempt, but that others, who do not hold tax-exempt securities, are not
taxed more. But neither the Constitution, nor any act of Congress, nor any con-
tract of the United States, provides that, in respect to this tax, a holder of tax-
exempt bonds shall be better off than if he held onl\' taxable securities * * * ^
* * * no rule is better settled than that provisions for tax exemption, constitu-
tional or contractual, are to be strictly construed.^^
« Internal Revenue Laws (1939), sec. 203.
'^ See Congressional Record, 44: 3980-3981, 4020-4021, 4039, 4053-4055; 50: 1304-1305, 1310-1311, 3802-3803.
3804. Also see the hearings before the Senate Finance Committee on the 1913 Income Tax Act, pp. 1964-2140,
" Supra, p. 22.
2» Dissentirsr opinion of Mr. Justice Brandeis in National Life Insurance Co. v. Unifed States, 277 U. S. 506
(1928), at p. 523.
»o Ibid., at p. 519.
»' Ibid., pp. 528, 533. "There is a distinction between imposing a burden and withholding a favor." At
p. 536.
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CONCENTRATION OF ECONOMIC POWER 35
The result of this decision was to allow life insurance companies to
claim, in addition to the deduction of or credit for all interest on tax-
exempt securities and all dividends (only 85 percent smce 1936) re-
ceived from domestic corporations, a special deduction of 4 percent of
the mean legal reserve fund. This deduction in its present form is
practically tantamount to exemption of life insurance companies from
Federal taxation. In 1937 the special reserve deduction of life insur-
ance companies amounted to $775,000,000, while taxable net income
amounted to $2,600,000. Only $392,000 were paid as taxes to the
Federal Govenmient by life insurraice companies in 1937.
The cunnilativp effect of tl)e various statutory deductions allowed
under the Revenue Act of 1936 upon total receipts (shown as 100 per-
cent) of corporations of varying size and in different industries is shown
in chart VIII as a series of pyramids, each consisting of 10 sectors
representing size classes (identified by Nos. 1-10). The chart was
constructed by plotting at the top (starting downward from 100 per-
cent) the amount of compiled net profits reported by corporations with
net income as percent of total corporate receipts of all corporations.
This item is followed by 6 main tj^pes of deductions — (1) interest,
(2) depreciation and depletion, (3) compensation of officers, (4) taxes
and rent paid, (5) miscellaneous deductions including bad debts, con-
tributions, and net capital losses, and (6) cost of goods sold and cost of
operations, each shown as percents of total corporate receipts. In
several size classes total deductions exceeded total receipts, resulting
in ^'deficits" instead of ''profits". The "profits" figure (shown at the
top of tiie diagram) excludes all deficit figures wliich appear at the
bottom as that part of the item ''called cost of sales and operations"
which falls below (or on the negative side of) the zero line of the dia-
gram.
Compiled net profits are defined as the excess of receipts over
statutory deductions. It is therefore apparent that the smaller the
profits area on the diagram (shown at the top of the chart), the greater
was the cumulative effect of the various statutory deductions in
converting coi:porate receipts into corporate profits. Conversely, the
larger the profits area, the less the total effect of the various statutory
deductions.
The relative magnitude of the aggregate statutory deductions from
corporate receipts tends to vary inversely with corporate size. In
other words, the cumulated deductions claimed by the smaller cor-
porations are relatively larger than those claimed by medium-sized and
large corporations. The size variation is relatively slight in trade,
service, and construction corporations, while the size factor is quite
marked in finance, public utilities, and mining corporations, with
manufacturing corporations falling between the two groups. A
similar observation can be made for the various manufacturing indus-
tries— the composite deductions are relatively largest on the small
corporations and relatively smallest on the large corporations. The
statutory deductions appear to have had the least effect upon the
financial corporations, more than one-fourth of whose receipts remained
(after subtractiug all statutory deductions) as "compiled net profits.*'
The deductions made the greatest imprint on trade and construction,
only one-thirtieth of whose receipts remained after the statutory
deductions had been allowed. The excess of receipts over deductions
35 CONCENTRATION OF ECONOMIC POWER
was approximately one-tenth for public utilities and mining, one-
fifteenth for manufacturing, and one- twentieth for service. The
manufacturing industries exhibit numerous differences, with the chemi-
cals and stone-clay-and-glass percentages ranging highest — con-
sequently the composite deductions had lesser effect— and the clothing
percentage ranging lowest — hence the composite deductions had
greater effect upon the latter.
This residual figure of corporate profits is taken as the point of
departure for the subsequent analysis of the effects of Federal income
taxes upon corporations. Before proceeding with this question
directly it is advisable to examine certain problems arising out of the
definition of the accounting period for tax purposes.
DEFINITION OF THE ACCOUNTING PERIOD DEDUCTION OF PRIOR YEARS'
LOSSES
Empirical studies have shown that the profitability of corporations
varies both with the size of corporations and the character of the
industry. The rate of return on investment for those corporations
which make profits in any given year tends to be higher for the smaller
corporations, but over a period of time the larger corporations tend to
have profits with greater frequency. In other words, the larger cor-
porations seldom suffer large losses, whereas the smaller corporations
lead a very uneven career with occasional profits of large magnitude
and frequent intervals of losses. ^^
Some industries make profits every year, although the profits ma3^
seldom be large or a high rate of return on investment, while
other industries experience wide yearly fluctuations in their profits.
When they strike good they may make considerable profits, perhaps
only to have that year followed by a series of lean years of deficits.
If determined on the basis of a single year's operations and without
reference to the corporation's experience in other years, it is apparent
that the Federal income tax on corporations (or industries) with widely
fluctuating income may operate somewhat differently from the tax on
corporations whose income remains fairly steady in character during
the course of years. Whenever they make profits they are taxed, and
presumably taxed on the profits for that year. When they have losses,
they file their income-tax returns with the Government, and that is
presumably the end of that. It is obviously to their advantage for
the revenue laws to take into account a longer time period than 1 year
in determining their income and resultant tax liability, and presumably
this advantage becomes more important with the length of the
accounting period.
The definition of the accounting period used for determining tax-
able income is therefore of considerable relevance to the size problem
in Federal corporate income taxation. Prior to 1933 and extending
as far back as 1918, the Federal revenue acts permitted the deduction
of operating losses in prior years from current income. The back-
ground out of which this provision emerged — as a '^response of Con-
gress to the hardships caused by the taxable year as a unit of time" —
has been dramatically stated in Hughes v. Commissioner, as follows:
Merchants and manufacturers, and other taxpayers employing capital in their
pursuits, had paid large taxes in preceding years on paper profits. Their shelves
32 See Edwin B. George and Robert L. Tebeau Profits and Dividends: Big Business vs. Small, Dun's
Review, January 1940, pp. 11-22.
CONCENTRATION OF ECONOMIC POAYER 37
and warehouses bulged with inventories whose values had increased fabulously
during the inflation period. The war had ended; deflation was forecast; war
trade was at an end. A class of taxpayeis had paid taxes on incomes reflected
by inventories, an income not in fact realized. There was no one to recoup them
the losses caused by the shrink in the value of their assets. This section was
designed to permit such taxpayers to carry over such losses into the 2 succeeding
years. 2^
The provision of the 1918 act arose clearly out of an emergency
situation and was designedly short-lived, applying onl}^ to the taxable
year October 31, 1918, to January 1, 1920. During \hat period the
taxpayer was allowed to deduct from the preceding year's income ^* —
as redetermined — any net loss resulting from (a) ''the operation of
an}^ business regularly carried on by the taxpayer" or (b) ''the bona
fide sale by the taxpayer of plant, buildings, machinery, equipment,
or other facilities constructed, installed, or acquired by the taxpayer
on or after April 6, 1917, for the production of articles contributive
to the prosecution of the present war." The term "net loss" as de-
fined included the "excess of deductions allowed by law (excluding
intercorporate dividends) over the sum of the gross income plus any
interest received free from taxation * * * >? 35
This provision for net loss carry-over (for 2 years) was made a gen-
eral feature of the Federal income-tax law by the Revenue Act of
1921 and remained so through the year 1931. The 1918 restrictions
as the offsetting character of intercorporate dividends and Govern-
ment interest were continued in the subsequent acts, which further
provided that in determining "net loss" no allowance should be made
for depletion based solely on discovery values. Nor could net loss for
1 year produce "net loss" in succeeding years.^^ In 1932 the carry-
over period was reduced from 2 years to 1 3^ear, while the deduction
itself expired at the end of that year — at the verj^ bottom of the great
depression. The Revenue Act of 1939 (apphcable to 1940), however,
has restored the limited deductibility of prior years' operating losses
(2-year carry-over). ^^
During the interim 1933-39, inclusive, taxable net income was
determined on the basis of a single year without reference to the
fortunes of other years (except for the emasculated undistributed
profits tax in 1938-39). As a consequence the only data available
on the operation of prior years' loss deductions pertain to the years
prior to 1933. These data have been summarized in charts IX
(1926-32, by industries) and X (1931-32 by corporate size).
The deductibility of prior years' losses (measured as percent of
net income), it is apparent from a quick inspection of chart IX, was a
matter of great consequence to construction and mining corporations,
the taxable net income of which was reduced by more than 13 percent
in 1932. The deduction was unimportant to public utilities, where
it usually reduced their taxable net income by only 1 to 2 percent or
less. Its importance to financial corporations sharply increased with
the course of the depression, more rising from 2.2 percent in 1929 to
7.1 percent in 1932. Its role in manufacturing increased only slightly,
rising from 2.2 percent in 1926 to 4.3 percent, and with the advent
33 38 F. (2d) 755 (1930), at p. 758.
34 Any excess could be deducted from the income of the succeeding year.
35 Sec. 234(a).
36 Sec. 204. Also see Regulations 62, art. 1601.
37 Sec. 122. The 1938-39 changes in the accounting methods for taking inventories were intended to
reduce fluctuations and insofar serve the same purpose as loss carry-over provisions.
262698— 41— No. 9 4
38 CONCENTRATION OF ECONOMIC POWER
of the depression (1930) actually declined below the 1926-29 figure.
Its role in trade and service also increased with the course of the
depression, somewhat paralleling manufacturing — experiencing a de-
cline in 1930 — but the use of prior years' losses in those industries
was quite unspectacular.
The prosaic course of the prior years' loss line in manufacturing is
spectacularly departed from by several manufacturing industries,
particularly in rubber, textiles, forest products, and food and beverages.
In rubber and food-beverages the deduction for prior years' losses
showed a tendency to soar upward as the depression became intensi-
fied, rising as high as 15 percent of net income in the former case.
Both textiles and forest products were characterized by considerable
irregularity during the entire period (1926-32) for which data are
available." Printing, leather, chemicals, metals (except in 1928),
stone-clay-glass, and paper appear fairly regular 3'ear by year in the
amount of losses claimed as a deduction from net income. Tobacco
made substantially no use of the deduction.
The importance of the prior years' loss deductions to corporations
of varying size in 1931 and 1932 is shown as a series of pyramids in
chart X (each containing 9 sectors representing size classes). The
relative magnitude of the deduction is measured as percent of net
income before the allowance for the prior years' losses. The size of
these percentages shows the relative degree by which net income was
reduced by the allowance of this deduction. The niagnitude of the
prior years' loss deduction tends to vary inversely with size — that is,
the smaller corporations tended to claim relatively larger prior years'
losses than did the larger corporations, particularly in manufacturing
generally, trade, and construction, and to a lesser degree, in finance
and public utilities. Among manufacturing industi'ies this observa-
tion is also applicable to tobacco, leather, paper, printing, chemicals,
stone-clay -glass, and metals.
But there were some very notable exceptions to this general pattern,
particularly in 1931, when the relatively largest deductions for prior
years' losses were claimed by the largest corporations, as in mining
(1931) and service (1932), and among the manufacturing industries,
in food and beverages (1932), textiles (1931), rubber (1932), and forest
products (1931) . These exceptions are notable because of the relative
magnitudes involved. The largest loss deduction claimed by small
corporations, among the major industries was 4.7 percent of net income
(construction corporations with assets under $50,000 in 1932) while
the largest loss deduction claimed by the biggest corporations was
92 percent (mining corporations with assets over $50,000,000 in 1931)
or approximately 20 times as much as that claimed by the smaller
corporations. Likewise among manufacturing industries the largest
deductions for small corporations was 48 percent of net income (rubber
corporations with assets from $100,000 to $250,000 in 1931) as against
78 percent (rubber corporations with assets from 5 to 10 million
dollars in 1931) of the net income of larger corporations.
These illustrations suggest that the prior years' loss deduction was
of very substantial importance to large corporations in particular in-
dustries (e. g., mining, rubber, and lumber) where the cyclical fluctu-
ations of the industry more than offset the size factor. Conversely,
the generahzation (stated at the outset of this section) that the smaller
corporations tend to have lower chances of profits in the long run may
not be applicable to highly fluctuating industries.
Chart IX
DEDUCTION OF PRIOR YEARS' LOSSES AS PERCENT OF TAXABLE NET INCOME BY INDUSTRIES. 1926-32 (RETURNS WITH NET INCOME ONLY)
1 1
MANUFACTURING INDUSTRIES
u
■' ]
MAJOR INDUSTRIES
CONSTRUC-
ION
/
l\
;
y
^ '
/
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/ -
SERVICE
TRADE
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^'^
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RINS
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N
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PUBLIC UTILITIES
1327 1928 1329 1930 1331 19^2
Source: Computed from Statistics of Income for respective years.
Department of Commerce.
1926 1927 1928
DO .40 -139
-41— No. 9 (Face p. 38) No. 1
\
1 ■^"^^
"n.
M:
-^
DEDUCTION OF PKIOR YEARS' LOSSES AS PERCENT OF TAXABLE NET INCOME, BY SIZE CLASSES AND INDUSTRIES 1931-32 (RETURNS WITH NET INCOME ONLY)
PESCENTAGE CLAIMED FOR BOTH YEARS
ADDITIONAL PERCENTAGE CLAIMED IN 1332 OVER 1931
ADDITIONAL PERCENTAGE CLAIVEO IN 1931 OVER 1932
LESS THAN .0^
Source: Computed from the Sourcebook of the Statistical Section of the Bureau of Internal Revenue.
Department of Commerce.
CHAPTER III
FEDERAL TAX TREATMENT OF HOLDING COMPANIES AND
RELATED FORMS OF INTERCORPORATE AFFILIATION
(CONSOLIDATED RETURNS)
To what extent are the profits of corporations of varying sizes and
industries affected by Federal income taxes?
The formulation of this question raises at least two problems of
definition — what taxes and what profits? The tax item has been
defined as including only taxes paid by corporations directly to a
governmental body — in this instance to Federal collectors of internal
revenue.^ For the purpose of this and the immediately following
chapter, the tax item has been further defined to include only the
so-called "normal" corporation income tax; succeeding chapters deal
with the effect of the excess-profits and capital-stock taxes and the
surtax on undistributed profits, and the composite effects of all four
Federal taxes based upon or related to corporate profits. The profits
item has been defined as including all income otherwise available
(that is, before the payment of Federal income taxes) to the corpora-
tion for (a) distribution of dividends to stockholders or (b) reinvest-
ment in or by a corporation ("undistributed profits").
THE CORPORATE WORLD
If corporations were separate entities and unrelated to one another —
except in a bargaining capacity "at arms' length" — these definitions
of the terms of the inquiry would probably suffice without more ado.
Ever since 1888, however, when the State of New Jersey authorized
corporations chartered under its laws — and, by the grace of the con-
stitutional doctrine of comity, operating anywhere in the United
States — to acquire stock in other corporations, the members of the
corporate system have become closely interrelated. Prior to this
step taken by the State of New Jersey, corporations were almost
invariably owned and controlled by natural persons as stockholders.^
With the rapid and widespread use of this new corporate power,
which was rapidly authorized by other State legislatures,^ corpora-
tions have become, to no small degree, owners of themselves. Accord-
ing to the most recent statistics (1934-37) collected on a comparable
base in this respect, a very substantial part of all cash dividends paid
1 This definition was made at the outset of the studies on the ground that only such taxes as were paid
directly to the Government can be accurately known for any tax-paying unit or aggregate of units for any
given time period.
2 Bonbright and Means record a handful of cases where corporations were specifically authorized by their
charter of incorporation to own stock in other corporations, including Baltimore & Ohio Railroad (1832),
Pennsylvania Railroad (1850), Western Union Telegraph Co. (1804), American Bell Telephone Co. (1880),
and some forty odd corporations specially chartered by the Pennsylvania Legislature between 1868 and 1872,
among which were the Pennsylvania Co. (probably the first pure holding company) and South Improve-
ment Co. See "Holding Companies," Encyclopedia of the Social Sciences, 7:404..
3 "In a period of 40 years the holding company, which had been regarded as undesirable and contrary to
public policy except under unusual conditions, was made by most States an acceptable and legal practice."
Ibid.
39
40 CONCENTRATION OF ECONOMIC POWER
out by American corporations have, in fact, been received b}^ them-
selves as corporate stockholders in one another. In 1934 dividend
income from domestic corporations constituted 45.6 percent of all
cash dividends distributed by American corporations; in 1935, 50.7
percent; in 1936, 36.5 percent; and in 1937, 34.4 percent.^ From these
figures it may be concluded that at least one-third to one-half of the
profits reported by the half-million corporations of the United States,
when distributed, are paid to and received by American corporations.*
Intercorporate investments have grown not only in magnitude —
so that approximately half of corporate America is owned by the other
half of corporate America — but also in complexity. By strategically
selecting the kind and amount of stock to be held in other corporations,
one corporation may in time control the policies and activities of
several corporations, representing investments vastly larger than the
original contributions of the controlling corporation or '4iolding
company," as it rapidly became known. ^
Essentially this new corporate device known as the holding com-
pany, or some gradation thereof, was simple in purpose and nature,
although its consequences in practice were to make an already com-
plicated corporate world so complex that words or two-dimensional
charts are usually inadequate to describe it. The simple purpose of
the holding compan}^ was to control and exercise overhead manage-
ment of the '' properties of two or more heretofore independent corpo-
rations," with minimum risk and investment. When carried to several
degrees, this teclinique of industry control has been appropriately
described as ''pyramidal," with the holding company sitting at the
top of the pyramid holding successively small blocks of stock in the
underlying layers of the pyramid and controlling the activities of the
entire pyramid.
Where each company in the series has bonds and nonvoting preferred stock out-
standing, the reduction in the investment necessary for control diminishes even
more rapidly, so that a pyramid involving three holding companies will allow, say,
a $1,000,000 investment in a top holding company to control a billion-dollar operat-
ing company. The investment necessary for control may be made even smaller
by issuing nonvoting common stock or stock with limited voting power. ^
The business advantages of the holding technique are obvious*
Bonbright and Means have summarized them as follows:
Ease of organizing the combination.
Ease of perpetuating control in the hands of the organizer by means of stock
pyramiding.
Ability to combine enterprise that could not be legally fused by direct ownership.
Secrecy of the fact of the combination and its financial accounts and operations.
Freedom from governmental regulation.
Decentralization of management.
Insulation of liabilities.
Ease of divorcing the properties.^
It is manifest from this formidable enumeration that industrial
integration has been greatly facilitated by the holding-company
technique without involving either the costs or the difficulties of out-
* Computed from Statistics of Income for respective j'ears.
* These relationships of dividend income and distributed dividends, of course, vary with corporate size.
In 1937 for every hundred dollars cash dividends distributed by the largest corporations (with assets over
$100,000,000) those same corporations received $52 as dividends, while the smaller corporations (with assets-
under $250,000) received as dividends only $6 to $9 for every hundred dollars distributed as cash dividends.
« See Bonbright and Means, The Holding Company. For concrete illustrations of intercorporate stock
ownership and control, see the reports of the Federal Trade Commission on public-utility holding companies-
and the Securities and Exchange Commission on investment trusts.
' Bonbright and Means, "Holding Companies," Encyclopedia of the Social Sciences, 7:406.
8 The Holding Company, pp. 30-40.
CONCENTRATION OF ECONOMIC POWER 41
right merger or consolidation and yet retaining all the flexibihty of
separate operating units. Such, in brief, without commendation or
condemnation, are the purposes and techniques of intercorporate
investment.®
CONSOLIDATED CORPORATE INCOME-TAX RETURNS! ORIGIN AND HISTORY
Prior to 1934-36 the Federal revenue acts substantially facilitated
the practice and growth of intercorporate affiliations by allowing the
members of an interaffiliated corporate system to file a consoliclated
income-tax return in wliich the losses of constituent members could be
offset against the profits of other members. The exemption from
Federal corporate income taxation of all dividend income received
from other domestic corporations subject to tax, w^hich will be ex-
amined in the following chapter, is another example of the Federal
revenue acts doing little or notiiing (prior to 1936) to hinder the
prevalence of holding companies and related forms of intercorporate
affiliation.
The basic industrial unit for Federal corporate-income-tax purposes
was originally the corporate entity ''as if it were in no way related to
any other corporation. "^° Starting in 1917, however, the Federal
revenue laws took special cognizance of the fact that corporations
frequently were closely interrelated through the ownership of the
stock of one another and the interlocking representation of common
interest. In the first period of this development (1917-21) all the
members of an interlocking corporate system were required to file
with the Bureau of Internal Revenue a consolidated income-tax
return as if they were a single legal-economic entity, without regard
to intermember activities within the system. In 1921 the mandatory
requirement was converted into a privilege of the interaffiliated
corporations to file a consolidated return for the entire system, if they
so should choose.
With the coming of the depression and the resultant decimation of
income taxes as producers of Federal revenue, the consolidated tax-
returns device became subject to intense criticism, which initially
reflected itself in the imposition of a tax at a slightly higher statutory
rate (three-fourths of 1 percent in 1932 and 1 percent in 1933) on
€onsolidated returns and then in the outright repeal of consolidated
returns in 1934, with the exception of ''common carrier by railroad.'^
The unit of Federal corporate income taxation has again become the
corporation ^^ as such, with the exception just noted.
(a) Mandatory consolidation of income-tax returns jor inter-affiliated
corporations.^^ — The enactment of an excess-profits tax at steeply
graduated rates (ranging from 20 to 60 percent) in 1917 (see ap-
pendix A), of course, brought in their tow aggravated administrative
problems. By regulation it was promptly provided that "wherever
necessary to more equitably determine the invested capital or taxable
» See also testimony of Professor Fetter before the Temporary National Economic Committee, Hearings,
Part 5, pp. 1667-1677.
If Bureau of Internal Revenue, Regulations 33 (under the 1916 Revenue Act), art. 207.
11 Regulations 101 (under the Revenue Act of 1938) define "corporations" as including not only "the
artificial entity usually known as a corporation, but * * * also an association, a trust classed as an
association, because of its nature or its activities, a joint stock company, an insurance company, and certain
kinds of partnerships," art. 901-1. For further definitions see the remaining sections of art. 901.
12 The American Institute of Accountants, iu advocating the use of consolidated returns prior to the
Bureau of Internal Revenue regulations under the 1917 act, stated that taxes would then be "based on the
real facts and determined by the relation between true income and true investment of the companies as
a whole." Quoted in Paul and Mertens, Federal Income Taxation, 4-420n,
42 CONCENTRATION OF ECONOMIC POWER
income," the Commissioner of Internal Revenue ''may require
corporations classed as affiliates under article 77 to furnish a con-
solidated return of net income and invested capital." ^^ Article 77
provided that affiliation would be deemed to exist:
1. When one such corporation owns directly or controls through closely affili-
ated interests, or by nominee or nominees, all or substantially all of the stock or
stocks of the other or ethers, or when substantially all the stock of two or more
corporations is owned by the same individual or partnership, and both or all such
corporations are engaged in the same or closely related business; or
2. When one such corporation (a) buys from or sells to another products or
services at prices above or below the current market, thus effecting an artificial
distribution of profits, or (6) in any way so arranges its financial relationships
with another corporation as to assign to it a disproportionate share of net income
or invested capital.'*
The need for requiring consolidated tax returns was stated by the
Bureau of Internal Revenue as follows:
Otherwise opportunity would be afforded for the evasion of taxation by the
shifting of income through price fixing, charges for services, and other means by
which income could be arbitrarily assigned to one or another unit of the group.
In other cases without a consolidated return excessive taxation might be imposed as
a result of purel.y artificial conditions existing between corporations within a
controlled group. '^
The Senate Finance Committee (reporting on the 1918 Revenue Act)
favored the consolidated tax return ''not primarily because it operates
to prevent evasion of taxes or because of its effect upon the revenue
but because the principle of taxation as a business unit, what in
reality is a business unit, is sound and equitable and convenient both
to the taxpayer and to the Government." ^^
The Revenue Act of 1918 specifically provided that interaffiliated
corporations "shall make a consolidated return of net income and
invested capital," ^'' for the purpose of tax computation upon the
basis of such return. Changing the definition of affiliation somewhat
from that found in the Commissioner's regulations, the statute
provided that corporations —
* * * shall be deemed to be affiliated (1) if one corporation owns directly
or controls through closely affiliated interests or by a nominee or nominees sub-
stantially all the stock of the other or others, or (2) if substantially all the stock of
two or more cori)orations is owned or controlled by the same interests. i^
An atternpt to confine consolidated tax returns to "corporations
engaged in the same or related business," as specified in the Com-
missioner's regulations, was unsuccessful.
The loose definition of "affiliation" naturally gave rise to difficult
problems of interpretation.^^ Regulations 45 (under the 1918 act)
required consolidation in all cases involving control of "95 percent or
more of the outstanding voting capital stocl^ (not including stock in
the treasury)" and contemplated tiiat consolidation might be required
in other cases where control was considerably less.^°
(6) Consolidation made optional with the tax-paying corporation. —
Under the 1921 Revenue Act the managers of an mteraffiliatod cor-
>» Regulations 41, art. 78.
" Tho Commissioner's action was specifically ratified by the 1921 Revenue Act, sec. 1331.
>» Regulations 45. art. 631.
18 65th Cong., 30th sess., S. Rept. 617, p. 819.
1' Sec. 240 (a). Note that the "shall" was construed as mandatory in effect. See also Regulations 45
arts. 631-638.
18 Sec. 240 (b).
i» For a list of such questions, see the 1928 Report of the Joint Committee on Internal Revenue Taxation,
pp. 65-66.
'« Art. 633. Tax Board cases have gone as far down as 85 percent. See Paul and Mertens, op. cit., 4: 523.
CONCENTRATION OF ECONOMIC POWER 43
porate system were permitted to elect whether to file separate tax
retm'ns or to make a consolidated tax return. But once having made
an election, the same became binding on all the members of the cor-
porate system, which must thereafter file its tax returns ''upon the
same basis unless permission to change the basis is granted by the
Commissioner." ^^ No substantial change was made in the statutory
definition of afhliation.^^
The Revenue Act of 1924 defined ''affiliation" with greater preci-
sion, specifying that "control" resulted "(1) if one corporation owns
at least 95 percent of the voting stock of the other or others, or (2)
if at least 95 percent of the voting stock of two or more corporations
is owned b}^ the same interests." -^ The words "substantially all"
were thus succeeded by an arithmetic figure and "control" became
limited to "own." Some vagueness about "voting stock" still
remained to be corrected in the 1926 act.^"*
Opposition to the device of consolidated returns began to be voiced.
In the debate on the 1924 Revenue Act, Senator Smoot contended
that consolidated tax returns played an important role in the current
phase of destructive competition in the lumber industry. ^^ By rais-
ing the control figure from 80 percent (as specified by the House) to
95 percent, this danger was believed accounted for. During the con-
sideration of the 1928 Revenue Act criticism of consolidated tax re-
turns again flared up, and in fact the opposition was sufficiently
strong for the House, supported to a substantial extent by the
report of the Joint Committee on Internal Revenue Taxation, to
vote for the abolition of the privilege of filing consolidated returns in
order to prevent unfair competition and price cutting via taxation.
In the Senate Finance Committee, however, the consolidated tax
returns were warmly defended:
To refuse to recognize this situation and to require for tax pur])oscs the break-
ing up of a single business into its constituent parts is just as unreasonable as to
require a single corporation to report separately for tax purposes the gains from
its sales department, from its manufacturing activities, from its investments,
and from each and every one of its agencies. * * * Your committee believes
that rather than departing from business practices and standards our revenue
laws should be brought nearer to a recognition of them.2«
The revenue lav/ of 1928 retained consolidated tax returns albeit
in somewhat altered form. The rule-making authority of the Com-
missioner of Internal Revenue was greatly increased. A separate
regulation series (75) comprising 24 printed pages was issued on con-
solidated tax returns, whereas previously only a few sections of three
to four pages of the general series on income-tax regulations had
sufficed. The mere filing of a consolidated tax return by an affiliated
group, it was stipulated in the new regulations, operated as its con-
sent to all regulations prescribed by the Commissioner.^^ The defini-
tion of "affiliation" was refined as follows:
* * * an "affiliated group" means one or more chains or corporations con-
nected through stock ownership with a common parent corporation if (1) at least
95 percent of the stock of each of the corporations (except the common parent
21 See Bureau of Internal Revenue, Regulations 62, arts. 631-638. Note, however, that each successive
revenue act (1924, 1926, 1928, and 1932) afforded new opportunities for election.
" Rej!:ulations 02 (under the 1921 act) raised the lower limit of potential affiliability to 70-percent control.
» See 240 (c). Chain Trade Act corporations were excepted.
'< "As used in this subdivision the term 'stock' does not include nonvoting stock which Is limited and
preferred as to dividends," sec. 240 (d).
" Cong. Rec, 65:71.30.
2« 70th Cong., 1st sess., S. Rept. 960, pp. 15-24.
" In 1932 this clause was enacted by the revenue act, sec. 1 11 (a).
44 CONCENTRATION OF ECONOMIC POWER
corporation) is owned directly by one or more of the other corporations; and (2)
the common parent corporation owns directly at least 95 percent of the stock of
at least one of the other corporations. ^^
Ownership by common ''interests" (e. g., by stockholders) — so-
called class B affihates — no longer sufficed; to permit the filing of a
consoHdated tax return, direct ownership by the corporation or
corporations was required. A major change in the nature of the
tax liability of the affiliated group and its member was effected by
article 15 (a) of the Commissioner's regulations, which provided that
the parent and each subsidiary were severally liable for the tax.
In the course of the debate on the Revenue Act of 1932, the con-
solidated tax return device was again scored for its competitive abuse
by chain stores and utilities.^^ The House was especially critical,
suggesting that consolidated tax returns, if permitted at all, must be
subject to an additional tax of Iji percent. The Senate, however,
insisted on paring the differential rate down to three-fourths of 1
percent. ^"^
(c) Abolition of consolidated returns in 1934, "^i^ certain exceptions. —
The growing opposition against consolidated tax returns reached its
chmax during the consideration of the Revenue Act of 1934. To the
charge of competitive unfairness, which had been aired on previous
occasions (notably in 1928 and 1932), wxre now added the following
specific criticism of the consolidated returns privilege:
It cannot be denied that the privilege of filing consolidated returns is of sub-
stantial benefit to the large groups of corporations in existence in this country.
This is especially true in depression years, for the effect of the consolidated return
is to allow the loss of one corporation to reduce the net income and tax of another,
and during a depression more losses occur. Another effect of the consolidated
return may be to postpone tax. This is because there is no profit recognized for
tax purposes on intercompany transaction, and profits on a product of the con-
solidated group, passing through the hands of the different members of the group,
are not taxed until the product is disposed of to persons outside the group.
In the past, when any corporation could carry forw^ard a net loss from one year
to another, the consolidated group did not have such a great advantage over the
separate corporation. Now that this net loss carry-over has been denied, the
advantages of the consolidated return is much greater on a comparative basis. ^^
Despite an estimate that the elimination of consolidated returns
would result in ''an annual increase in revenue of $20,000,000,"^^
the Treasury favored the retention of consolidated returns:
* * * there are considerable savings to the Treasury, as well as to taxpayers,
in the present arrangement. The administration of the law is simpler since it
conforms to established practice. The Treasury need deal with only one corpora-
tion, the parent. On the taxpayer's side, the requirement of separate returns
would cause largely increased expense to set up separate sets of books for tax
purposes, an undesirable result in itself. The present law permits a return in
accord with business practice, and gives the Treasury broad powers to make the
necessary rules and regulations to prevent escape from the tax. In the judgment
of the Departm.ent, the law should not be changed in this particular. 33
The Treasur;^'s spokesman referred to the fact that sometimes State
law required in effect multiple incorporation of corporations, as in the
" Sec. 141 (d). Insurance companies were excepted, sec. 141 (e).
29 Cong. Rec, 75: 7124-7128.
20 The National Industrial Recovery Act of 1933 raised the differential rate to 1 percent. The regulations
issued under the 1932 Revenue Act (series 78) followed substantially the previous regulations under the
1928 act (series 75) . '
31 Report on the Revenue Bill of 1934, p. 16.
32 House Ways and Means Committee, 73d Cong., 2d sess., Hearings on Revenue Revision, p. 85.
33 Ibid. In the absence of consolidated returns, the tax administrator must carefully scrutinize inter-
corporate transactions in order to detect the creation of various types of artificial losses, including those
resulting from intercompany transfer of assets.
CONCENTRATION OF ECONOMIC POWER
45
case of railroads. Apparently little significance was attached by the
Treasury to the alleged competitive abuses of the privilege.^*
Obviously influenced by the stand of the Treasury, the Ways and
Means Committee voted to override the report of its subcommittee
and the House itself voted against the abolition of consolidated tax
returns. In the Senate, however, the objections against consolidated
tax returns were voiced v\dth greater strength, in contrast to previous
years when the Senate had rejected House proposals for abolishing
consolidated returns. ^^ Instead of an outright abolition of the privi-
lege, however, the 1934 Revenue Act permitted consolidated tax
returns to be filed by railroads, in consonance with the practice of
the Interstate Commerce Commission to permit consolidation for
regulatory purposes. The consolidated tax returns so filed, however,
were to be subject to an additional tax of 2 percent in 1934-35. In
1936 this differential tax was removed.
The resultant change took the form of a new definition of ''aflaiiated
group," as follows:
* * * an "affiliated group" means one or more chains of corporations con-
nected through stock ownership with a common parent corporation if * * *
(provisions (1) and (2) as in the 1928 act) (3) each of the corporations is either
(A) a corporation whose principal business is that of a common carrier by rail-
road or (B) a corporation the assets of which consist principall}' of stock in such
corporations and which does not itself operate a business other than that of a
common carrier by railroad * * *.36
All other corporations must
each corporate entity.
file separate income-tax returns for
IMPORTANCE OF CONSOLIDATED RETURNS, 1928-33
It is difficult to exaggerate the importance of consolidated tax
returns in the operation of Federal taxes on corporate income during
the period 1928-33. Half or more of all Federal taxes on corporate
income were reported on consolidated tax returns in the years 1928-31.
Half or more of the total taxable income reported for all corporations
came from consolidated returns for the years 1929-31, while the gross
income reported on consolidated returns varied from 44 to 48 percent
of the gross income of aU corporations for the same period. (See
table lY.)
Table IV. — Importance of consolidated income-tax retunu, 1928-33
[Items on consolidated tax returns as percentages of items on all returns]
192S
1929
1930
1931 1932
1933
Average
1928-33
Gross income. .. .
45.6
47.6
49.9
43.6
51.1
52.9
47.6
52.5
55.9
46.7
50.1
54.3
39.6
23.3
23.5
37.9
27.9
28. 6
43.5
Taxable net income
42.1
Federal income taxes
44.2
Source: Computed from Statistics of Income for respective years.
3^ See the exchange of remarks between Undersecretary Magill of the Treasury and Congressmen Vinson
and McClint, ibid, pp. 104-05. Cf. a contrary statement of Robert Jackson, representing the Bureau of
Internal Revenue, during the 1935 hearings before the Senate Finance Committee, pp. 223-226.
3-^ See Cong. Rec, 78:5847, 6304-7, 6463-66. 6555-61.
36 See 141 (d). In other respects the Regulations No. 89 issued pursuant to the 1934 Revenue Act followed
substantially the previous regulations. One innovation was the requirement that each subsidiary file a
special form consenting to the use of the consolidated device by the parent member of the affiliated group.
Art. 12. The 1938 Revenue Act expanded the definition to include, in addition to the foregoing, "a street
or suburban trackless trolley system of transportation operated as part of a street or suburban electric rail-
way or trackless trolley system." Sec. 141 (d) (3). The 1939 Revenue Act added Pan-America trading
corporations ito the {permissive category. The second Revenue Act of 1940 reintroduced consolidated
returns for purposes of the new excess-profits tax.
46 CONCENTRATION OF ECONOMIC POWER
When these statistics are broken down in terms of specific industries
(see chart XI), it is apparent that consohdated income-tax returns
played an overwhelming role in public utilities, accounting for ap-
proximately 80 percent of gross income, net income, and Federal taxes
reported for that industry in 1929. Next in order of importance were
manufacturing and mining, where consolidated tax returns accounted
for approximately 60 percent of the gross income, taxable income,
and Federal taxes, respectively, reported in 1929. Consolidated tax
returns were less important to service corporations and relatively
unimportant to trade, finance, and construction corporations, account-
ing for approximately one-third to one-fifth of the gross income, net
income, and Federal taxes, respectively, reported in 1929.
In 1933, on the other hand, the consolidated tax return had shrunk
in relative importance. The decline is particularly marked in the
relative importance of the taxable net income and Federal income
taxes reported on consolidated income-tax returns. Substantial de-
clines, if not so marked, are also shown in the relative amount of
gross income reported by consolidated corporations. This decline in
the use of the consolidated returns device is a consequence of two
factors — (a) the higher tax rates applicable to consolidated tax
returns (introduced in 1932), the effect of which is primarily reflected
in the decline in relative gross income, and (b) the increasing magni-
tude of intercompany losses during the course of the depression.
Within manufactimng there are also marked differences in the im-
portance of the consolidated returns (see chart XI). Rubber, chem-
icals, metals, food, beverages, and tobacco characteristically made
extensive use of consolidated tax returns, 60 to 80 percent of the
gross income of which was reported on consolidated tax returns in
1929. Consolidated returns were relatively unimportant to textiles,
printing, and forest products corporations, where the consolidated
■group accounted for only 20 to 30 percent of the gross income reported
for those industries in 1929. Leather, paper, and stone, clay, and
glass occupied a middle position in the consolidated tax-returns picture,
the gross income reported on such returns accounting for approxi-
mately 40 percent of that shown for the entire industries in 1929.
Substantially the same relationships are shown for taxable net income
and Federal income taxes reported on consolidated returns in 1929.
One of the outstanding facts shown in chart XI is that in 1929 the
bars showing the percentile importance of gross income, taxable net
income, and Federal income taxes reported on consolidated income
tax returns tend to closely parallel one another, industry by industry
(with the exception of rubber and chemicals). This substantial coin-
cidence means that given amounts of gross income result (after
deductions allowed by the tax laws) in similarly proportioned amounts
of taxable net income upon which, in turn, similarly proportioned
amounts of Federal corporate income taxes that are reported due
and payable.
The fact that these three percentages for consolidated returns of all
income tax returns exhibited a fair degree of constancy can be taken
to prove that there were in 1929 no marked differences between con-
solidated tax returns and unconsolidated tax returns in the determina-
tion of taxable net income and the resultant tax liability thereon. In
1933, on the other hand, this parallel does not appear; on the contrary
the relative amounts of taxable net income and Federal corporate
income taxes of the consolidated group are conspicuously smaller than
CONCENTRATION OF ECONOMIC POWER
47
the relative amount of gross income, industry by industry. By 1933
there appeared, then, to be marked differences between consolidated
tax returns and unconsolidated tax returns as to the determination of
taxable net income and the resultant tax liability thereon. In other
words, the situation with respect to consolidated income tax returns in
1933 represents a radical change from what the situation had been in
1929.
Chart XI
ROLE OF CONSOLIDATED RETURNS IN FEOERAL CORPORATE INCOME TAXATION, I329 and I933
CONSOLIDATED RETURNS A8 i OF ALL aETURNS
1929 )933
80^ 60^ 40^ 20-^ 0 20-r. 40?» 60^ Bo^
Manufacturing
Mining
Service
Trade
Construction
Finance
NET raCOUE
Public UtUities
Uanuf actur ing
SWTlO*
Trade
Codstruction
FEDERAL TAXES
Public Utilities
HBDufacturlnc
Serrlee
Xr«d«
Caostruotlon
GBOSS IHCOIIE
Rubber
Chemicals
Uetals
Food, Beverages & Tobacco
Laather
Paper
Stone, Clay & Glass
Printing
Forest products
TextUee
CheuiotLls
Uetals
Rubber
Food, Bererages & Tobacco
Stons, Clay & Glass
Taxtilaa
Printing
Paper
Forest products
Chemicals
Hetals
Rubber
Food, Beverages 4 Tobacco
Leather
Stone, Clay 3c Glass
Printing
Forest products
Paper
TextUea
Source: Computed from Statistics of Income for respective years.
Department of Commerce.
48 CONCENTRATION OF ECONOMIC POWER
DEDUCTION OF LOSSES BY SUBSIDIARIES
The differences found between consolidated and unconsolidated
income tax returns may, of course, be the reflection of many factors,
some of which may bear no relationship to the device of consolidated
tax returns. It is possible to eliminate such extraneous factors to
some extent by making the comparisons industry-by-industry rather
than for corporations as a whole. The nature of the data unfor-
tunately does not permit holding the size factor constant, and perhaps
there may be other factors whose influence cannot be fully controlled.
For example, the gradual tax rate penalization of corporations filing
consolidated income tax returns undoubtedly led some of the corporate
systems, which on the whole were profitable, to abandon the privilege
and to file separate income tax returns for each corporate member as a
unit in itself. To this extent only corporate systems having heavy
losses by subsidiaries that would outweigh the additional tax rate
(three-fourths of 1 percent in 1932 and 1 percent in 1933) would pre-
sumably avail themselves of the privilege of filing a consolidated
tax return.
In other words, the relative financial success of the consolidated
group in 1932-33 was probabty lower than it would have been if a
discriminatory tax (however slight) had not been imposed. A decline
in the absolute number of consolidated tax returns did occur, changing
from 8,495 in 1931 to 7,426 in 1932 and to 7,101 in 1933, a decline
of 16 percent. But the absolute number of unconsolidated tax returns
also declined, falling from 516,404 in 1931 to 508,636 in 1932 and to
504,080 in 1938, a decline of 2.4 percent. It must be noted, however,
that no discriminatory tax was imposed in 1931 when some of the
trends stresses (infra) had already begun, that after a]l the statutory
discrimination was relatively minor in character (at most 1 percent),
and that the empirical data conform to the main hypothesis derived
from a reading of the relevant statutory provisions. The statistical
data are not so valid as could be desired, but their deficiencies are not
of such a degree as to preclude realistic analysis or conclusions. In no
instance do the data fly in the face of what might have been reasonably
expected from an a priori standpoint.
Consolidated and unconsolidated tax returns have been compared
in terms of the amounts of taxable net income and total gross income
reported on consolidated tax returns as percentages of the respective
items reported for all corporations. The broken line on chart XII
shows total gross income reported on consolidated tax returns in the
given industr}^ as percent of total gross income reported for all cor-
porations in the same industr}^ The solid line shows taxable net
income reported on consolidated tax returns (excluding deficits) in
the given industry as percent of taxable net income reported for all
corporations (excluding deficits) in the same industry. Whenever
the net income line is lower than the gross income line, it is assumed
that the variation between the two lines (show a as a cross-hatched
area) shows the role of ofi'setting losses by subsidiaries in the opera-
tion of consolidated income tax returns. This assumption is fortified
by the fact (a) that the comparison is always made industry by
industry and (b) that the larger corporations (among which naturally
fell the consolidated returns) are known in 1931 to 1933 to report
relatively larger taxable net incomes than do smaller or medium-sized
^ — . ^jCt
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CONCENTRATION OF ECONOMIC POWER
49
I
corporations .2^ Where the net income Hne, on the other hand, is
equal to or greater than the gross income hne (the variation between
which is a striped area), no clear assumption can be made, for sub-
sidiary losses may still remain important to the consolidated group
but be offset by the relatively larger taxable net income of the larger
corporation (which probably includes the major part of the consoli-
dated group) .
Froni chart XII it is apparent that prior to the coming of the
depression (1930-31) consolidated corporations reported the same or
larger taxable net incomes in relation to gross income. This state-
ment is not quite applicable to finance, public utilities, and mining,
nor to certain manufacturing industries (i. e., food, beverages, tobacco,
rubber, paper, chemicals, and metals) where some offsetting losses by
subsidiaries appear to have occurred in 1928 and 1929.^^
With the coming of the depression, however, the taxable net income
reported by consolidated companies declined relatively much more
rapidly than the taxable net income reported by the unconsolidated
group. This decline was particularly marked in manufacturing,
mining, and public utilities, and to a lesser degree in finance, service,
and construction. No decline appeared in trade where the taxable
net income of the consolidated group remained proportionately larger
than its gross income. ^^ Within manufacturmg the decline w^as
3specially notable in food (including beverages and tobacco), rubber,
forest products, paper, chemicals, stone, clay, glass, and metals. A
iecline occurred in the remaining manufacturing industries (i. e.,
textiles, leather, and printing), but was distinctly less marked.
ABOLITION OF CONSOLIDATED TAX RETURNS IN 1934
Further light on this problem may be shed by statistical examination
)f the effects of the statutory abolition in 1934 of the general privilege
)f filing consolidated returns upon corporations which had previously
employed such consolidated tax returns. Such an examination can
)e made — albeit only in an approximate manner and in terms of
)road industrial groups for the years 1933 and 1934 — by virtue of a
" This assertion is made on the basis of the following table computed from Statistics of Income:
Taxable net income {excluding deficits) as percent of compiled receipts of all corporations
Size classes (based on assets in thousands)
1931
1932
1933
Average
Under $50
Percent
1.5
1.6
2.0
2.4
2.6
3.2
4.4
4.4
4.3
Percent
0.7
1.0
1.3
1.8
2.2
2.5
3.4
3.6
3.6
Percent
0.9
1.5
2.1
2.8
3.5
4.2
4.8
5.3
4.0
Percent
1.0
$50-$100
. 1.4
$100-$250
1.8
$250-$o00- . .
2.3
$500-$1,000
2.8
$l,000-$5,000
3.3
$5,000-$10,000 ..
4.2
$10,000-$50,000
4.4
Over $50,000
4.0
Note. — "Compiled receipts" differs slightly from "gross income" by including interest from
governmental securities, but this discrepancy from the basis used in the text is believed to be very
negligible.
" Data on consolidated tax returns are unfortunately not available for earlier years. Since the 1928
avenue Act imposed several limitations upon the employment of consolidated returns (supra), it may be
njectured that previously the consolidated tax returns device may have been more extensively used than
the period for which data ai^ available.
'° This industry includes chain stores, which were frequently cited in connection with alleged competitive
uses of the consolidated returns privilege.
^Q CONCENTRATION OF ECONOMrC POWER
series of special tabulations of identical corporations published in
Statistics of Income for 1934.^° The central point of this comparison
is the relationship between taxable net income and total corporate
receipts for the consolidated group and the unconsolidated group of
corporations and what happened to this relationship in 1934 when
the privilege of filing consohdated tax returns was repealed. A com-
plicating factor in such a comparison is the fact that 1934 was on the
average a better year than 1933 and that the rate of recovery may
vary with industry and corporate size. This factor cannot be directly
eliminated from the comparison, but it can be taken into account to a
considerable degree by noting the relative change of the two groups
of corporations in given industries. It must also be recognized that
the unscrambhng of consolidated accounts into separate accounts for
each corporation may introduce other variables.
The method involved computing taxable net income as percentages
of corporate receipts for corporations which filed consolidated returns
in 1933 and which filed unconsolidated returns in 1934, and the same
percentages for corporations which were unconsolidated in 1933 and,
of course, remain unconsolidated in 1934. This computation makes
it possible to compare the increase or decrease in the relative amount of
net income — that is, the excess of corporate receipts over allowable
deductions (including losses by subsidiaries) and credits for investment
income "'^ — of the two groups of corporations.
The results of this comparison are shown in chart XIII, in which
are plotted the 1933-34 differences between the percents that taxable
net income was of compiled receipts for the 2 years, by industries.
If the line goes above the zero line, it indicates that the 1934 per-
centage was larger than that for 1933. If the line goes under the
zero line, it indicates that the 1934 percentage decreased from that
for 1933. The length of the line in either direction indicates the
magnitude of the change between the 2 years.
When this comparison is made, it is discovered that the amount
of taxable net income relative to corporate receipts remained com-
pletely unchanged for manufacturing corporations which had filed
unconsolidated returns in both 1933 and 1934.*^ On the other hand,
there was a distinct increase in the amount of taxable net income
relative to corporate receipts for manufacturing corporations which
had filed consolidated tax returns in 1933 and which were required in
1934 to file unconsolidated tax returns. The removal of the privilege
operated to increase the relative taxable net income of manufacturing
corporations. This same tendency for the consolidated group to
increase their relative taxable net income while the unconsolidated
group remained stationary is also found in public utilities.
In mining both the consolidated and unconsolidated group of cor-
porations reported relative increases in taxable net income from 1934
over 1933, but the increase was distinctly larger for the consolidated
group of corporations than for the unconsolidated group. This
«> For description of these special tabulations and statement of (lualifications as to results, see Statistics
of Income for 1934, pt. IT, pp. 19-32.
<i The net loss carry-over provision expired in 1932 and consequentlv does not enter into any comparison
involving 1933 and 1934.
« For simplicity in reference the phrase "consolidated groups" shall be understood to mean that group-
of corporations which filed consolidated tax returns in 1933 and were later unconsolidated (except for rail-
roads), while the phase "unconsolidated group" shall be understood to mean that group of corporations,
which filed unconsolidated tax returns in both 1933 and 1934.
CONCENTRATION OF ECONOMIC POWER
51
tendency was also characteristic of service, finance, and trade. A third
situation is found in certain manufacturing groups (food and rubber)
where the consolidated group of corporations reported relative in-
creases in taxable income in 1934 over 1933, whereas the unconsoli-
dated group reported relative decreases. A fourth, and reverse,
situation is found in tobacco and metals, where the consolidated
group reported relative decreases in taxable net income in 1934 over
1933, whereas the unconsolidated group reported relative increases.
Chart XIII
EFFECT OF ABOLITION OF CONSOLIDATED TAX RETURNS IN 1934ION CORPORATE
TAXABLE NET INCOME BY INDUSTRIES
■n C0RP0RATI0^4S FOR WHICH CONSOLIDATED RETURNS WERE
^" riLEO IN f933
m^ CORPORATIONS FOR WHICH NO CONSOLIDATED RETURNS WERE
'^'^^ FILED IN 1933
{^^ ALL CORPORATIONS
>< NO CHANGE
Taxable Net Income as ^ of Compiled Receipts
DECREASE OF 1934 OVER 1933 INCREASE OF 1934 OVER 1933
43210123
Source: Computed from Statistics of Income for respective years.
Department of Commerce,
^2 CONCENTRATION OF ECONOMIC POWER
During the prosperity years (1928 and 1929 — the earliest years for
which statistical data are available) the consolidated tax-returns device
did not appear to offer substantial tax benefits to holding companies
and related forms of interafhliated corporations. The reason was
fairly simple: During that period there were not substantial losses by
subsidiaries (except in a few industries, e. g., rubber) that could be
appropriately deducted via consolidated tax returns from the profits of
other subsidiaries or of the parent. With the coming of the depres-
sion, however, and the intensification of the downward swing of the
business cycle from 1930 to 1931 to 1932, the privilege of deducting
subsidiary losses within affiliated systems became very important to
the member corporations of the system in reducing their tax liability
from what it would have been if the tax laws had treated each corpo-
ration as a unit in itself.
Given effective administration of the tax laws, the filing of consoli-
dated tax returns by affiliated corporations results at best in the same
amount of taxes that would have been collected if each corporation
had been taxed separately. In any depression period consolidated
tax returns drastically curtail taxes from what they would have been
on an unconsolidated basis. In no event can consolidated tax returns
result in higher tax liability than that computed on an unconsoHdated
basis, provided the tax laws are efficiently enforced.
It may be argued by the proponents of consolidated tax returns
that such a basis for computing Federal income tax liability is (a) juster
than the original (before 1917) and present (since 1934) method of
determining the tax liability of interaffiliated corporations and (b) is
administratively more feasible, for the reporting taxpayer and the
tax collector. The argument of tax justice is predicated upon the
general maxim that the taxpaying units should approximate the real
business units, a proposition from which it is difficult to dissent in the
abstract. By taxing interaffiliated corporations on a consolidated
basis, it may be argued, the tax laws are but treating loosely knit
combinations in the same way as the tax laws apply to merged or
consolidated corporations. The one consists of parents and sub-
sidiaries while the other consists of operating departments within the
framework of a single corporation. Departmental losses in the latter
case are, of course, offset against the profits of other departments within
the same corporation, and only the residual is subject to Federal tax.
This argument overlooks, however, a very important point, namely,
that loosely knit combinations and merged or consolidated corpora-
tions are quite different in nature, each from the other. These
differences are practically identical with the unique advantages of
the holding-company teclmique of corporate growth which were set
forth at the beginning of this chapter. A single phrase may perhaps
sum up these differences — a common unit of responsibility, or the
lack of such a unit. The merged or large corporation affords such a
common unit of responsibility. The holding company and its sub-
sidiaries do not constitute any common unit of responsibility. In the
realm of contracts and torts, employees and customers, investors and
the general public, corporations are usually allowed to define their
duties and liabilities strictly in terms of separate corporate entities,
largely irrespective of intercorporate relationships. By defining the
''real business unit" on a consolidated basis for affiliated companies,
the Federal tax laws accepted a unit of responsibility which was prac-
tically nonexistent elsewhere in corporate relationships.
CHAPTER IV
INTERCORPORATE DIVIDENDS AND INTEREST ON
GOVERNMENTAL SECURITIES
Another case in which the Federal revenue acts have clone httle to
hinder the growth and continued existence of vast intercorporate net-
works is the treatment accorded dividend income in Federal corporate
income taxation. It is, of course, obvious that the privilege of filing
a consolidated income-tax return involves a complete disregard of all
dividends received from subsidiaries within the affiliated system, but
that was only one of the minor aspects of the consolidated tax returns
device, since intercorporate dividends were free of taxation in the
hands of the receiving corporation during the substantive life of the
consolidated tax returns privilege.
FEDERAL TAXATION OF INTERCORPORATE DIVIDENDS HISTORY
The Federal corporate excise tax of 1909 expressly excluded from
corporate income, for tax purposes, all ''amounts received by it as
dividends upon stock of other corporations, joint stock companies or
associations, or insurance companies, subject to the tax hereby
imposed." The case for exempting corporate profits derived from
dividends was stated in the House of Representatives, as follows:
Mr. EscH. As the corporation tax went to the Senate it exchided holding
companies, as I understand it?
Mr. Payne (who had previously stated, "I have no use for an income tax").
It certainly does.
Mr. EscH. What is the reason for the exclusion?
Mr. Payne. There is no reason in the world why a corporation that owns stock
in another corporation should pay a double tax upon those holdings.^
The case against the exemption was developed at considerable
length in the upper legislative branch by Senator Newlands. At the
outset of his remarks he observed that the problem had better be
analj^zed in terms of the role of dividends and the effect of their
taxation upon different types of corporation:
Mr. President, there are three kinds of holding companies. One is represented
by insurance companies, another by holding railroad companies, another by the
great combinations which hold the stock of other companies for the purpose of
monopolizing production.
It is very clear, so far as the first class of corporations is concerned, such as
insurance companies, that it would be unjust to prevent such companies from
exempting from their incom.e the dividends received from corporations which pay
this tax, for insurance companies are organized for the purpose of investing the
money of their policyholders in the stocks of other corporations, and such invest-
ment is a perfectly legitimate one and is sanctioned by law.
As to railroad holding corporations, that is a device which has grown up from
the fact that the United States has never as yet passed a national corporation law
for the incorporation of interstate railroads; and of course it is necessary that in
some way the union of railroads organized in different States, but when joined,
1 Cong. Rec, 44: 4696.
53
262698— 4 l—No. 9 5
^4 CONCENTRATION OF ECONOMIC POWER
forming continuous lines, should be accomplished in order that the great systems,,
extending from ocean to ocean and through many States, may be organized in such
a wav as to meet the convenience of the public.
Therefore certain States grant charters, enabhng such corporations to hold the
stocks of other railroad corporations and to operate the roads owned by various
railroad corporations as an entire system. That form of holding corporation,
though it is a clumsy substitute for a national corporation and has led to many
evils in overcapitalization and escape from proper control, meets the convenience
of the public; and as the various constituent corporations under it are subject to
public regulation and control as natural monopolies, and the holding company
itself, if it operates the continuous line, is also subject to public regulation and
control, no m.oral objection can be made to that form of a holding company. ^ It
would be unjust as to that form of a holding company to compel it to pey another
tax upon the income received from the dividends of corporations which have
already paid this tax.
We now come to the monopolistic holding com.pany, the great trust organized
like the Steel Trust, for the purpose of holding the stock of other constituent
companies, with a view to controlling and monopolizing prodjiction in certain
lines. Such an organization is not sustained by any moral consideration and is
against public policy and the spirit of the interstate commerce law.
The objection made to taxing such a company is that you give sa nction to it,
or, at all events, recognize it as a legalized form of combination. You may
not sanction it; but you, by the law, recogiiize its existence. You recognize that
existence without reprobation. Such an organization has a privilege of vast
value, if it is to be regarded as legal; for, whilst it has no property except the stock
of other corporations and no income except that whicli it derives from other
corporations which may pay the tax, yet the privilege of combination itself is
one of vast value. You cannot reconcile the exemption of such a corporation from
a direct excise tax upon that vast privilege under this proposed law.
Therefore, it seems to me, the only way to do is to support the amendment of
the Senator from Minnesota, to withdraw this particular exemption of income from
the bill, and afterward to shape the bill in such a Way as to perniit the exemption
of the income derived from stocks owned by insurance companies or savings banks
organized for profit; to perm.it the exemption of the income derived by these
great holding railroad corporations from the dividends of other corporations
subsidiary to it, and then, if we propose to recognize also the only form of holding
companies that is subject to criticism — the holding corporations organiz;ed for
monopolistic purposes — we should frame a tax especially designed to reach the
value of the great privilege which they en joy. 2
The income-tax law of 1913, however, defined net income very
broadly and provided for no special treatment of intercorporate divi-
dends/ which consequently remained fully taxable to the receiving
corporation from March 1,^ 1913, onward. In the course of the House
debate on the 1916 act, Representative Cordell Hull declared—
The dividends received by one corporation from the stock of another corporation
are not exempted from the tax. This provision was based upon the policy that if
a corporation desires to hold stock in another corporation, with all the corporate
and business advantages arising therefrom, it should not object to paying taxes
accordingly .3
So remained the state of the law till the War Incom.e Tax Act of 1917
which introduced a special credit from corporate gross income for ''the
amount received as dividends upon the stock or from the net earnings
of anv other corporation * * * v/hich is taxable upon its net
income." "" Observe, however, that the ordinary corporate income
tax at 2 percent remained applicable to intercorporate dividends
throughout 1917— see section 10 (a) of the Income Tax Act of 1916 as
amended in 1917 — and that an attempt in Congress to enact a general
2 Cong. Rec, 44: 4232-423.3.
3 Ibid., 53; 509.
* Sec. 4 of the War Income Tax Act of 1917.
CONCENTRATION OF ECONOMIC POWER 55
credit for intercorporate dividends was defeated, for reasons that
clearly appear from the following exchange of remarks:
Mr. KiTCHiNs. Is it not a fact that practically all the so-called holding com-
panies of the corporations are organized for the purpose of getting all the sub-
sidiary competing companies into a monopoly?
Mr. Lenroot. Absolutely; and that is their very purpose, and this amendment
would be putting a premium on that kind of corporation. ^
The war excess-profits tax of 1917 completely exempted intercor-
porate dividends received from corporations already subject to income
tax. The 1918 Revenue Act made the exemption for intercorporate
dividends complete b}^ providing that they were deductible whenever
received from corporations alread}^ taxed thereon. From 1918 to
1934 intercorporate dividends received from domestic corporations and
foreign corporations (more than half the gross income of v/hich was
derived within the United States), were either deducted from or cred-
ited against corporate gross income. In 1934 the credit was limited
to dividends received from domestic corporations subject to Federal
income taxation.® Corporations could no longer deduct dividends
received from dom.estic corporations exempt from Federal income
taxation or received from foreign corporations. The 1935 Revenue
Act hmited the deduction to 90 percent of such intercorporate divi-
dends, and this limitation was increased to 85 percent by the Revenue
Act of 1936, which provision is presently (September 1940) in effect.
The 1936 act introduced a novel provision with respect to mutual
investment trusts, which were authorized to claim full credit for all
dividends paid out but no credit for dividends received.
Under the excess-profits tax enacted by the second Revenue Act
of 1940 all intercorporate dividends (whether derived from domestic
or foreign corporations) were excluded from base of income from
which ^'excess profits" are to be computed.
To sum^marize the taxability of intercorporate dividends in the
hands of the receiving corporation: Prior to March 1913 and from
1918 through 1935 such dividends were not included in the taxable
net income of corporations. From March 1913 through 1917 they
were fully taxable under the ordinary corporate-income tax. In 1917
they were excluded from the corporate income subject to the war-
income tax of 4 percent and the excess-profits tax (at graduated
rates). ^ Since 1936, 15 percent of intercorporate dividends have been
subject to the Federal normal corporation-income tax.^
The avoidance of double taxation furnishes the basis for exempting
from Federal taxation all or the major part of intercorporate dividends.
According to this argument, the corporate profits out of which divi-
dends are distributed had been previously taxed in the hands of the
distributing corporation and to tax the dividends when received is to
5 Cong. Rec, 55: 92494.
6 Sec. 23 (p). In the ensuing debate on this modification Senator Borah argued for the complete elimina-
tion of the deduction of intercorporate dividends. See Cong. Rec, 78: 6467.
7 The tax treatment of intercorporate dividends during this interim (1913-17) is somewhat complicated
by the fact that under the 1917 act the rate of the tax on dividends varied with the rate prevailing during
the period when the dividends were presumably earned by the distributing corporation. Thus dividends
received in 1917 were taxed at (a) 1 percent when paid out of earnings of 1913-1-3 and (b) 2 percent when
paid out of earnings of 1916-17.
8 During the life of the surtax on undistributed profits (1936-38), discussed in the following chapter,
intercorporate dividends were fully included in taxable net income, against which, of course, the corpora-
tion was entitled a special credit for all taxable dividends distributed.
56 CONCENTRATION OF ECONOMIC POWER
tax the same income twice. It is obvious that the case is not of 100-
percent double taxation, for the amount distributed, according to the
argument, must already have been reduced pro rata by the amount
of the tax paid thereon by the distributing corporation.^ It is also
obvious that the taxation of intercorporate dividends involves no
double taxation in any constitutional sense since the taxable units
are different corporate entities.
But the argument of double taxation may have little to do with
the taxation of intercorporate dividend as a matter of national eco-
nomic policy. Intercorporate affiliation is the consequence of the
exercise of a higbJy valuable privilege — the right of one corporation
to own stock in another corporation with incidental control and result-
ing profits — with which corporations have been endowed by State
law. And such a legal privilege may be appropriately taxed.
MAGNITUDE OF THE TAX CREDIT FOR INTERCORPORATE DIVIDENDS FOR
CORPORATIONS OF VARYING INDUSTRIES, 1926-37
The importance of the special tax credit for intercorporate divi-
dends for various industries in the years 1926 to 1937 is shown graph-
ically in chart XIV. The lowest line of each industry graph shows
the ratio of Federal tax to total corporate profits, disregarding the
taxable character of specific sources of corporate profits (i. e.. Govern-
ment interest) and looking at each corporation as a separate entity —
as they are in law, generally. The second layer shows the ratio of
taxes to corporate profits less the credit for intercorporate dividends
(100 percent in 1931-35 and 85 percent in 1936-37). The area be-
tween the first and second ratio shows the extent to which the Federal
revenue acts have dealt with intercorporate affiliation by totally or
partially exempting the income resulting from such relationships (i. e.,
intercorporate dividends) from taxation in the hands of the recipient
corporations. If such dividends income had not been exempted from
or credited against net income on the rationale of ''double taxation,"
corporate taxes would, in fact, have been higher by the amount of
the cross-hatched area. It is the scope of this credit which is of
particular importance in the present section.
Before examining the industrial and size characteristics of this
credit, it would probably be in the interest of clarity to complete the
description of the chart, although the other layers are of interest only
in the succeeding sections of this chapter. The third ratio shows
taxes as percent of corporate profits less the credit for intercorporate
dividends and less the amount of interest received on governmental
securities. ^^ The fourth line (found only for 1932 and prior years)
shows the ratio of taxes to corporate profits less the credits for invest-
ment income and the deduction of prior years' losses; the variation
between the third and fourth lines shows the relative importance of
the prior years' loss deduction. For the years 1926-32, inclusive, the
' It is also apparent that the double-taxation argument assumes that the Federal taxes paid by the dis-
tributing corporation equally or proportionally affect the profits that are distributed as dividend, and the
profits that are reinvested in or by the earning corporation. Only the latter may be visibly affecteds at
least in the short run, if the dividends distributed continue in the same or greater volume. Unless divi-
dends are actually diminished by income taxes paid by the distributing corporation, it is difTicult to regard
the same as falling on the corporate stockholder until the final day of reckoning (which may be indefinitely
postponed).
10 Since 1936 the third ratio also excludes from the denominator the amount of the excess-profiis tax, which
Is usually very slight in dollars (except in the smaller size classes). See infra, pp. 60-70.
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CONOENTRATION OF ECONOMIC POAVER 57
fourth line gives the effective tax rate (i. e., taxes as percent of legal
income), while this rate is given by the third line for the years 1933-37.
It is readily apparent from the chart that the tax credits vary con-
siderably from industry to industry and also from year to year in
any given industry. The increase in importance of these tax credits
to an industry reflects the diminishing importance of operating income
to that industry and the increasing importance of intercorporate
affiliation and investments in governmental securities, as in finance,
public utilities, mining, and such manufacturing industries as rubber
and chemicals. There is no necessity for reciting at length in the text
what is apparent from inspection of the charts.
The size characteristics of the intercorporate dividends credit are
shown in chart XV for the years 1931-37." Each year is sho^\Ti as a
pyramid consisting of 9 sectors (1931-35) or 10 sectors (1936-37),
each representing 1 size class (identified by numbers 1 to 10), with
the smaller corporations on the left, the larger corporations on the
right, and the medium-sized corporations in between. Otherwise
the construction of the chart closely parallels that of chart XIV which
has been described in detail in the foregoing paragraphs.
An examination of chart XV shows that the size patterns of the
corporate normal income tax falls into four district periods:
(1) 1931, when the effective tax rate (i. e., after all credits for invest-
ment income) w^as steeply progressive — that is, the magnitude of the
rate varied directly with corporate size. The explanation of this
progressive pattern is to be found primarily in the special exemption
of a minimum amount of net income ($3,000) available to corporations
w4th net income under $25,000.^^
(2) 1932, when the effective tax rate (after all credits for investment
income) was relatively flat or very slightly progressive. The slightly
progressive shape of this pyramid may be attributed to the special
deduction available to corporations with fluctuating income (usually
smaller corporations), which were permitted to deduct prior years'
operating losses. ^^
(3) 1933-35, when the size pattern of effective rates (after all credits
for investment income) was relatively flat. The chart clearly shows,
especially in the case of the large corporation, the growing importance
of the credit for intercorporate dividends. ^^
(4) 1936-37, when the effective rate of the normal tax (after all
credits for investment income) was again somewhat progressive —
although, it should be noted, not at all to the extent of the 1931 pattern.
The change in the revenue acts between 1936-37 and the revenue acts
applicable to 1934-35 was to lower the normal tax on the smaller
corporations, particularly with assets under $100,000 and to leave
substantially unchanged the effective tax rates for the medium-sized
and larger corporations.
It is obvious from an inspection of the chart that, aside from the
slight progression in the statutory rates of the normal tax, the major
factors contributing to the size shape of 1936-37 tax pyramids was the
credit for 85 percent of intercorporate dividends. The magnitude of
11 No size data are available for earlier years.
12 Supra, pp. 23-24.
13 This factor has been discussed at length in the previous chapter (supra, pp. 36-38) and is not of further
concern here.
1* The 1931 abolition of the consolidated tax returns privilege, in which intercorporate transactions were
eliminated, contributed in part to the statistical increase of intercorporate dividends.
58
CONOENTRATION OF ECONOMIC POWER
Chart XV
FEDERAL (NORfML) CORPORATE INCOME TAX PAYf^ENTS AS PERCENT OF PROFITS
OF CORPOP-VnONS OF VARYING SIZE, 1531-37
(RETURNS WITH NET INCOivIE ONLY)
LEGENO
ASSET SIZE CLASSES
( UNDER ^50,000
2 *50,000 TC ^100.000
3 100,000 TO 250,000
4 250.000 TO 500 000
5 500.000 TO i. 000.000
6 1,000,000 TO 5.000.000
7 5,000 000 TO 10.000.000
8 10,000,000 TO 50,000,000
9 50,000,000 TO 100.000.000
10 OVER 100.000 000
^^ TAX AS ^ OF COMPILED NET PROFITS
R;3331 TAX AS ^ OF COMPILED NET PROFITS LESS
^^'^'^^ TAX EXEWPT DIVIDENDS RECEIVED
^^ TAX AS 1!> OF COMPILED NET PROFITS LESS
^'^^^'^ TAX EXEMPT DIVIDENDS RECEIVED AND LESS
INTEREST RECEIVED ON GOVERNMENT OBLI-
GATIONS
FxTm TAX AS ^ OF COMPILED NET PROFITS LESS
TAX EXEMPT DIVIDENDS RECEIVED AND LESS
INTEREST RECEIVED ON GOVERNMENT OBLi-
GATIONS LESS NET LOSS FOR PRIOR YEARS
^mm TAX ON INTERCORPORATE DIVIDENDS AS ^ OF
"^ COMPILED NET PROFITS
SOURCE: COMPUTED FROM STATISTICS OF INCOME FOR RESPECTIVE YEARS
/Z3*56763 /23456T69 /234S67Q9 /234S67e9 1^34567^3 / Z3-tS67e%iO IZ3456789of0
1931 1932 1933
DEPARTMENT OF COMf^ERCE
1934 1935 1936 1937
COXGENTRATION OF ECONOMIC POWER 59
this special credit shows a distinct tendency to vary directly with cor-
porate size — that is, the larger the corporation the greater the credit
claimed for intercorporate dividends. This credit is not quite so ex-
tensive in 1936-37 as it was in prior years when all dividends received
from domestic corporations subject to tax were credited against or
deducted from net incom.e under the normal tax.
When the size pyramid for 1937 is broken down by industries, the
general size pattern is naturally substantiated with a few interesting
extremes. See chart XVI. In a few industries (construction, to-
bacco, textiles, and clothing) the credits for intercorporate dividends
and for Government interest were relatively unimportant, even in the
largest size classes. In the case of such major industries, however,
as manufacturing, mining, service, and finance, it is obvious that the
special credit for intercorporate clividends played a very major role
for the largest corporations. This observation is also applicable to
such manufacturing industries as food, forest products, chemicals,
petroleum, stone-clay-glass, mietals, and motor vehicles, while the credit
for intercorporate dividends was relatively unimportant to public
utilities (except the very largest size class), beverages (except the
very largest size class), leather, rubber, paper and printing, and, as
already noted, in construction. The surprisingly small role of the
intercorporate dividend credit for public utilities results in part from
the fact that the consolidated returns privilege is still available to rail-
roads and related common carriers, resulting in the complete elimina-
tion of intercorporate transactions (includmg intercorporate dividends).
The industrial comparison is given in greater detail for 91 groups in
chart XVII (the construction of which is substantially similar to that
of charts XV and XVI). The credit for intercorporate dividends is
most prominent among the various types of financial corporations —
insurance, banks, and investment trusts. But the dividend credit was
also c[uite important to a number of nonfinancial corporations — nota-
bly electric light and power, motor vehicles, airplanes, sugar, steam
railroads, chemicals, and petroleum. The role in other industries is
apparent from inspection of the chart and therefore need not be
elaborated. ^^
The partial taxation of intercorporate dividends under the Revenue
Act of 1936 and subsequent years probably has operated as a mild
deterrent to holding companies and related forms of interafiiiiated
corporations. At the time of its introduction into the Revenue Act
of 1935 the limited taxation of dividends was conceived primarilj^ as
an auxiliary enforcement device of the graduated rate structure which
was introduced at the samic time. Without a tax on intercorporate
dividends, it was considered, corporate taxpayers might be tempted
to evade the graduated tax rates by splitting one corporation into
several corporate entities for the purpose of reducing the size of each
corporation's income. To this extent the limited taxation of inter-
corporate dividends is probably effective.
The ''mild" character of the deterring effect on holding companies of
the present method of taxing intercorporate clividends can be easily
15 The influence of the statutory graduation of the rate structure (of the 1936 Revenue Act) in specific
industries can be observed by comparing the effective tax rate (i. e., normal tax as of corporate profits after
all credits for dividends and governmental interest). In pipe lines, office equipment, railroads (steam and
electric), light and power, motor vehicles— all industries that are characteristically organized on large
scale— the effective rates of the normal tax are relatively high, while the rates are relatively low for con-
struction and service— both industries characteristically 'organized as small-scale enterprises.
60
CONCENTPvATION OF ECONOMIC POWER
Chart XVI
FEDERAL NORMAL CORPORATE INCOME TAX PAYAAENTS
AND CREDITS FOR INVESTMENT INCOME
BY SIZE CLASSES AND MAJOR INDUSTRIES, 1937
23456789 10
CONSTRUCTION
Source: Computed from the Sourcebook of the Statistical Section of the Bureau of Internal Revenue.
Department of Commerce.
substantiated by an examination of the actual tax rates. Only 15
percent of intercorporate dividends is at present subject to Federal
taxation; the remaining- 85 percent is tax exempt. This partial tax-
ation of intercorporate dividends was at most equivalent (a) in 1936-37
to a tax of 2.3 percent of all dividends received from domestic corpo-
rations, (6) in 1938-39 to a tax of 2.5 percent, and (c) in 1940 to a tax
of 3.6 percent. The partial taxation of intercorporate dividends can
be measured only indirectly and somewliat roughly for 1937 (shown
CONCENTRATION OF ECONOMIC POWER
Chart XVI — Continued
61
FEDERAL NORMAL CORPORATE INCOME TAX PAYMENTS
AND CREDITS FOR INVESTMENT INCOME
BY SIZE CLASSES AND MANUFACTURING INDUSTRIES 1937
1 UNDER
$ 50.0C0
2 ..50.000 TO
3- -.100
000 ro
250,000
4_ ._250
000 TO
500.000
5 _50C
300 TO
000 TO
5.000,000
7 5,00C
000 TO
10.000,000 1
8 lO.OOC
000 TO
50.000,000
9- SO.OOC
000 TO
100,000.000
100,000 000 1
Source: Computed from the Sourcebook of the Statistical Section of the Bureau of Internal Revenue.
Department of Commerce.
as cross hatching supeiimposed on the area representing the tax-profits
ratio). As expected, the intercorporate dividend tax was substan-
tially nonextant, or at least it could not be shown graphically in the
smallest size classes (assets under $100,000) and it increased in magni-
tude directly with corporate size.
62
CONCENTRATION OF ECONOMIC POWER
Chart XVI — Continued
FEDERAL NORMAL CORPORATE INCOME TAX PAYMENTS
AND CREDITS FOR INVESTMENT INCOME
BY SIZE CLASSES AND MANUFACTURING INDUSTRIES 1937
pili
iiiBlil
: ASSET_S.LE_CLAS_S
; 1 UNDER
2 50,000 TO
• 3 100,000 TO
4 250,000 TO
5 500.000 TO
6 1,000,000 TO 5
: 7 5,000,000 TO 10
, 8__IO.OOO,000 TO 50
; 9-J50,000,000 to 100
.0 OVES 100
E.S
; 50,000 1
100,000
250,000
500.000
000.000
000.000
000,000
000,000
000,000
000,000
To. oi V. of Co'l
iQl Ton OS %Qi Corpofole Prodi
Credits for Inlercorpofolc
icr.as 85 %
Ta« ail. of Cori
Source: Computed from the Sourcebook of the Statistical Section of the Bureau of Internal Revenue.
Department of Commerce.
m
1° teS
°5 sS
f5
1
gS 2fe
Sw SS
}^
la p
5^^ g"
8
s ii os
fe
S
1 o3j 2gS
tf
i
11 0
UULi
-JIUJ
yi&MUr'
CONOENTKATION OF ECONOMIC POWER
63
There is some evidence to indicate that intercorporate affiliations
have been shghtly declining in importance, in part perhaps as a con-
sequence of the limited taxation of intercorporate dividends. The
data, for whatever they may be worth, are presented in the following
table:
Table V. — Magnitude of intercorporate dividends, 1935-37
1935
1
1936
3,013
2.63
50.60
2,677
2.02
36.30
1,492
1.92
32.10
2,504
2.38
34.90
1937
I. DIVIDEND EECEIVED BY ALL CORPORATIONS
Amount (millions of dollars) .._ 3,013 2,677 2,682
Percent of corporate receipts 2.63 2.02 1.
Percent of cash dividends paid out... 50.60 36.30 35.70
II. DIVIDENDS RECEIVED BY NET-INCOME CORPORATIONS
Amount (millions of dollars) 1,492 2,504 2,515
Percent of corporate receipts---- 1.92 2.38 2.30
Percent of cash dividends paid out 32.10 34.90 34.40
Source: Computed from Statistics of Income for respective years.
But the evidence is not very conclusive. The record of all corpora-
tions as a group, including the profitable and the unprofitable, indicate
between 1935 and 1937 a drop in the absolute amount and in the
relative magnitude of intercorporate dividends. If only the net-
income corporations are considered, there is, on the contrar}^, a sub-
stantial increase in both the absolute amounts and in the relative
magnitude of intercorporate dividends. The partial taxation, of
intercorporate dividends may have played a role, among other
factors, ^^ in specific instances of the simplification of corporate struc-
tures that have recently been taking place. ^^ The effect of the inter-
corporate dividend tax has on the whole been rather negligible.
CORPORATE INVESTMENT IN GOVERNMENT SECURITIES
Corporations have been acquiring securities issued by governmental
units — Federal, State, and local — and have successfully claimed an
exemption for all interest derived from such securities during most of
the life of the Federal corporation income tax. The basis for this
exemption in the case of interest received from State and local obliga-
tions rests presumably on that traditional doctrine of American con-
stitutional law which forbade the members of a Federal system from
taxing one another. This basis is ' 'presumed" only, for such interest
was fully taxed under the corporation excise tax of 1909, with the
specific approval of the United States Supreme Court in Flint v.
Stone Tracy }^ But the general income tax law of 1913 exempted
19 A novel provision was introduced into the capital-gains provision of the 1935 Revenue Act (sec. 110 (a))
for the purpose of facilitating the simplication of corporate structures by exempting from tax all property
received by one corporation on the complete liquidation of another corporation. This provision that the
receipt of such property shall not result in a taxable capital gain has been limited to cases where the receiving
corporation owned 80 percent of the voting stock of the liquidating corporation. See Internal Revenue
Laws, sec. 112 (b) (6), and Regulations 103, sec. 19.112 (b) (6)-l-5.
Under the 1938 Revenue Act (sec. 371) it is expressly stipulated that no recognition as to gain or loss shall
be given to exchanges of stocks or securities "in obedience to an order of the Securities and Exchange Com-
mission."
1' Facing the Tax Problem (at p. 547) cites a few specific corporate systems which allegedly abandoned
subsidiaries because of the taxation of dividends.
18 220 U. S. 107 (1911): "Vv^here a tax is lawfully imposed upon the exercise of privileges within the taxing
power of the State or Nation, the measure of such tax may be the income from the property of the corporation,
although a part of such income is derived from property in itself nontaxable." At p. 163. To this extent the
Pollock case (157 U. S. 429) was modified.
64
OONOENTRATION OF ECONOMIC POWER
from corporate profits all interest received on State and local
obKgations.
Interest received on Federal securities has likewise been exempt in
order ''to keep faith" with the declaration of exemption usually con-
tained in the various acts under which some obligations were issued.
The exemption clause has usually been believed to have enabled the
Federal Government to obtain loans at lower interest rates, but it
is a moot question whether the revenue gained — through lower interest
rates — is less or greater than the revenue lost — through tax exemption.
In 1917 natural persons were required for surtax purposes to include
in their taxable net income all interest received on Federal obligations
unless such interest was specifically exempt under the act authorizing
the issue of such obligations — namely, all United States bonds, except
pre-war issues, and securities issued by Federal instrumentalities
(except Federal land banks, joint-stock land banks, and intermediate
credit banks). Tliis provision did not apply to corporations. In
1933, however, the interest received upon Federal obligations, which
was subject to the surtax on individuals, became subject to the
present excess-profits tax on corporations. As will be pointed out in
the following chapter, this change was relatively unimportant since the
corporations obtaining considerable income from such sources are large
in size and consequently are not likely to pay any excess-profits tax
at all.
The aggregate amount of interest received by corporations from
governmental securities has been very substantial and in fact has
been increasing in recent years. In 1937 corporations with net income
reported receipts from governmental securities in the amount of
$429,000,000, while individuals reported at least $301,000,000.
Since individuals are not required to report their income from wholly
tax-exempt securities, it is obvious that the latter figure involves a
substantial underestimate. The estimated distribution of tax-
exempt securities by classes of holders is shown in the following table,
as of June 30, 1937:
Table VI. — Estimated distribution of tax-exeinpt securities by classes of holder.
June 30, 1937
[In billions of dollars]
Wholly exempt
"Partially
exempt"
U.S.
Govern-
ment
and
Federal
instru-
men-
talities
State
and
local
Federal
instru-
men-
talities
U.S.
Govern-
ment
Total
Government and their agencies, trust funds, sinking
funds, and investment funds and Federal Reserve
banks
4.3
2.8
1.8
.8
A
0.8
.3
3.5
5.9
W
.3
.1
2.9
6.5
8.7
3.7
.8
2.1
.4
6.8
15.1
Active banks, excluding mutual savings banks
Insurance companies
17.7
6.8
other corporations . . .
.1
2.8
Mutual savings banks
3.2
other tax-exempt institutions . -
1.0
Individuals
1.0
19.0
Total
19.3
2.2
15.1
29.0
65.6
Source: Hearings before the House Ways and Means Committee, 76th Cong., 1st sess., on Proposed Legis-
lation Relating to Tax-exempt Securities, p. 29. More recent figures (as of June 1938) for Federal securities
may be found in the Treasury Bulletin for February, 1939, p. 22.
CONCENTRATION OF ECONOMIC POWER g5
Taking all net-income corporations as a group, the magnitude of the
credit for governmental interest claimed by corporations under the
Federal normal corporation income tax varies directl^^ with corporate
size — the larger the corporation, the larger the credit for Government
interest. See chart XV. This size variation is by no means as
pronounced as the size variation of the credit for intercorporate divi-
dends, although in recent years it has become more accentuated.
This tendency is readily evident from a comparison of the 1936-37
patterns with that of the 3 previous years (1933-35).
When the size patterns are broken down by industries (see charts
XVI and XVII), however, it is found that the*^Government interest is
of great importance only to the financial group of corporations where
it equals — if not exceeds — the credit for intercorporate dividends. It
was relatively of no importance to other major industries or to the
various manufacturing industries. ^^
By exempting Government interest from taxation under the normal
tax the Federal revenue acts have, by design or not, encouraged the
large financial corporations to acquire extensive holdings in govern-
mental securities.
'S It should be pointed out that the area on the graphs technically does not wholly consist of credits for
governmental interest but also includes a credit for the amount of the excess-profits tax.
CHAPTER V
FEDERAL TAXATION OF 'EXCESS PROFITS" AND
UNDISTRIBUTED PROFITS
The Federal normal corporation income tax, which was considered
at length in the two previous chapters, is only one out of several
Federal taxes based upon or related to corporate profits. Although
in magnitude the normal tax accounts for the major share of both
Federal revenues derived from corporate profits (85 percent in 1936-37)
and tax paj^ments made by individual corporations. The excess-
profits tax and the surtax on undistributed profits, however, have had
important effects upon corporate attitudes, profits, and methods of
financing, and these effects have varied with corporate size and the
nature of the industries.
EXCESS-PROFITS TAX! PREMIUM ON THE PREDICTABILITY OF CORPORATE
PROFITS
The present excess-profits tax, which was initially enacted by the
National Industrial Hecovery Act of 1933, is an excess-profits tax in
name only, thoroughly unlike its namesake of the war period.^ Essen-
tially, the present excess-profits tax is the lesser of a pair of Siamese
twins, the better half of which is the capital-stock tax enacted at the
same time, and functions as a whipping boy for the latter. The
capital-stock tax of 1933 was imposed ''upon every domestic corpora-
tion with respect to carrying on or doing business for any part of
such year,'' at the rate of ''one dollar per thousand dollars of the
adjusted declared value of its capital stock."
The corporation may choose any value of the capital to be declared,
but if the declared value was excessive in relation to the corporation's
earnmg capacity it found itself subject to an excess-profits tax in
1933-35 of 5 percent of all profits in excess of 12}^ percent of its declared
capitalization and, in 1936, of 6 and 12 percent of those profits which
were 10 and 15 percent, respectively, in excess of declared capital.
Having once made a declaration of capital, it was assumed that such
a declaration would be more or less bmdmg on the corporation for a
definite time, subject to a few adjustmients of a very specific character.
As a matter of fact, however, the corporations have been able to make
a redeclaration of capital in 1934 and 1936. The 1938 act introduced
the concept of a 3-year period for which the declaration of capital
should be binding, and of course afforded an opportunity for a new
declaration. Notice, however, that in 1939 and 1940, a corporation
was allowed to revise its declaration upward, thus miuiimizing the
excess-profits tax, and, of course, in 1941 a new 3 -year declaration is
scheduled to be made.
See appendix A.
67
gg OONCENTRATION OF ECONOMIC POAVER
Since the corporation may freely report any capitalization figure
that suits its needs, it is to its advantage to select a figure which is
approximately 8 times (1933-35) or 10 times (1936 and subsequent
years) its expected earnings during the coming years. If the capital-
ization figure is higher than this ratio to earnings its capital stock tax
is pro rata heavier than it need be in order to avoid payment of an
excess-profits tax. If the capitalization figure is less than this ratio
to corporate earnings, the resultmg lightness of the capital stock tax
will be more than offset by an excess-profits tax. It is always prefer-
able to pay the capital-stock tax — at the rate of $1 per thousand of
invested capital, which is the equivalent of a tax at 1 percent of taxable
net mcome — to paying the excess-profits tax at the rate of 6 to 12
percent of taxable net income provided the future earnings are given.
The selection of favorable capitalization figures depends obviously
on the accuracy with which earnmgs may be forecasted, a factor which
varies with the economic skill of the corporate managers, the stability
or fluctuation of corporate profits in difl'erent industries, and the
chances of a particular corporation to make profits in any given year.
If in doubt the corporate managers may prefer to avoid or reduce a
present tax liability (the capital-stock tax) to a contingent liability
(the excess-profits tax) if tiieir profit equation should turn out better
than they expected. It must not be overlooked, however, that the
rate of the excess-profits tax is of a very high-powered character com-
pared to the mild rate of the capital stock tax, so that an underpay-
ment of the capital-stock tax may result in an exceedingly high excess-
profits tax, while an overpayment of the capital stock v/ill not
ordinarily invojve large amounts.
The interlocking operation of the Federal capital stock and excess-
profits taxes are shown graphically in chart XVIII. The plotted line
of the diagram shows the m.agnitude of the combined capital stock
and excess-profits taxes measured as percentages of net income ac-
cording to different assumptions as to the relationship of declared
capitalization and net income.^ It is obvious from this chart that the
corporation's capital-stook-excess-profits taxes are miiiunized — at
1 percent of net income — if a capital stock tax is paid upon a declared
capital 10 times earnings. It is equally obvious that, if the corpora-
tion is apt to err in forecasting profits upon which to file a declaration of
capital, it is best to err toward an overdeclaration rather than toward
an underdeclaration. An underdeclaration of capital, and consequent
underpayment of the capital stock, leads to an excess-profits tax of
rapidly increasing magnitude. Assuming constant earnings, an
underdeclaration of 10 percent is equivalent to an overdeclaration of
50 percent, an underdeclaration of 20 percent is equivalent to an over-
declaration of 100 percent, an underdeclaration of 30 percent is
equivalent to an overdeclaration of 180 percent, an underdeclaration
of 40 percent is equivalent to an overdeclaration of 260 percent, an
underdeclaration of 50 percent is equivalent to an overdeclaration
of 400 percent, an underdeclaration of 60 percent is equivalent to an
overdeclaration of 540 percent, an underdeclaration of 70 percent is
equivalent to an overdeclaration of 680 percent, an underdeclaration
of SO percent is equivalent to an overdeclaration of 820 percent, an
underdeclaration of 90 percent is equivalent to an overdeclaration of
2 For the formula, which was derived by Orvis A. Schmidt, see appendix B, sec. 1.
4
1
^
■^
4
1
0
-
/£ 6
(returns with net income only)
BY SIZE CLASSES
INTERLOCKING OPERATION OF FEDERAL CAPITAL STOCK TAX AND EXCESS-PROFITS TAX
Under the Revenue Act of 1936
^^m EXCESS-PROFITS TAX AS i
i^lH OF CORPORATE PROFITS ^ ""Jot«"'5"o™""
3
y///A EXCESS-PROFITS TAX AS 3 looooo to 250000
LESS TAX EXEMPT DIVI- ? i SSS 2SS ™ .VooVooo
OENDS AND GOVERNMENT S iS SSoSSS ?S "o'o'oVo'o'o
INTEREST 9n>vE« sSobo.Mo— * —
10 o»eR 100.000.000
5
R^^SSQ ESTIMATED CAPITAL STOCK
m^e^ TAXES AS ft OF CORPORATE
PROFITS
1
V
L
^^^H^^^rsl^H !^H
s
\
^^^^H^^^^^^l v^^l nl^^l
^
■^1 ^^^H P^ "^H
1
1 \ "
^1 ^™ 1
n
r\
MIHBWB
\,
'
oflia td Bsaaa ei m^^^"""^^^
\
,ZH-^(,lSSt< l231Se7S9k IZ345b7eSt U34JC7e 910/ 1 3 4 5 6 7S 9,0
\
1933 1934 1935 1936 1937
\
SOURCE
: Computed from Statistics of Income J
\
h^ ^
FOR Respect 1
VE YEARS
p-
"^"^1 — \ —
D0-40-I3i
OEPARTV.ENT CF COW.fERCE
262698—41— No. 9 (Face p. 69)
8 10 12
DECLARED CAPITALIZATION Tl
14 |£ |8 20
rs NET INCOME (FOR EXCESS PROFITS 1
22
PURPOSES)
CONCENTRATION OF ECONOMIC POWER
69
I
960 percent, while a declaration of zero capital v/ill subject the cor-
poration to an excess-profits tax equal in magnitude to an overdeclara-
tion of capital of 1,100 percent.
It is unfortunately not possible at the present time to examine for
actual cases the interlocking efi'ects of the Federal capital stock tax
and the excess-profits tax upon the profits of corporations of various
sizes and industries, since there are no data available on the size and
industrial character of corporations choosing to pay the capital-stock
tax and by what amount, or choosing not to pay it. It is believed
possible, however, that certain crude estunates can be made of the
magnitude of the capital stock tax from the present data on the
excess-profits tax available in Statistics of Income. The results of
these estimates are presented in chart XVIII, for ail corporations with
net income, classified by size of assets for the period 1933-37.^
From this chart it appears that the excess-profits tax shows a very
m.arked tendency to vary inversely with corporate size, while the
capital stock tax pattern characteristically exhibits only slight size
variations. The regressivity ^ of the excess-profits tax has been stead-
ily mounting since 1934, so that in 1937 the efiective tax rate ranged
from 1.7 percent in the case of corporations with assets under $50,000
dov/n steadily step-by-step to less than two-tenths of 1 percent in the
case of corporations with assets over $50,000,000. In 1933-35 the
range of the regression did not exceed 1 percent of corporate profits
while in 1937 the range vv as more than 1.5 percent. Stated differently,
the magnitude of the excess-profits tax paid by the smallest corporations
was more than eight times that of the excess-profits tax paid by the
largest corporations. This chart indicates that the regression of the
excess-profits tax, standing alone, is hardly offset by the interlocking
capital-stock tax, because of the grossly disparate rate structure of
the two taxes.
The chart also shows clearly that the credits for corporate profits
derived from intercorporate dividends and for Government ^ interest
are quite insignificant in the operation of the excess-profits tax, and
naturally so. The m_agnitude of the excess-profi.ts tax varies inversely
with the corporate size — that is, the larger the corporation the smaller
its excess-profits tax (the excess-profits tax may be wholly nonextant
in the larger size classes) — whereas the relative magnitude of cor-
porate profits derived from intercorporate dividends and Govern-
ment interest for which special credits may be available under the
revenue act, varies directly with corporate size^that is, the larger
the corporation, the more likel}^ it is to obtain a relatively larger
amount of its profits from mtercorporate dividends and Government
interest.
3 For the method of estimating the magnitude of the capital-stock tax, see appendix B, sec. 2.
^ The terms "regressivity" "regression," and "regressive" as used throughout this chapter refer to the
inverse relationship between the magnitude of the tax ratios and corporate size. In other words these
terms mean only that the tax rato is smallest on the large corporations and largest on the small corporations,
and nothing more is meant, or implied, in this connection.
5 The credit for Governm.ent interest under the excess-profits tax does not include interest received on
the United States saving bonds and Treasury bonds ov/ned in principal amount of over $5,000 and obliga-
tions of instrumentalities of the United States which were not exempt from taxation by the respective
congressional acts authorizing the issurance of such obligations. Such partially tax-exempt interest
in 1937 amounted to $201,477,000 while wholly tax-exempt interest on governmental securities (State and
local obligaiions, etc.) amounted to $210,320,000. It also should be noted that the credit for Government
interest allowable under the normal tax and the surtax on undistributed profits has never included Gov-
ernment interest of either character (except under the excise tax of 1909).
262698— 41— No. 9-
70 CONOENTRATION OF ECONOMIC P0^^ ER
The general pattern of regressivity exhibited by the excess-profits
tax for all corporations taken as a group, is largely confirmed in the
industry-by-industry analysis shown in chart XIX. In only one
industry (tobacco) does the excess-profits tax appear to exhibit no
size variation, while in another industry (rubber) the effective rate
of the excess-profits tax on the medium-sized corporations appears
heavier than on the smaller corporations. In all other industries the
excess-profits tax appeared markedly regressive in 1937, The re-
gressivity of the excess-profits tax is particularly accentuated in con-
struction, forest products, stone, clay, and glass, where the rate on
the sm.aller corporations (with assets under $100,000) is more than
20 times that on the largest corporations, while in the case of motor
vehicles the rate on the smallest corporations is 31 times the rate on
the larger corporations (with assets from $5,000,000 to $10,000,000).
With the single exception of construction (which has no corporations
with assets above $10,000,000) the effective rates of the excess profits
in the largest size classes was so small that they could not be graph-
ically shown.
Chart XX presents a m^ore detailed industrial picture of the con-
siderable variation in the relative magnitude of the excess-profits tax
in 1937. In fact this diagram shov/s that the differences among in-
dustries in the ratio of the excess-profits tax to corporate profits in
1937 were fully as great as the size difl'erences. The highest ratio for
an industry (air transportation) was 2.5 percent and the lowest; (tele-
phone and telegraph) was less than 0.05 percent. The excess-profits
tax was largest on construction, mining, heavy industry (e. g., ma-
chinery and tools, railroad equipment), air and water transportation —
all industries characterized by fluctuating profits. The excess-profits
tax was lowest on various public utilities— such as telephone and
telegraph, railroads, electric light and powcr^ — on consumers' goods
industries — such as tobacco, shoes, and food products. Other indus-
tries typically organized as large-scale enterprises report low excess-
profits taxes — banks, motion-picture producers, uivestment trusts,
anthracite coal, chemicals. The effect of the tax upon other specific
industries is apparent from an inspection of the chart and need not
be further elaborated here.
Although the excess-profits tax is usually small in actual dollars
and cents, it is vvithout question a very regressive tax on corporate
profits. Yet its rate structure contains a slight graduation — 6 to
12 percent — based on the amount of profits in excess of a stated pro-
portion (10 and 15 percent, respectively) to declared capital. Such
data as are at hand (see chart XVIII) do not indicate that the capital-
stock tax compensates or neutralizes these regrevssive tendencies to
any noticeable degree.
SURTAX ON UNDISTRIBUTED PROFITS: PREMIUM OX THE DISTRIBUTION
OF CORPORATE PROFITS
During 1936 and 1937 the Federal Revenue Act imposed on cor-
porations retaining the greater share of their profits, a tax, additional
to the normal tax, ranging from 7 to 27 percent in accordance with
the relative magnitude of undistributed profits. In 1938 and 1939
the tax rate of the undistributed profits was nominal (2.5 percent).
Starting with 1940, when even this merest remnant disappeared, the
n^i »BBrj
m
I
JXAT 2rH05>'^
TUO
EOERAL EXCESS-PROFITS
CASH DIVIDENDS PAN
UNDISTRIBUTED PROFITS TAX PAYMENTS,
D CREDITS FOR INVESTMENT INCOME,
INDUSTRIES. 1937
CONCENTRATION OF ECONOMIC POWER
71
Chart XIX
FEDERAL EXCESS-PROFITS TAX PAYMENTS OF CORPORATIONS OF VARYING SIZE
CLASSES AND INDUSTRIES, 1937 (RETURNS WITH NET INCOME ONLY)
BSii^;'i'i-^:ai
ASSET SIZE CLASSES
UNDER *50.000
»50,000 TO *I00.000
100,000 TO 250.000
250,000 TO 500.000
500,000 TO 1.000.000
i. 000.000 TO 5.000.000
5.000.000 TO lO.OOC.OOO
10.000.000 TO 50 000 000
£0.000.000 TO 100,000.000
OVER 100.000,000
234 567 3 910
!2a45GTfi9IO
PETROL-
si
2345678910
STONE-
CLAY-
_6LASS
LEGEND
0 - No Tax
] Excess-profits Tax .as ^ of
Corporate Profits
i Excess-profits Tax as ^ of
Corporate Profits less
Credits for Intercorporate
Dividends and Government
Interest
123*5678910 I2345fc789«0
METALS MOTOR
VEHICLES
X - No Cases
Y - Less than .05^ D.P.40-/33
Source: Computed from the Sourcebook of the Statistical Section of the Bureau of Internal Revenue.
Department of Commerce.
72 CONCENTRATION OF ECONOMIC POWER
Federal Revenue Act has become largely unconcerned with corporate
policies as to the retention or distribution of profits to stockholders.
This statement must be modified by one important — at least poten-
tially important — proviso: Where the ' 'unreasonable" magnitude of
retained profits may be taken as prima facie evidence of a ''purpose
of preventing the imposition of the surtax upon its shareholders,"
the corporation m-.ay find itself subject to a surtax of 25 to 35 per-
cent on the undistributed net income, under section 102 of interna]
revenue laws.^ To this extent the undistributed-profits tax has
now (September 1940) become an episode in the history of Federal
income taxation. But it is not just an episode filed away in the
archives for the purpose of accumulating dust. The undistributed-
profits tax v/as an experiment in corporate-tax reform v/hose record
of performance deserves careful scrutiny.
As originally conceived in the President's message sent to Congress
on Alarch 3, 1936, and to a substantia.! extent as drafted in the House
bill/ the new tax plan contemplated the outright abolition of all
existing Federal taxes based on or related to capital profits — i. e,,
the normal tax, the capital stock tax, and the excess-profits tax —
and the substitution therefor of a new tax of a graduated character
on that part of "corporate income (including dividends from other
corporations) which is not distributed as earned * * *." The
new tax was designed to (a) remove the "existing difference between
corporate taxes and those imposed on owners of unincorporated
businesses," (b) prevent avoidance of existing surtaxes by natural
persons who can afford to leave corporate earnings undistributed,
and (c) reduce corporate savings.
The problem of the undistributed profits of corporations, as Com-
missioner Helvering pointed out, was "no new development."
It has received the attention and support of students of taxation from the
earliest days of income taxation in the IJnited States. Its principles were in-
corporated in our first income-tax law, 1862-71, when Congress provided that
the gains and profits of corporations should be included in the annual taxable
gains, profit, or income of any person entitled to them, whether divided or un-
divided. Shortly before and while the Revenue Act of 1921 was under consider-
ation, a proposal identical in principle with the President's suggestion received
the support of many representatives of organized business, Members of Con-
gress, and the Treasury Department. The principle v/as recommended by Sec-
retary of the Treasury Houston in his annual report for the year 1920. In some-
what modified form, it was incorporated in a bill passed by the Senate in 1924. ^
The Senate, however, was reluctant at one stroke to abandon
existing Federal taxes on corporate profits — the normal tax on cor-
poration income being highly productive from a revenue viewpoint —
and amended the House bill by (a) retaining all existing taxes on
6 Under T. T>. 4914 the Bureau of Internal Revenue has indicated that its tax auditors will closely scruti-
ni:^-e the foUo'.vin'i' elasses of corporations in order to determine the applicability of S'^c. 102:
"(1) Corporations which have not distributed at least 70 percent of their earnings as taxable dividends.
"(2) Corporations which have invested earnings in securities or other properties unrelated to their normal
business activities.
"(3) Corporations which have advanced sums to officers or shareholders in the form of loans out of undis-
tributed profits or surplus from which taxable dividends might have been declared.
"(4) Corporations, a majority of whose stock is held by a family group or other small group of individuals,
or bv a trust or trusts for the benefit of such groups.
"(5) Corporations the distributions of which, while exceeding 70 percent of their earnings, appear to be
inadequate when considered in connection with the nature of the business or the financial position of th?
corporation or corporations with accumulations of cash or other quick assets which appear to be beyond the
reasonable needs of the business."
Evidence is lacking at the moment as to efficacy of sec. 102 and its administrative enforcement.
7 Union Calendar No. 944 of the 74th Cong., 2d sess.
8 Senate Finance Committee, hearings on the 19.36 Revenue Act, pp. 12-13.
For a fuller review of the legislative background of the problem of undistributed profits see the statement
of Herman Oliphant reproduced in appendix C of this report.
CONCENTRATION OF ECONOMIC POWER 73
corporate profits with some modifications as noted below and (b)
superimposing thereupon a new surtax on the undistributed profits
of corporation. The new surtax contained a severely graduated rate
structure ranging from 7 percent to 27 percent of that portion of cor-
porate profits (including all intercorporate dividends received and
excluding interest received on Government securities) which was not
distributed during the year as taxable dividends. The new surtax
applied to all corporations not otherwise tax exempt except the
following:
1. Banks.
2. Insurance companies.
3. Foreign corporations.
4. Corporations operating in the United States possession's.
5. China Trade Act corporations.
6. Joint-stock land banks.
7. Bankrupt, insolvent, or receivership corporations.
The first two problems wliich the undistributed-profits tax aimed
at originally rose out of the constitutional dictate that '^ unrealized
income" is not 'Haxable income/' at least as conventionally construed
in Supreme Court decisions.^ The undistributed profits of corpora-
tions cannot be taxed to the stockholder, the courts have held, be-
cause he cannot dispose of such income until it is realized, i. e., paid
out to him as dividends. A partner on the other hand, is taxed on
his pro rata profits of the partnership, irrespective of the fact whether
they are retained in the business or paid out. Again legal logic focuses
its attention on the power of disposal.
At the outset it must be clearly recognized that the undistributed-
profits tax as finally enacted by the 1936 revenue act — ^'^a grating
compromise that pleases neither believers nor disbelievers" ^° — could
not be expected substantial^ to correct existing tax inequalities be-
tween corporate and noncorporate enterprise, for the simple reason
that all existing taxes on corporate profits (i. e., the normal tax, the
excess-profits tax, and the capital-stock tax) were retained in unaltered
form.
The judicial attitude toward taxing ''unrealized income" makes it
possible for a steeply progressive personal income tax operating in
conjunction with a moderately progressive or flat corporation income
tax to favor one type of taxpayers at the expense of other taxpayers.
The type favored is of course individual stockholders in corporations
wliich do not fully and promptly distribute their earnings in the form
of dividends. The undistributed-profits tax of 1936 was designed to
diminish this favoritism by subjecting the undistributed profits of
corporations to a special tax.
Further, it may be contended, corporate self-financing out of re-
tained profits and depreciation charges dispenses with the necessity
for resorting to the capital market. The range of decision is thus
narrowed to the corporate managers themselves, who thus avoid
outside check and approval (i. e., b}^ the functionaries and institu-
tions of investment) of their plans for expansion, possibly entailing
waste of capital. Such short-circuiting of the instrumentalities of
the capital market also precludes effective supervision of investment
channels by the Government. It should be pointed out that the
9 See the comprehensive review of relevant cases in Eoswell Magill's study of Taxable IncomefClGSe).
10 See Willard L. Thorp and Edward B. George, "An Appraisal of the Undistributed Profits Tax,"
Dun's Review, September 1937.
74 CONCENTRATION OF ECONOMIC PO^VER
undistributed-profits tax of 1936 made only a partial approach to the
problem of corporate savings, since depreciation funds (which, of
course, are very large) were completely unaffected by the new tax.
One of the misfortunes of the undistributed-profits tax of 1936, it
has been frequently suggested, was that it was enacted at a time when
the market for new capital issues was not functioning satisfactorily.^^
The accumulation of criticism ^^ against the tax on undistributed
profits lead Congress to all but repeal the tax, retaining in the 1938
Revenue Act a small stump of 2K percent of the undistributed profits
of corporations with net income in excess of $25,000. Besides thus
exempting the smaller corporations (i. e., with net incomes of not
more than $25,000) the 1938 act also expanded the scope of various
credits allowed under the surtax, including the reintroduction of the
net operating loss carr\^-over provision (in effect from 1919 through
1932) insofar as the surtax was concerned. A credit was also allowed
for ''amounts used or irrevocably set aside to pay or to retire indebted-
ness (existing on December 31, 1937) of any kind, if such amounts are
reasonable with respect to the size and terms of such indebtedness.'^
The corporation was also allowed to claim ''a consent dividends credit
equal to such portion of the total sum agreed to be included in the gross
income of shareholders by their consents." ^^ In the 1939 act (appli-
cable to 1940) the surtax on undistributed profits was completely
abandoned.
The data presently available are inadequate either to determine
the degree to which the new tax, by forcing distributions of corporate
profits into the hands of individuals, implemented the surtax on
natural persons, or to indicate the efficacy of the reforming changes
made by the 1938 act, particular!}^ with reference to the exemption of
smaller corporations (i. e., with net incomes under $25,000) and cor-
porations desiring to retire existing indebtedness and with reference to
the employment of the consent dividends device. ^"^ All that is possible
at the present instance is to examine for 1936 and 1937 the effect of
the surtax on the profits of corporations of varying sizes and industrial
activities, and to determine insofar as possible, how the magnitude
of the tax varied with the magnitude of dividends distributed.
The undistributed-profits tax applied to all corporate profits except
interest derived from governmental securities. Dividends received
from other corporations were included in net income to the full
amount, while only 85 percent of intercorporate dividends were
n See Gerhard Colm, The 1938 Revenue Act, Social Research.
" The House Ways and Means Committee of the 75th Cong., 3d sess., summarized the criticism of the
surtax on undistributed profits as follows:
"(1) It discourages, in many cases, legitimate business expansion, and therefore has an adverse effect on
employment.
"(2) It puts a penalty on corporations which find it necessary to use current earnings in the payment of
debts.
"(3) It burdens the small and weak corporation more than the large and financially strong corporation.
"(4) It is unfair to corporations with impaired capital which under State law cannot legally declare divi-
dends.
"(5) The relief provisions of existing law dealing with corporations having contracts not to pay dividends
or contracts requiring the use of current earnings for the payment of debts are so restrictive as to provide
relief only in rare cases.
"Your subcommittee has examined these complaints and believes there has been much exaggeration as to
hardships in the great majority of cases. It is bf^lieved, however, that a substantial number of cases of
hardship exist and that in such cases there is merit in the complaints. It appears, however, to design general
relief provisions broad enough to take care of these meritorious cases without a very serious loss of revenue."
Revision of Revenue Laws. 1938, p. 12..
13 If the shareholder who makes the consent Is a corporation, the amount specified in the consent shall be
considered as part of its earnings or profits for the taxable year * * * sec. 28. Also see Regulations 101,
arts. 26-27. Note that the 1938 revenue act was allowed to become law without the President's signature and
that the President issued a statement criticizing the abandonment of the undistributed-profits tax principle.
» See sec. 27 of the 1938 act.
CONCENTRATION OF ECONOMIC POWER 75
included in net income for the normal tax and the excess-profits tax.
To this extent it is apparent that the sm^tax on midistributed profits
acted somewhat as a deterrent to intercorporate afliiliations. The
undistributed-profits tax, however, contained no restrictions as to the
taxable character of the recipient of dividends paid upon Avliich the
distributing corporation claimed credit. In other words it was irrele-
vant whether the stockliolder was a natural person (who would pay
normal and surtaxes upon his entire dividend income) or a tax-
exempt corporation (wliich would pay no normal taxes whatever).
To this extent the purpose of forcing corporate profits to be distributed
into the hands of stockholders and there taxed under the individual
income tax was partially defeated, especially in cases where the stock-
holder fell in the tax-exempt category. In the case of the corporate
stockholder it should be noted that it would of course be subject to
the surtax on midistributed profits (if not specifically exempt) upon
the entire amount of its dividend income. ^^
Corporations were allowed to deduct from net income, so defined,
the am.ounts of the excess-profits tax and the normal tax paid and to
take credits for the total amount of taxable dividends distributed and
all amounts required by contracts (executed prior to May 1, 1936,
and expressl}' dealing with the payment of dividends) 'Ho be paid
within the taxable year in chscharge of a debt, or to be irrevocably set
aside within the taxable year for the discharge of a debt." ^^ These
deductions from and credits against net income resulted in ''undis-
tributed net income" which was subject to a special surtax ranging
from 7 percent to 27 percent in accordance with the magnitude of such
undistributed net income in relation to net income before the credits.
In the case of banking affiliates subject to regulation by the Board
of Governors of the Federal Reserve System and in the case of national
m.ortgage association created under title III of the National Housing
Act, special credits were respectively available for the "amount of
earnings or profits which * * * j^^^g been devoted by such
affiliate during the taxable year to the acquisition of readily m.arket-
able assets other than bank stock" and "the am.ount of earnings or
profits which * * * }ias been devoted by such association
during the taxable year to the acquisition of such reserves as the
Federal Housing Adm.inistrator m.ay require." ^^
In order to claim a credit for dividends distributed it was necessary
for the corporation to establish that the distribution was a taxable
dividend. As to cash dividends no legal problem, was presented
since they were clearly taxable under the sixteenth amendment as
construed by the Suprem.e Court. Difficulties, however, did exist
with respect to stock dividends, stem.m.ing from, the celebrated decision
of the Supreme Court in Eisner v. Macomber ^^ which held that a
dividend in com.rnon stock issued to the holder of com.m.on stock
was not income within the nieaning of the Constitution . For som.e time
it was felt, and the revenue acts and treasury regulations so indicated,
1' In Facing the Tax Problem it is suggested that the undistributed-profits tax may encourage holding
companies. See p: 180.
'« 1930 act, sec. 26 (c). In lieu of this provision, the 1938 act provided that a credit could be claimed for all
'"amounts used or irrevocably sot aside to pay or to [retire indebtedness (existing on Dec. 31, 1937, and evi-
denced by a bond, note, debenture, certificate of indebtedness, mortgage, debt of trust, or accepted bill of
exchange) of any kind, if such amounts are reasonable with respect to the size and terms of such indebted-
ness," sec. 27 (a).
i' See sec. 26 (d-e) of the 1936 act. The 1938 act completely exempted all rental housing corporations from
the undistributed profits tax.
J«252U. S. 189(1920).
76 CONCENTRATION OF ECONOMIC POWER
that all stock dividends were nontaxable. During 1936 and 1937,
however, the Supreme Court in Koshland v. Helvering ^^ held preferred
stock distributed to the holders of common stock was taxable incom.e,
although both classes of stock were outstanding at the tim.e of dis-
tribution, but not held in equal proportion, and in Helvering v.
Gowan ^^ held taxable common stock distributed to the holders of
preferred stock. In Regulations 103, the Treasury has sum.marized the
legal position of stock dividends as follov/s:
The distinction between a stock dividend which does not, and one which does,
constitute income to the shareholder within the meaning of the sixteenth amend-
ment to the Constitution is the distinction between a stock dividend which works
no change in the corporate entity, the same interest in the samie corporation being
represented after the distribution by more shares of precisely the same character,
and a stock dividend where there either has been a change of corporate identity
or a change in the nature of the shares issued as dividends whereby the propor-
tional interest of the shareholder after the distribution is essentially different
from his former interest. A stock dividend constitutes income if it gives the
shareholder an interest different from that which his former stock holdings
represented. A stock dividend does not constitute income if the new shares confer
no different rights or interests than did the old — the new certificates plus the old
representing the same proportionate interest in the net assets of the corporation
as did the old.21
Very few corporations, however, appear, at least in 1936 and 1937,
to have chosen stock dividends in preference to cash dividends as a
m.ethod of distribution designed to satisfy the requirements for a
credit under the surtax on undistributed profits. Taking all corpora-
tions with net incom.e in 1936, the am.ount of cash dividends am.ounted
to $7,179,200,000 whereas stock dividends amounted to $335,319,000
or approximately 4 percent of total dividends distributed. In 1937,
cash dividends am.ounted to $7,308,774,000 while stock dividends
am.ounted to $170,945,000 or 2.3 percent of total dividends distributed.
The stock dividends distributed in 1936-37 were apparently inade-
ciuate in most cases to satisfy the requirements of the credit under the
surtax, at least insofar as indicated by available data on a sample
number of corporations subject to the surtax. In 1936 only 13.4
percent of the stock dividends reported for this sample were claimed
taxable by the taxpayer (before audit by the Treasury) — consisting
largely of preferred stock distributed to the holders of common stock. '^
See table VII. In 1937 the percentage of taxable stock dividends out
of total stock dividends rose to 37 percent while the total stock divi-
dends, as already indicated in the previous paragraph, declined from
4 percent of total dividends distributed in 1936 to 2.3 percent in 1937.
The aggregate result was a slight increase in the relative amount of
taxable stock dividends out of total taxable distributions from 0.6
percent in 1936 to 0.9 percent in 1937.^3
'-8 298U. S.441 (1936).
■-0 302TT. ?. 238 (1937).
21 Art. 115-7. Tho same lans:u3?e may be found in Regulations 94. issued under the revenue act of 1936.
22 In 1936 the corporation income tax form provided no direction to the taxpayers as to whether particular
types of noncash distributions were taxable— and hence available as a credit under the surtax— or nontax-
able, while in 1937 the corporation income-tax form specifically indicated that such a distribution should not
be claimed as a taxable distribution for purposes of the surtax.
23 All the figures in this paragraph have been computed from a special tabulation (made available by the
Division of Tax Research of the Treasury Department) of corporation income-tax returns filing the special
schedule ("N" in 1936 and "M" in 1937. of form 1120) on the composition of dividend distribution upon which
claims for the dividend credit under the surtax may be made.
HTIW eViHTJ
■
Chart XXI
FEDERAL SURTAX ON UNDISTRIBUTED PROFITS OF CORPORATIONS BY SIZE CLASSES AND MAJOR INDUSTRIES, 1937 (RETURNS WITH NET INCOME ONLY)!
Cosh Dividends c
PERCENT CORPORATIONS MANUFACTURING
SURTAX
TRADE SERVICE
ASSET SIZE
CLASSES
100,000
250,000
5,000,000
9
10
-'^S -
io'o,oo'o,ooo
100,000,000
CONSTRUCTION PUBLIC UTILITIES
rf
^
5
"
-
-
I
%^ Wmmi
PERCENT CORPORATIONS MANUFACTURING
CASH DIVIDENDS PAID
TRADE SERVICE
CONSTRUCTION PUBLIC UTILITIES
1
I ^
1
^
34S6789I0 123456789 10
Source. Computed from the Sourcebook of the Statistical Section of the Bureau of Internal Revenue.
Department of Commerce.
J
1
1
1
23456789 10
262698— 41— No. 9 (Face p. 77) No.l
y/////Ayyy////yy///,
^/a/^/.
Ifiiii
IsSSSSSSSSE
i igg-g-&s-§g-&s
III I
fill
m
S c
CONCENIEATION OF ECONOMIC POWER
77
Table VII. — Types of dividends distributed by corporations subject to the surtax on
undistributed profits, 1936-37
[In percent]
193fi
1937
Cash
94.19
2.28
2.20
.49
.10
.37
.10
.09
.20
Assets - - --- -
Obligations of corporations .- .
\ 99.15
Optional medium (cash) .
Treasury stock - --
Preferred stock on common .
Common stock on preferred .
I 85
Preferred stock on preferred ...
Optional medium (common stock) ..- .
Total taxable distributions
100. 00
100 00
Total taxable distributions
96.50
3.50
98 6
Nontaxable stock dividends ..- _ __
1.4
Total distributions
100. 00
100 00
Source: Computed from a sample tabulation made available by the Treasury Department and published
in less detailed form in the Treasury Bulletin for March, 1940.
A slight size variation was noticeable in 1936 with respect to cash
distribution as compared with taxable stock dividends. Corpora-
tions with large net incomes (over $5,000,000) in 1936 distributed
substantially all their dividends in the form of cash (97 percent),
whereas corporations with relatively small incomes (under $50,000)
preferred to distribute at least one-eighth of their dividend (12.8 per-
cent) in forms other than in cash.^-
Chart XXI shows the effect of the undistributed profits tax on cor-
porations of varying size and industries in 1937. The surtax is meas-
ured as a percent of compiled net profits (a) before credits and (b) after
credits for the amounts of the normal tax and the excess-profits tax
and the interest derived from governm-ental securities, while the
amount of cash dividends paid out has been shown as a percentage of
the total profits. ^^ Stock dividends have been disregarded, as gen-
erally constituting a nontaxable distribution upon which no credit
may be claimed under the surtax. It is, unfortunately, not possible
to show the effect of credits for written contracts restricting payment
of dividends, since no data are available by size or by industries.
From these charts it is at once apparent that the undistributed-
profits tax operated very unevenly in the different size and industrial
classes. Taking all corporations as a group in 1937 the magnitude
of the undistributed tax tends to vary inversely with corporate size —
that is, the larger the corporation, the smaller the tax, and the smaller
the corporation, the larger the tax. This pattern generally reflects the
complementary pattern of the distribution of dividends, the magnitude
of v/liich varies directly with the corporate size— that is, the larger the
corporation, the greater the share of distributed profits and, conversely,
the smaller the corporation the greater the share of undistributed
profits.
21 Also see Thorp & George, op. cit.
25 The amount of cash dividends paid out by corpojations in a given size-industry class is not necessarily
equivalent to the aggregate dividend credit claimed, since some corporations (esj^ecially in the larger size
classes) may distribute more dividends than they had "adjusted net income."
78 CONOENTRATION OF ECONOMIC POWER
When the size pattern, however, is broken down by industries it
does not exliibit as clear a size variation, although there is a general
tendency in most cases for the magnitude of the undistributed-profits
tax to be higher on the smaller corporations than it is on the larger
corporations. But this tendency is by no means invariable and is
frequently obliterated by the tendency for the medium-sized corpora-
tions to report the highest undistributed-profits-tax ratio. This
analysis will be presented for 1936 and 1937 in succession.
Among the major industries in 1936, the undistributed-profits tax
appeared fairly heavy on the smaller corporations in construction,
trade, and public utilities, while in manufacturing and service the
higher effective rates of the surtax appear in the medium-sized classes.
In mining and finance the undistributed-profits tax was relatively low,
exhibiting a tendency to vary inversely with corporate size. Among
the manufacturing industries, the highest rates appear frequently in
the larger-size classes, particular^ in beverages, leather, rubber,
forest products, paper, and petroleum, while the smaller size classes
report higher rates in food, tobacco, clothing, printing, chemicals,
stone-clay-glass, metals, and motor vehicles.
The charts also show, in most cases, the essential insignificance of
the credits for Government interest and for the amounts of the normal
and excess-profits taxes that were allowable under the surtax on
undistributed profits. Among the major industries this credit was of
substantial importance only to finance where large holdings in govern-
mental securities account for a major share of corporate profits. By
exempting such profits from the surtax on undistributed profits,
corporate investments in Government obligations were encouraged.
The relative unimportance of these credits among the larger corpora-
tions in other major industries reflects the lightness of the surtax of
those instances, residting from the substantial cash distribution in
corporate profits. Among the manufacturing industries the credit
was likewise relatively insignificant except for a fev,^ of the larger-size
classes — notably clothing, rubber, forest products, and petroleum.
In 1937, the latest year for wliich data are available, the undis-
tributed-profits tax appears to have operated somewhat less unevenly
than it did in 1936. For example, the highest effectiv^e rate in 1937
for any size-industrial class was 8.9 percent (beverages — seventh-size
class) whereas ^n 1936 the effectVe rate ranged as high as 20.2 percent
(paper — eighth-size class). Aside from the greater extremes that
characterize the 1936 pattern, the 1937 size pattern appears to closely
approximate that shown by 1936.
In trade, public utilities, and finance the pattern is one of general
regressivity with the highest effective rates reported for the smaller
corporations and the lowest rates reported for the larger corporations.
In the case of manufacturing, mining, service, and construction, on
the other hand, the lugliest eft'octive rates are reported for the medium-
sized corporations. The general pattern for manufacturing as a
whole is naturally shown for most manufacturing industries. How-
ever, it should be noted that the pattern is progressive in the case of
beverages and regressive in the case of goods, textiles, clothing, leather,
and chemicals. These variations, of course, are largely accounted for
by variations in the magnitude of dividends distributed.
CONCENTRATION OF ECONOMIC POWER 79
When the figures on the undistributed -profits tax are broken down
by more detailed industrial groups these observations are generally
substantiated. See chart XX, which presents tax data for 86 in-
dustries. From this chart it is readily apparent that there w^ere very
substantial industrial differences in the operation of the undistributed-
profits tax, the tax-profits ratio ranging from a high of 4.9 percent for
agricultural machinery to 0.1 percent for telephone and telegraph.
The ratio of the former was 49 times as high as the ratio of the latter.
The fact that certain exceptions (i. e., radios, shipbuilding, motion-
picture producers) appear to the general observation can be explained
in terms of the behavior of individual corporations within the industry.
The main tendency is clearly shown. It is interesting to observe that
the upper part of the chart — where the tax ratios are high and the
distribution of profits is relatively low — are to be found the industries
known to be largely small scale and highly competitive — while the
lower part of the chart — where the tax rates are low and the dis-
tribution-of-dividends rates are high — are to be found industries
characteristically organized on large scale and commonly cited as
^'monopolistic."
CHAPTER VI
FEDERAL CORPORATE INCOME TAXES PAID BY
CORPORATIONS OF VARYING SIZE, 1931-37
This concluding section of the size chapters is designed to indicate
the aggregate effect of Federal taxes upon corporate profits in various
size and industrial classes, insofar as available data permit. Each
type of Federal corporate incorp.e tax — the normal income tax, the
capital stock, and excess-profits taxes, and the undistributed profits
tax — has been separatel^^ examined in detail in this and the three fore-
going chapters. To what extent have Federal corporate incon\e taxes
reduced corporate incom.e that would otherwise be available for (a)
distribution of dividends to stockholders (inaividual and corporate)
and (6) reinvestment (and industrial replacem.ent) by corporations of
varying size and industrial classes?
Available data are unfortunately not sufficient to furnish a com.plete
answer to this inquiry at the present tim.e. But the deficiencies in the
data are hardly of such a m.agnitude as to preclude any comparisons
at all. One deficiency is the lack of data on the operation of the
Federal capital-stock tax and the other is the im.possibility of corre-
lating the undistributed profits tax of the corporation and the income-
tax pajmients of the individual stockholders on dividends. The
omission of the capital-stock tax is not believed, in view of the analysis
presented in section 1 of the preceding chapter, to introduce any sub-
stantial bias into the size and industrial com.parisons. Data on the
undistributed profits tax are presented always in conjunction with
data on distributed dividends.
The statistical answer to the inquiry will be sought in term.s of three
different charts: (a) In actual dolla.rs (for 4 size groups during a
7-year period (1931-37)), (b) in percents of corporate profits for
10 size groups crossed by 22 industrial groups in 1937, and (c) in
percents of corporate profits for 91 minor industrial groups in 1937.
For the purpose of the first chart it was found advisable to reclassif}^
the corporations into 4 asset-size classes — sm.all (with assets under
$250,000), m.edium -sized (assets from. $250,000 to $5,000,000), large
(assets from. 5 to 50 million dollars), and giants (assets $50,000,000)
while the regular 10 asset-size classes are retained in the second com.-
parison. The third comparison involves no size com.parisons but
presents greater industrial detail. ''Corporate profits" are through-
out defined in term.s of ''compiled net profits" (of Statistics of Incom.e),
including intercorporate dividends and interest received from, tax-
exempt securities, both of which are at the disposal of the receiving
corporation. These charts cannot be used to show the relative "tax
burden" ^ of corporations of different size classes without considering
the taxable status of intercorporate dividends and interest from, govern-
mental securities that were examined at length in the preceding
chapter.
1 It may be questioned whether it is possible to speak of the "tax burden" of other than natural persons.
81
32 OONOENTRATION OF ECONOMIC POWER
Chart XXII shows for the four size groups for each year (repre-
sented by a smgle bar), between 1931 and 1937, the magnitudes (in
millions of dollars) of (a) Federal corporation income taxes (at top of
the chart), (6) corporate profits after taxes that were distributed to
stockholders as cash dividends (second section of the bar from the
top), (c) income available for reinvestment (third section of the bar),
and {(1) funds accrued (income available) for industrial replacement
(lowest section of the bar).
In all size classes the recovery in corporate profits has been substan-
tial in magnitude. Each size class showed a steady gain in corporate
profits (before and after taxes) year-by-year from 1932 and 1936.
But only the giant corporations continued to increase the volume of
their profits in 1937 ; the other size classes reported a smaller volume of
profits in 1937 than in 1936. The rate of recovery has been lowest for
the giant corporations, but likewise their profits declined less precipi-
tously and consequently had less ground to regain.
The substantial recover}^ in corporate profits has been offset by
increasing Federal incoftie taxes only to a minor extent (infra). The
relative effect of such taxes upon corporate profits in the various size
classes can be gaged from a comparison of the rates of increase of
corporate profits before taxes with the rate of increase of profits after
taxes. This comparison gives probably the clearest indication of the
relative role in recent years of Federal corporate income taxes ^ in
reducing corporate profits otherwise available for distribution of
dividends.^ Expressing the rate of increase from 1932 to 1937 of
corporate profits before taxes as 100 in each size class, the rate of
increase of prohts after taxes (excluding the undistributed pi'ofits tax)
was 100 for the small corporations, 99 for the giant corporations, 97
for the large corporations, and 9G for the medium-sized corporations.
This comparison indicates that the curtailing effect of the Federal
corporation income taxes upon corporate profits was somev/hat greater
in the medium-sized class of corporations than in the case of either the
giant or the small corporations. A size comparison of the rate of
increase of taxes between 1932 and 1937 likewise shows the highest
increase occurring in the medium-size group. The explanation for this
size differential is to be found in the one case (i. e., small corporations)
in the graduated feature of the normal tax and in the other case
(i. e., giant corporations) in the operation of the special credits for
investment income.
This chart also shows the relative magnitude of corporate funds
available for reinvestment and industrial replacement (i. e., corporate
profits after all taxes and cash dividends paid out plus depreciation
and depletion) in the various size classes. The rate of recovery of
such corporate funds can be shown by a comparison of the same with
the rate of recovery of corporate profits before taxes and dividends.
Holding the latter constant at 100, the rate of recovery between 1932
and 1937 of corporate investment replacement funds was 68 for the
small corporations, 73 for the medium-sized corporations, and 87 for
the large and giant corporations.
'' In this partionlar comparison, thp undistributed profits tax has been omitted.
- The years 1931-33 are not entirely comparable with one another, nor with the succeeding period as a
result of statutorj' changes with respect to the filing of consolidated income-tax returns.
CONCENTRATION OF ECONOMIC POWER
Chart XXII
83
MILLIONS or
""km
BULLIONS OF
OOLLAaS
4,000
3.-000
2,500
3,500
3.0C0
2,500
Small Corporations Medium-Si zeo
(Assets Uhoer Corporations
$50,000)
LEGEND
(Assets
1250,00
ET8 From
000 TC
000)
Large Corporations Giant Corporations
(Assets Frow (Assets Over
55.000,000 TO $50,000,000)
$56,000,000)
"§DERAL CGRPORATIOM INCOME TAXES (INCLUDING EXCESS^P?0FITS
Tax SINtlE 1333 AND UNDISTRIBUTED PROFITS TAX IN h3^31)
DORFORATE INCOf^'E PA 10 OUT AS CASi D!VIDE:>iDS
{CORPORATE INCaiE AFTER TAXES AND D!ViOE^aS ^ £> '40-J36
^^DEPRECIATION AND DEPLETION CHARGES
Source: Statistics of Income for respective years.
Department of Commerce.
34 CONOENTRATION OF E(:0N0:MIC POWER
These general size patterns have been broken down by 22 industries
for 1937 in chart XXIII. In order to make comparisons easier, com-
piled net profits (including intercorporate dividends and interest from
governmental securities) are expressed as 100, rather than in absolute
dollars, and the three types of taxes (i. e., the normal tax, the excess-
profits, and the imdistributed-profits tax), cash dividends paid out,
and residual profi.ts (i. e., after taxes and dividends) are shown as
percentages of corporate profits before Federal income taxes. "^ The
normal tax is shown at the top of the chart. Next follows the excess-
profits tax. Both of these taxes are collected by the Federal Govern-
ment irrespective of corporate policies as to the (listribution of cash
dividends, the relative magnitude of which is shown next. The un-
distributed-profits tax, which is a function of the magnitude of divi-
dends paid out, is shown below cash dividends. The residual area
indicates the percentage of corporate profits remaining after all taxes
and cash dividends — that is, income available for reinvestment or as
liquid reserves. It was unfortunately not technically feasible to show
on this diagram the relative magnitude of depreciation and depletion
which are frequently the source of corporate expansion as well as
replacement. The investment area was affected by the undistributed-
profits tax in at least two ways — (a) by forcing distribution of divi-
dends in order to avoid payment of the surtax and (b) by reducing
income after taxes and dividends by the amount of the surtax legally
due (i. e., from 7 to 27 percent of the residual, less credits for tax-
exempt interest).
These charts clearly show that Federal corporate income taxes in
the aggregate (i. e., the normal tax plus the excess-profi.ts tax plus the
undistributed-profits tax) reduced corporate profits otherwise dispos-
able to the greatest extent in the medium-sized classes. This state-
ment does not take into account the role of individual stockholders
whose tax payments of course depend upon the distribution policy of
the corporation. It is applicable to all major industries except finance
where the curtailing effect of taxes w^as greatest in the smaller-size
classes. Corporate profits were reduced to the least extent by Federal
corporate income taxes in the largest-size classes, except trade, where
the effect of taxes was least in the smaller-size classes.
The magnitude of corporate profits remaining after taxes and divi-
dends varied inversely with corporate size — that is, the amount of
profits retained for investment purposes or as liquid reserves was
relatively greater in the smaller corporations than in the medium-sized
and large corporations, and, conversely, the amount of retained profits
was relatively smaller in the large corporations than in the small and
medium-sized corporations. This observation does not apply to (a)
mining ^ where the aggregate amount of cash dividends paid out ex-
ceedecl total corporate profits in all size classes except the largest or
(b) finance where retained profits were relatively largest in the medium-
sized classes. The undistributed-profits tax was larger on the small
and medium-sized corporations, as has already been shown, but did
not markedly curtail such undistributed profits.
* The capital-stock tax has been already deducted as an expense item. See sec. 1 of this chapter.
5 The fact that mining corporations as a group reported surtaxes on undistributed profits, despite the fact
that cash dividends exceeded profits in the aggregate, can be explained only by assinuing considerable va-
riation among individual corporations— one corporation, for reasons sufficient to itself, chose to pay out cash
dividends equivalent to loO percent of its profits, while another corporation, for equally self-sufficient
reasons, chose to pay out cash dividends only to the extent of 60 percent of its profits. The sum of these
would show a surtax and yet a dividend distribution of 105 percent.
Hjq 3T0U00JI9 f>3fle>i«
01 e 8 T a e ^ £ '
Chart XXIII— Continued
FEDERAL CORPORATE INCOME TAXES DISTRIBUTION OF DIVIDENDS AND
RETENTION OF PROFITS BY CORPORATIONS OF VARYING SIZE AND INDUSTRIES
(NET -INCOME TAX RETURNS ONLY)
a UNDISTRIBUTED PROFITS TAX
piiiiii "iiiiiiir liiiiiiir "iiiii
kmm wMm. mM mmH iliL lil.
FOREST PRODUCTS Pes cm
3456789 10
"iifiMiir mmmw
P^'ROLEUM STONE. CLAY. GLASS
MOTOR VEHICLES
ciMiiiiiiiiiiiiii jiiijikiililiik l.iiiiihiriiiniiil
[ill
23456789 10
lai
lii ill ii
3456789 10
JiL JJU
3456789 10
a02«»8-4 1 _ No. 9 ( Faoe p. 85 )
CONCENTRATION OF ECONOMIC POWER
85
Chart XXIII
FEDERAL CORPORATE INCOME TAXES
DISTRIBUTION OF DIVIDENDS AND RETENTION
OF PROFITS BY CORPORATIONS OF VARYING SIZE
AND INDUSTRIES, 1937
(net-income tax returns only)
0 Jj^iJ-A^
11±^^A.
l^XAAlH.
90
100
I Z 3 4 5 6' 63
ALL CORPORATSOHS MANUFACTURING
[INCWD'm AGRIC
MINING
I2:i4567d0l0 / 23456739 10
TRADE SERVICE
ASSCr SIZE CLASSES
250,000 TO ^,
5!oo.,„^„
,000,000 TO 16,000,000
,000 TO 5,000,000
I23f667b3l0 123456789 10 I 23 4 56789 10
CONS'^RUCTIOH PUBLIC UTILITIES FINANCE
DEPARTMENT OF CO.MSEffCE
Over 100,000,000
^y Excess-profits Tax
FS-^ Cash Dividends Paid Out
^^ Undistributed Profits Tax
V^'^ Retained Profits
SOURCE: Computed from "Statistics of Income"
AND Sourcebook of the Statistical
Section of Bureau of Internal Revenue
202008 — 41 — No. ".) 7
86 CONCENTRATION OF ECONOMIC POWER
Chart XXIV (the construction of which parallels chart XXIII)
shows these same relationships for 91 minor industrial groups. The
industries have been ranked by the magnitude of profits remaining
after taxes and dividends. Such profits were very substantial for
several kinds of financial corporations (e. g., insurance and banks) and
very low or practically nonextant for various types of public utilities
(e. g., gas, light and power, telephone and telegraph) and consumers^
goods industries (e. g., sugar, silk and rayon, boots and shoes). The
characteristics of any specific industry are apparent upon inspection
and need not be elaborated further here.
z —
I
gUi
Ts: o o
§ ^
-< Ui
UJ >»
CHAPTER VII
FEDERAL TAXATION OF MONOPOLY PROFITS: A NEGATIVE
RECORD
High corporate profits in relation to investment may result from
(a) a condition of ''imperfect competition" of a sort that may be loosely
labeled ''monopoly," (b) a return on investment commensurate
with the degree of risk involved, or (c) a sudden increase in demand
(e. g., during war) which cannot be met by existing capacity. If the
accounting period is sufficiently long, the second type of high profits
for a single year will be offset by losses in previous or succeeding years.
The first type is appropriately termed monopoly profits, while the
third type is the case of "war profits," which may be quite unrelated
to "monopoly" as generally conceived.
The Federal tax laws have only once been directly concerned with
the degree of profitability of corporations and that only as an emer-
gency program to finance the wartime activities of Federal Govern-
ment. This single incident was the excess-profits tax in effect between
1917-21, and the war-profits tax of 1918.^
With the expiration of the war excess-profits tax in 1921, the Federal
tax laws reverted to their earlier emphasis upon the mere dollar
magnitude of profits to the exclusion of any concern with the rate of
profit of corporations. If corporations have a net income a Federal
tax was imposed at a fixed rate irrespective of the relationship of
such income to investment. The enactment of the excess-profits tax
in 1933 changed this situation only in a minor respect. That tax was
no attack via taxation upon the high profits of corporations, but did
discriminate against corporations with fluctuating income.^ Fluc-
tuating income implies high and low points of profit. Whenever the
high point was reached without accurate anticipation by the corpora-
tion (i. e., in its capital-stock declaration), it found itself subject to an
excess-profits tax.
The definition of taxable net income for Federal tax purposes may
indirectly involve some tax discrimination among corporations accord-
ing to their rates of profits. For example, high profits are more likely
to result in the case of operating companies than in the case of cor-
porations deriving most of their income from investment sources
(i. e., intercorporate dividends and Government interest), which are
substantially exempt from Federal taxation in the hands of the
recipient corporation. To this extent only can it be said that the
present Federal corporate income taxes attack "high corporate profits."
The actual tax experience of corporations of varying profitability
during a recent 4-year period (1934-37) is shown in chart XXV, which
is based on profits and investment figures filed by 435 manufacturing
1 See appendix A for a brief review of wartime taxation. The excess profits tax enacted by the Second
Revenue Act of 1940 constitutes another potential exception to the statement in the text.
* Supra, pp. 69-70.
87
gg CONCENTRATION OF ECONOMIC POWER
corporations with the Securities and Exchange Commission and on the
tax data reported by the identical group to the Department of Com-
merce. These corporations have been grouped into 9 profit classes,
based on the ratio of ''net before interest" to ''invested capital"
(including long-term debt).^ The Federal normal corporate-income
and excess-profits taxes and the capital-stock tax are measured as a
percent of "net." From this diagram it is readily apparent that, in
each year between 1934 and 1937, the relative magnitude of such
Federal taxes tended to vary somewhat with the rate of corporate
profits. That is, the tax-profits ratio was higher on the more profitable
corporations and lower on the less profitable corporations. This
direct relationship between the relative magnitude of the tax and the
profit rate, however, was not invariably in evidence, although these
exceptions to the general pattern may be the consequence of extreme
cases, nor was it very substantially in magnitude. Standing by
itself, the capital stock tax was clearly larger on the less profitable
corporations, as may be expected in view of the analysis presented
in the preceding chapter.
These tendencies are substantially confirmed when the figures are
broken down by size and industries for 1937. The size variations for
1937 are shown as the lower part of chart XXV, while the industrial
variations in 1937 are shown in chart XXVI (based on 578 corpora-
tions). In most cases the tax-profits ratios were highest in the most
profitable groups, while in other cases the reverse relationship was
noticeable.
These data show a slight tendency for the Federal corporate income,
excess-profits, and captal-stock taxes (in the aggregate) to vary with
corporate profitability. It is difficult to reach very definite conclu-
sions, however, as to whether and to what degree existing Federal
income taxes curtail corporate profits differently in various profitability
groups.
One of the justifications made of the undistributed-profits tax
by its proponents was its effect in curbing "monopoly." As originally
enacted in the 1936 Revenue Act, however, the undistributed-profits
tax approached this problem only indirectly and without adequate
differentiation between industries with fluctuating income and those
with stable income.
The approach of the undistributed-profits tax to the m.onopoly
problem, was indirect because it focused on that portion of corporate
profits which rem.ained undustributed and was not directly concerned
with the relationship of profits to investment. Yet it is known that
the amount of profits retained after the paym.ent of dividends tends to
vary directly with the rate of profit — that is, the m,ore profitable
corporations tend to distribute relatively less of their profits or divi-
dends than do the less profitable corporations. Eegular payment of
dividends are, of course, essential to the maintenance of corporate
reputations upon the capital m.arket and hence are apt to vary rela-
tively less over tim,e than the volume of profits retained within the
corporate system.. By im.posing a special tax upon the latter it is
clear the m.ost profitable corporations are apt to pay a larger tax of
this sort than the less profitable corporations.
3 For definition of terms, see Technical Appendix E. Note that the data used in this chapter have not
been compiled on a basis entirely comparable to that of the data presented in the previous chapter.
Chabt XXV
FEDERAL CORPORATE INCOME TAX PAYMENTS AS PER CENT
OF NET PROFIT BEFORE INTEREST
435 MANUFACTURING CORPORATIONS
BY PROFIT RATE CLASSES
1934-1937
UNOISTRteuTED PROFITS TAX
CAPITAL STOCK TAX
NORMAL S EXCESS PROFITS TA
PROFIT RATE CLASSES
( NET AS PER CENT OF INVESTED CAPITAL )
UNDER 5 6-29-30
10-15 805-40
15-20 9. OVER 40
20 -Z5
AVERAGE 1934-1937
3 4 5 6
2 3 4 5 6 7
BY SIZE, 1937
2 3
(jipoopoo-$5,ooopoo) ($5,000j000-»l0p00,000) ($IOpOO,000
$200p00p001 lOVER $200.000.0001
123456789 123456769 123
Source: Department of Commerce Survey of Business Taxation.
S— il— No. 9 (Face p.
( Ui/.K<..»
M3ivvvM i aAT 3M00HI 3TA?10q?100 JAH3a31
fl3Tl/ll 3H033a TRO^iq T3M 30
DITAROSROO OI/imUTOAlUHAM a£^
8338AJ0 3TAFI TRO^q YG
FP\ irNAP"^VA
>y:-^
T£ei.3
9
Chart XXVI
FEDERAL CORPORATE INCOME TAX PAYMENTS AS PER CENT
OF NET PROFIT BEFORE INTEREST
578 LARGE MANUFACTURING AND TRADE CORPORATIONS
BY PROFIT RATE CLASSES
1937
B CAPITAL STOCK TAX
NORMAL & EIXCESS PROFITS TAX
PROFIT
(NET AS PER
RATE CLASSES 11
CENT OF INVESTED CAPIT4L) ||
1 ■ UNDER 5
2. 5-10
3.10-15
4.15-20
5.20-25
S. 25-30
7-30-35
8.35-40
9.0VEH40
3 15 6 7
CHEMICALS
2 3 4 5 6 7 (
PETROLEUM
123456769
BUILDING PRODUCTS %
IRON & STEEL
CHAIN STORES
». DEPARTMENT STORES
IISCELLANEOUS
; Survey of Business Taxation.
202698— 41— No. 0 (Face p. 88) No. 2
i'VIYAS XAT 3M00H! BTA^CSFIOO JAnSQBl
^"'"\ 3^10138 mom T3H 30
. -AflT QUA OHmUTOAlUMAM BORA '^ —
;53aAJ0 BTAFi TllOfiq Ya
Tcei
fl3HT^
R^- !i L2 P^ ifi ^>
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\ 8 a ^
^U
iL&SH-K^L, ,
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i
wo
0)3 ■■ ■
-I ^
Uj5 °;
CONCENTRATION OF ECONOMIC POWER
89
If one of the purposes of such a tax is to check imperfect competi-
tion, however, it is necessary that the tax discriminate between the
two types of profit situations outhned by extending the accounting
period or by permitting the carry-over of losses. The surtax provi-
sions of the 1936 Revenue Act permitted only the carry-over of
excess credits for dividends paid out, while the revision of the tax
by the 1938 Revenue Act expressly provided for a loss carry-over for
the previous year.^
Chart XXY shows the relative m.agnitude of the undistributed-
profits tax in 1936-37 for 435 m.anufacturing corporations classified
by 9 profit classes and by 6 size classes (in the lower part of the dia-
gram). Both in 1936 and in 1937 the relative m.agnitude of the
undistributed-profits tax tended to vary with the profit rate — that is,
the undistributed-profits tax ratio was relatively larger in the case
of the more profitable corporations and relatively lower in the case of
the less profitable group. When these figures are broken down by
size classes it is discovered that this tendency is very m.arked in the
middle size classes (assets from 1 to 50 million) — which probably
include the so-called growing corporations — while no tendency (or in
fact a contrar}^ tendency in the case of the giants) is noticeable in
the larger size classes. This size disparity can perhaps be explained
by the easy access of the larger corporation to the capital m.arket.
The latter group, to this extent, forms an exception to the general
observation on the direct relationship between the proportion of
profits retained within the corporation and the rate of profit. Inso-
far as ''monopoly" or ° 'imperfect com.petition" can be associated
with large corporations, it should be apparent that the undistributed-
profits tax contributes little to the solution of the m.onopoly problem,
since the ready access of such corporations to the capital m.arket
obviates reliance on retained profits as a technique of growth. In
the case of the gi-owing or m.iddle-sized corporations Avhich m.ay not
possess easy access to the capital m.arket and therefore distribute
less profits, it is not unlikely that an undistributed-profits tax m.ay
operate to check "m.onopolistic tendencies." In a word, an undis-
tributed-profits tax may not curb existing m.onopolies but m.ay
constitute a check to the growth of new m.onopolies.
Chart XXVII shows the m.agnitude of the undistributed-profits tax
in 1937 for 578 corporations, classified by 9 profit classes and 21 indus-
tries. The direct relationship between the m.agnitude of the tax and
the rate of profit is readily apparent in beverages, tobacco, textiles,
rubber, building products, iron and steel, m.achinery, and chain stores.
In chemicals, transportation equipm.ent, and departm.ent stores a
reverse tendency m.ust be noted while in the rem.aining industries no
tendency is observable.
The four Federal taxes based on or related to corporate profits in the
aggregate tend to vary roughly with the rate of corporate profits in
relation to investment — that is, the tax-profits ratio tends to be higher
on the m.ore profitable corporations than on the less profitable. Yet it
should be obvious that the tax variation is neither large nor universally
in evidence, while the variation in profits is very considerable. Out of
the 591 corporations in the 1937 tax sample, m.ore than one-third of the
num.ber of corporations, reporting approxim.-ately half of the incom.e of
* See Internal Revenue Code, sec. 26 (c).
90
OONCENTRATION OF ECONOMIC POWER
the group, reported profits of more than 15 percent on investment.
(See fcable VIII.) It is obvious that the Federal taxes affect ' 'mo-
nopoly" profits only to a very minor extent.
Table VIII. — Numher of corporations and amount of net before interest of 591
manufacturing and trade corporations in 1937 tax sample, hy profit rate classes
Number of corporations
Net before interest
Profit rate classes
Actual
number
Percent
Cumula-
tive
percent
Actual
amount
(million)
Percent
Cumula-
tive
(percent)
Deficit -.-
13
62
167
128
80
59
39
25
12
6
2.2
10.5
28.2
21.7
13.5
10.0
8.6
4.2
2.0
1.0
99.9
97.7
87.2
69.0
37.3
23.8
13.8
7.2
3.0
1.0
0)
43
718
549
475
325
182
79
11
11
Under 5
l.S
30.0
22.9
19.9
13.6
7.6
3.3
.4
.5
100.0
5 to 10...
98.2
10 to 15
68.2
I5to20 .
45.3
20 to 25
25.4
25 to 30
11.8
30 to 35
4.2
35 to 40
.9
Over 40
.5
Total
591
100. 0
2,392
1 Denotes red figure.
Note.— Profit rate equals net before interest as percent of inverted capital (including long-term debt).
i
CHAPTER VIII
EQUITY VERSUS CREDITOR CAPITAL IN FEDERAL
CORPORATE INCOME TAXATION
Corporate activities maj^ be financed by stockholders or by bond-
holders, or by both, or, after the corporation has been operating for a
time, b}^ undistributed profits and depreciation.^ The contribution of
the stockholders is conventionally termed "equity" capital — other
term,s are ''risk" or 'Venture" capital — -while that of the bondholders
is called debt or "creditor" capital. These different m.odes of cor-
porate financing have particular advantages over one another. If any
general statement can be m.ade, it can probably be said that financing
by "risk" capital is probably preferable to creditor financing. It is
at any rate clear that the converse proposition can be sustained only
with great difficulty and subject to several limitations.^
The Federal tax laws, however, at present discriminate in favor of
creditor financing by exem.ptmg from the corporation's tax base all pay-
ments of interest to bondholders, while of course no deduction is
allowed for dividends paid out to stockholders (except in the case of
the surtax on undistributed profits). Such interest is of course tax-
able in the hands of the recipient (i. e., the bondholders), but so are
dividends received by natural persons. Insofar as corporate capital —
whether equity or debt — is contributed by other corporations, the tax
discrimination is not so marked since (a) in the case of equity capital
the earning corporation paj^s the tax vvdiile the dividend-receiving
corporation is substantially exem.pt (85 percent) from Federal tax
upon such dividends and (b) in the case of creditor capital the earn-
ing corporation is free of taxation upon all distributions (as interest)
while the interest-receiving corporation is presumably taxed thereon.
From the point of view of the paying corporation per se, separate
and apart from its owners and creditois, there is a substantial tax
discrimination, irrespective of the corporate character of the contrib-
utors of capital. In the one case a distribution in the form of interest
is tax-exem,pt while in the other a distribution in the form of dividends
is taxable.^
The present statutory deduction for interest is fairly unlimited in
scope — all interest m.ay be charged as expense except that paid on
indebtedness incurred to acquire tax-exem.pt securities. This was not
the case prior to 1918, when the amount of interest deductible under
the Federal corporate-income tax was lim.ited to that paid on indebted-
ness which bore a specified relationship to equity capital. As a matter
of fact, the question whether any deduction at all should be allowed
1 The relation of Federal taxation to undistributed profits and depreciation has been examined in pre-
ceding chapters, especially at pp. 17-18, 30-31, 70-79.
2 See Jerome Frank, "Too Much Interest in Interest."
3 The varying importance of the interest deduction in diiTerent industries (particularly public utilities,
service, and finance) has already been set forth, supra, pp. 30-31, 70-79.
91
92 CONCENTRATION OF ECONOMIC POWER
for interest paid on bonds was quite warmly debated at the time of
the enactm.ent of the corporate excise tax in 1909. As the Blakeys
report in their tax history —
Most of the Members were at first opposed to such deduction because they
thought it would encourage the substitution of bonds for stocks so as to avoid
the tax. Some questioned the legaKty of taxing earnings set aside for interest
payment; others argued that a tax upon such funds was really a tax upon stock-
holders, inasmuch as their dividends would be reduced by the amount deducted
from earnings for this purpose. Root insisted that at least part of the interest
should be taxed. One Member cited a Supreme Court decision in which it was
held that net earnings included interest upon bonded indebtedness. The final
decision, a victory for Root, was to permit corporations to deduct interest on an
amount of bonds not in excess of paid-up capital stock.*
The income-tax law of 1913 amplified the scope of the deduction
by providing that the indebtedness upon which the claimed interest
was paid could equal (but not exceed) ''one-half of the sum of its
interfest-bearing indebtedness and its paid-up capital stock outstanding
at the close of the year." ^ This limitation was further relaxed by
the Revenue Act of 1916 which provided that there may be deducted
interest wherever the indebtedness on which such interest was paid
equaled or was less than ''the sum of (a) the entire amount of the
paid-up capital stock * * * ^j^^i Qry^ one-half of its interest-
bearing indebtedness then outstanding." ^ A proviso prohibited the
inclusion in the interest deduction of taxes paid on tax-free guaranty
bonds. Since 1918, when the revenue act removed all restrictions
upon the deductibility of interest, corporations can deduct "all interest
paid or accrued within the taxable year on indebtedness * * *." ^
The 1932 act excluded interest paid on debt incurred to purchase
annuities, which provision was subsequently repealed by the 1934 act.
The actual tax experience of 435 manufacturing corporations of
varying equity composition of capital is given for a recent 4-year
period (1934-37) in chart XXVIII. The corporations have been
grouped into seven equity classes based on the ratio of equity capital
(i. e., tangible net worth) to creditor capital.^ Chart XXIX presents
for 1937 similar data for 609 corporations arranged by 21 industries.
The relative magnitude of the Federal corporate income taxes (meas-
ured as percents of "net before interest") shows a tendency to vary
directly with the proportion of equity capital, although this variation
follows by no means a step-by-step pattern. The tax ratios in the low
equity classes are invariably lower than the tax ratios in the higher
equity classes, but the former does not invariably furnish the lowest
tax ratios (except in the smallest size classes). The tax differential
arising from the exemption of interest paid is important in oft'setting
corporations with proportionably small equity capital from those
having relatively larger equity capital. But as the proportion of
creditor capital diminishes and the equity ratio arises correspondingly
the tax-ratio differentials substantially disappear. Corporations hav-
ing substantial equity capital do not report lower tax ratios than cor-
porations the capital of which is almost exclusively composed of
equity.
4 R. G. Blakcy and G. C. Blakey, The Federal Income Tax (1940), pp. 46-47.
« Sec. n (g) (b).
6 Sec. 12(a) (3d).
'Sec. 214 (a) (2).
8 For definitions, see Technical Appendix E. It is unfortunate that these ax data do not include public
utilities, where creditor financing is very predominant.
I
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O CO
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is
cncn
§8
iuj
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ro
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i
III
1
til IS!
I
CONCENTRATION OF ECONOMIC POWER
Chart XXIX
93
FEDERAL CORPORATE INCOME TAX PAYMENTS AS
PER CENT OF NET PROFIT BEFORE INTEREST
609 LARGE MANUFACTURING AND TRADE CORPORATIONS
BY EQUITY RATIO CLASSES
1937
CAPITAL STOCK TAX
NORMAL a EXCESS PROFITS TAX
EQUITY RATIO CL.ASSES
(NET WORTH AS PER CENT OF TOTAL DE8T)
1 = UNDER 2 5 = :2-IG
2 = 2-4 6 = 16-20
3=4-8 7 = OVER 20
4=8-12
LUMBER PER CENT
2 3 4 5 6 7
CHEMICALS
2 3 4 5 6 7
2 3 4 5 S
LEATHER
2 3 4 5 6 7
RUBBER
2 3 4 5 6 7
BUILDING PRODUCTS
I 2 3 4 5 6 7
IRON a STEEL
2 3 4 5 6 7
NONFERROUS
METALS
2 3 4 5 6 7
MACHINERY
I 2 3 4 5 6 7
rRANSPORTATlON
2 3 4 5 6 7
2 3 4 5 6 7
MISCELLANEOUS
MANUFACTURING
2 3 4 5 6 7
WHOLESALE
2 3 4 5 6 7
2 3 4 5 6 7
TOTAL
MANUFACTURING
2 3 4 5 6 7
MISCELLANEOUS
MERCHANDISING
2 3 4 5 6 7
2 3 4 5 5
CHAIN STORES
■234557
DEPARTMENT
STORES
Source: Department of Commerce Survey of Business Taxation.
94
CONOENTRATION OF ECONOMIC POWER
Chart XXX
FEDERAL UNDISTRIBUTED PROFITS TAX PAYMENTS AS PERCENT OF NET PROFIT
BEFORE INTEREST, 609 LARGE MANUFACTURING AND TRADE CORPORATIONS BY
EQUITY RATIO CLASSES, 1937
EQUITY RATIO CLASSES
(NET WORTH AS PER CENT OF TOTAL DEBT )
I = UNDER 2 5 '12- 16
2'2-4 6'l6-20
3 • 4 - 8 7 ' OVER 20
4«e-l2
PER CENT FOOD
BEVERAGES
TOBACCO
TEXTILES
-15
10
5
LUMBER P
■
Yn"'"'
■
n *■■ — '
■ „
1.
1 2 3 4 5 6 7
CHEMICALS
1.1
1 2 3 4 5 6 7
PETROLEUM
1 1
1 2 3 4 5 6 7
LEATHER
12 3 4 5 6 7
X PAPER
12 3 4 5 6 7
PRINTING
%
1
B
„ Iflll -
Ijn 1
t 2 3 4 5 6 7
BUILDING PRODUCTS
! 2 3 4 5 6 7
IRON 6 STEEL
-■■ -
12 3 4 5 6 7
% RUBBER
12 3 4 5 6 7
NONFERROUS
METALS
1 2 3 4 5 6 7
MACHINERY
%
1
0 -III
12 3 4 5 6 7
TRANSPORTATION
% EQUIPMENT
■■iIIh.
1 2 3 4 5 6 7
MISCELLANEOUS
MANUFACTURING
lll.l
12 3 4 5 6 7
TOTAL
MANUFACTURING
.■-I. .
12 3 4 5 6 7
CHAIN STORES
III.. .
1 2 3 4 5 6 7
DEPARTMENT
STORES
-0
%
0 -III 1
12 3 4 5 6 7
12 3 4 5 6 7
% WHOLESALE
IIIbbh.
1 2 3 4 5 6 7
MISCELLANEOUS
MERCHANDISING
1 2 3 4 5 6 7
TOTAL TRADE
JlLuJL
12 3 4 5 6 7
DO- ^-365-
-0
■ ll-l
s
l_l
I 2 3 4 5 6 7
Source: Department of Commerce Survey
1234567 1234567
of Business Taxation.
CONCENTRATION OF ECONOMIC POWER 95
One of the common criticism.s of the undistributed-profits tax
was that it fell with particular weight on corporations with consider-
able debt. Chart XXVIII, which presents 1936-37 data for 435
manufacturing corporations, seems to substantiate this criticism,
insofar as manufacturing and trade corporations are concerned. In
1937 the magnitude of the undistributed profits tax (measured as
percents of ''net before interest") paid by manufacturing corporations
varied inversely (step by step) with the extent of equity capital —
that is, the highest undistributed-profits tax ratios appeared for those
corporations with the lowest equity ratios and, conversely, the lowest
tax ratios appeared for those corporations with the highest equity
ratios. When these general figures for 1937 are broken down by size a
similar pattern emerges, except in the smallest size classes. This
observation is largely confirmed by an industrial comparison. (See
chart XXX). But again there are notable exceptions (building
products, paper, transportation equipment) to the generalization that
the undistributed-profits tax was particularly heavy on ''debt ridden"
corporations.
In 1937 the normal tax, excess-profits tax, and capital-stock tax in
the aggregate were found to be typically lighter on those coi-porations
the capital structure of which contained a substantial amount of
debt, while the undistributed profits tended to be heavier on the same
group of corporations. In the one case a specific part of the Federal
corporate-income tax system tended to encourage creditor financing,
while another specific component of the tax system tended to counter-
act the former tendency. The net result in the various manufacturing
mdustries was a general tendency for the tax system to encourage
creditor financing.
CHAPTER IX
VARIABLE— COST TAXES
An increasing share of the revenue of both the Federal and State
Governments is derived from taxes which vary in magnitude directly
with the volume of industrial activity and, consequently, add to the
"variable costs" of business enterprise. The most important types
of '^ variable cost" taxes are (a) the pay-roll tax (imposed by the
Federal Government and by 51 other jurisdictions), (b) Federal
excise taxes (including taxes on liquor, tobacco, and various manu-
factured products), and (c) State sales and gross-receipt taxes. The
actual economic effect of such taxes in the long run is very difficult to
determine with any degree of precision, since so many factors are
involved — the price level, the competitive situation, labor-union
strength, cost of raw materials, and the volume and direction of
governmental expenditures financed out of such taxes.
Yet some data are available for an examination of the extent to
which such taxes contribute to the ''costs" of various tj^pes of busi-
ness enterprise. That is the primary question which this chapter pur-
ports to throw some factual light upon. How such costs are ultimately
borne is a question which cannot be fully answered in this connection.
See Temporary National Economic Committee Monograph No. 3,
Who Pays the Taxes? by Gerhard Colm and Helen Tarasov.
PAY-ROLL TAXES
For the purpose of financing the recently enacted social security
program, the Federal Government has imposed (a) starting with
January 1, 1936, a special unemployment security tax at the rates of
1 percent in 1936, 2 percent in 1937, and 3 percent in 1938, upon the
pay rolls of enterprises employing eight or more persons in all indus-
tries except those specifically exempted ^ — and (b) starting with 1937,
another special tax (old age) at 1 percent of the pay rolls of all enter-
prises, irrespective of the number of employees, nat specifically exempt.
The first tax applies to total pay rolls without deductions while the
second tax applies only to the first $3,000 and excludes the pay rolls
of individuals over 65. Under the unemployment security tax each
employer was permitted to credit against the Federal tax up to 90
percent the amount paid under an approved State unemployment
compensation plan. The purpose of this tax-credit device was of
course to persuade the States to enact pay-roll taxes for employment
purposes and was as such shortly achieved.^
The impact of the pay-roll taxes upon business costs has been
examined for 23,000 small and medium-sized manufacturing, trade,
1 The exempt classes initially included agriculture, domestic service, shipping, Government, and non-
profit corporations. , , , ^ ^ ^ i. t
2 By June 30, 1936, 12 States had acted; by January 1, 1937, 23 additional States bad acted; and by June
1937, all States imposed a pay-roll tax for unemployment.
97
98 CONCENTRATION OF ECONOMIC POWER
and service concerns in 1938 and for 700 large manufacturing' and
trade corporations in 1937. In the large sample the pay-roll tax is
shown for different size classes (based on sales) as percents of sales.
In the smaller sample of large corporations the pay-roll tax is shown
as percents of ''gross margin" and the corporations have been grouped,
in addition to size (based on assets) and industries, by (a) magnitude
of labor costs and (b) profit rate.^
Chart XXXI shows the pay-roll tax payments as percents of sales
for the large sample of 23,000 concerns, classified into 4 size classes
and 12 manufacturing industries, 11 retail trade groups and 5 whole-
sale trade groups. The ratio of pay-roll taxes to sales tends to vary
directly with size in 8 out of 36 manufacturing industries — baking,
dairies, milling, nonalcoholic beverages, weaving, leather, engines, and
miscellaneous manufacturing— in substantially all the retail groups,
while substantially no size variations are apparent in wholesale trade.
Of the remaining 28 manufacturing industries, 8 — meat, distilleries,
paper, printing, newspapers, industrial chemicals, and stone, iron and
steel — show an inverse size relationship, that is, the pay-roll tax ratio
is lower in the larger size classes and lighter in the smaller size classes.
In 20 industries little or no size pattern is visible.
Chart XXXII shows the pay-toll tax as percent of ''gross margin"
for 700 large manufacturing trade corporations in 1937, classified into
6 size classes (based on assets) and 21 industries. The pay-roll tax
jratio varies directly with corporate size in only two manufacturing
industries — food and textiles — while no size patterns are apparent in
trade. An inverse relationship between the pay-roll tax ratio and
corporate size is, per contra, shown for beverages, building materials,
nonferrous metals, machine and transportation equipment. In the
remaining industries no size patterns are visible.
Whatever variation may be found in certain industries between the
relative magnitude of pay-roll taxes and the size of business enterprise
is a reflection of at least three factors — (a) the inapplicability of the
employment tax to enterprises employing less than 8 persons, (h) the
exemption of entrepreneurial labor from both pay-roll taxes, and (c)
the exclusion from the tax base under the old-age tax of all wages
above $3,000. The first factor is clearly of importance to small enter-
prise which, if sufficiently small, is wholly exempt from taxation.
The second factor is probably more important to small enterprise than
to middle-sized or large enterprise, since the labor contribution of the
entrepreneur rapidly diminishes with the size of enterprise. The
third factor is presumably of greater importance to middle-sized and
large enterprise, since small enterprise may not be apt to employ
many persons at wages-salaries exceeding $3,000. Yet the size pat-
terns are not very pronounced except in a few industries and in these
industries the variations of the pay-roll tax ratio may be due to other
factors, the presence of which merely coincide with size in the par-
ticular instance.
One such factor is the relative importance of labor and capital to
various types of enterprises and is probably the primary factor in
producing variations of the pay-roll tax in different industries and
enterprises. In order to isolate this factor clearly each corporation
of the small sample was classified into one of six "labor cost" groups,
2 For definitions and methodology, see appendix E.
il
CD •^
5 °
'.^Sir^
I..-:
»^<i. '^rfP
1%
,^4^^^-^:^.
-^:^^
fe^^ii^
ri^^i:r:
^
i
o |i
Q I^
i ^J
" ^
s g
1 !tj
iiitii
5 S^
S 1 ^;:,n
fe 0^
(0
0 ,^
H 1
In
g K
£ ti:
55
0(0
I I
5 I
^ a
b
£i^K
8
J
.:^-
f-v
^^•
m-
£|
(0 g o
W 3 o88c
O 5 Zoo'
'Ǥilli
£8
o
1
1
I i
5 °
t
?*
'mm
1
4
1
1
33
1 ^
: o
o
o
CONCENTRATION OF ECONOMIC POWER
Chart XXXII
99
PEDERAL-STATE PAY-ROLL TAX PAYMENTS AS PERCENT OF GROSS MARGIN, 697 LARGE
MANUFACTURING AND TRADE CORPORATIONS CLASSIFIED BY ASSETS IN MILLIONS
1937
libit
I 2 3 4 5 6
1 SIZE
CLASSES 1
(BASED ON ASSETS IN MILLIONS) 1
1 -
UNDER 1
2 =
1 -5
3
5-10
4
10-50
5 =
50-200
6'
OVER 200
2 3 4 5 S
PRINTING
BEVERAGES
I 2 3 4 5 6
CHEMICALS
TEXTILES
LUMBER PERCENT
3
Z 3 4 5 6
RUBBER
illtjlilCliU
I 2 3 4 5 6
2 3 4 5 6
BUILDING
PRODUCTS
2 3 4 5 6
IRON & STEEL
2 3 4 5 6
NONFERROUS
METALS
ti
MACHINERY x
■ 3
I 2 3 4 5 6
TRANSPORTATION
% EQUIPMENT
3
ut unit jiiu ]ini[
2 3 4 5 6
MISCELLANEOUS
MANUFACTURING
2 3 4 5 6
TOTAL
MANUFACTURING
2 3 4 5 6
CHAIN STORES
DEPARTMENT
STORES %
3
JlUt lUii: Jiliit muL do
2 3 4 5 6
2 3 4 5 6
% .WHOLESALE
3
I 2 3 4 5 6
MISCELLANEOUS
MERCHANDISING
2 3 4 5 6
TOTAL TRADE %
2 3 4 5 6
lit Tiz mm
123456 123456 123456
Source: Department of Commerce Survey of Business Taxation.
ranging from cases where labor costs were low (i. e., less than 10 per-
cent of sales) to cases where labor costs were relatively high (i. e., more
than 50 percent of sales). The data are shown in chart XXXIII for
21 industries. The pay-roll tax ratio to gross margin varies quite
sharply with the degree of labor costs. In manufacturing the varia-
tion in 1937 ranged from 0.67 to 1.78 percent, while in trade the
100
CONCENTRATION OF ECONOMIC POWER
Chart XXXIII
FEDERAL-STATE PAY-EOLL TAX PAYMENTS AS PERCENT OF GROSS MARGIN, 697 LARGE
MANUFACTURING AND TRADE CORPORATIONS BY LABOR COST CLASSES, 1937
PER CENT FOOD
3
LABOR
COST CLASSES 1
(PAYROLLS AS PER CENT OF SALES) j
UNDER 10 1
10 TO 20
20 TO 30
30 TO 40
40 TO 50
6
OVER 50
TOBACCO
TEXTILES
flt .-t jUt ill Ett
2 3 4 5 6
PAPER
2 3 4 5 6
PRINTING
I 2 3 4 5 6
CHEMICALS
2 3 4 5 6
PETROLEUM
2 3 4 5 6
RUBBER
itzilft Jnt
2 3 4 5 6
2 3 4 5 6
BUILDING
PRODUCTS
2 3 4 5 6
IRON a STEEL
2 3 4 5 6
NONFERROUS
METALS
I 2 3 4 5 6
MACHINERY
Ht jlltt 3111: adz ]Ut
3456 123456 123456 123456 123456
I 2 3 4 5 6
TRANSPORTATION MISCELLANEOUS
I EQUIPMENT MANUFACTURING
TOTAL
MANUFACTURING
MISCELLANEOUS
MERCHANDISING
I 2 3 4 5 6
CHAIN STORES
ii 3 jdA mt
123456 123456 123456 1234
2 3 4 5 6
2 3 4 5 6
DEPARTMENT
STORES X
I 2 3 4 5 6
TOTAL
TRADE %
3
itdi Jit jdtt
2 3 4 5 6
2 3 4 5 6
2 3 4 5 6
Source: Department of Commerce Survey of Business Taxation.
variation was from 0.91 to 1.94 percent. In other words, the pay-roll
tax falls heavier on those firms where pay rolls are a very major cost
item, while it is lighter on firms that are highly mechanized (where
pay rolls are low with respect to capital costs). When these figures
are further broken down by size classes, the variations of the pay-roll
tax with the degree of labor intensity tend to be greater in the smaller
size groups than in the larger size groups.
Ill
Ilk < III
(
■H i lill
T a ^ fr £ > £ S 1
ilUIII
L( il
MK^ucat' u: >»
T a e *> •
1
iillllL
B » \ a ,: » • s
Chart XXXIV
FEDERAL-STATE PAY-ROLL TAX PAYMENTS AS PERCENT OF GROSS MARGIN, 572 LARGE MANUFACTURING AND TRADE CORPORATIONS BY PROFIT RATE CLASSES, 1937
7 = 25-30
8 = 30 - 35
9 . 35-40
10 = OVER 40
PER CENT FOOD
JilliilliL n.l^
3 4 5
PRINTING
■■■■■■ ■ ■
I 23456789 10
ll= =l=z llitz
3456789 10
LEATHER
BUILDING PRODUCTS %
llllll JUIOiLl ■ ■
23456789 10 123456789 10
IRON 6 STEEL NONFERROUS METALS
3 4 5 6 7 8 9
MACHINERY
III I— 1
23456789 10 123456789 10
JIUIIU
I 2 3 4 5 6 7 8!
lUldx llllll I JllUlUk JmiUllL jIlltlLC luiiUUi
23456789 10
•/. CHAIN STORES
DEPARTMENT STORES
9 10 123456789 10
TOTAL TRADE ».
liiiiii iiii — ilii — I i~iii~ Jiiimzt
Source: Department of Commerce Survey of Business TaiBtion.
282898— 41— No. » (Face p. 101)
OONOENTRATION OF ECONOMIC POWER
101
The pay-roll tax has nominally no relationship to the profitability
of corporations. Its liability results wherever persons are employed
in a nonexempt industry and varies with the magnitude of the pay
roll. Profitable and unprofitable corporations must alike pay this
tax, since it is based on a cost factor and not on the margin of profits.
Yet it by no means follows that the pay-roll tax impinges equally upon
corporations of varying profitability and it may f ah more heavily on the
less profitable group. In order to examine this aspect of the ratio of
the pay-roll tax to gross margins the corporations were classified into
the various profit groups as shown in chart XXXIV for 21 industries.
It is apparent from this diagram that the pay-roll tax ratio is larger
in the case of the less profitable corporations than in the case of the
more profitable group. This observation applies to most manufac-
turing industries and, somewhat less clearly, to the trade groups. It
does not apply to tobacco, beverages (little or no variation) and
printing. To this extent the pay-roll may be said to be a "regressive"
tax, falling more heavily upon the less profitable corporations.
These data on manufacturing and trade corporations unfortunately
do not show the full range of the variation in the magnitude of the
pay-roll taxes since other industries are perforce lacking from the
comparison. It can readily be assumed that the pay-roll tax is proba-
bly ver}^ low in public utilities (other than transport) where labor costs
are relatively low while capital costs are high. In construction, on
the other hand, the pay-roll taxes are probably high since the labor-
capital equation is probably tilted upward for the former. But
enough data are available to prove that the pay-roll tax adds to the
costs of production in substantially different magnitudes in the various
industries, according to the dominance of labor or mechanization.
The present level of the differential is after all relatively slight, but
with the gradual step-by-step increase of pay-roll tax rates in future
years the differential may become of great significance to the rela-
tionship between labor and mechanization.
This conclusion must, of course, be understood in terms of the special
purposes for which payroll taxes are levied — old age and employment
security of industrial workers. The differential arises out of the selec-
tion of pay rolls as the tax base, but labor, as is well known, is only
one among several cost factors. The security problems that are to
be solved, or at least ameliorated, by the use to which the pay-roll
taxes are put are by no means peculiar to industries employing labor
in preference to machines. As a matter of fact there have been those
who have attributed a goodly share of the rising economic problems
subsumed under the general term of security to the accelerated growth
of mechanization.
FEDERAL EXCISE TAXES *
The various excise taxes imposed by the Federal Government —
import duties, selective manufacturers' and dealers' excises, tobacco,
and alcohol taxes, stamp taxes, the short-lived processing taxes, etc. — ■
are generally regarded by the taxed producer as business costs which
he expects to shift, usually forward to the consumer, for whom. they
* This and the following section have been primarily contributed by Miss Helen Tarasov of the Division
of Industrial Economics, Department of Commerce.
262698— 41— No. 9 8
202 CONCENTRATION OF ECONOMIC POWER
then become "indirect taxes." But as this report is concerned with
business taxes, it is from the standpoint of the first payer that the
Federal excises will be analyzed. This section on Federal excises
differs in several major respects from the treatment of other taxes
in this report. The relationship of such taxes to business costs will
be measured in terms of sales exclusively. No size analysis is pre-
sented, but industry differences are stressed.
The oldest Federal excise was the whisky tax, imposed in 1790.
Tobacco taxes were first levied as a war measure in 1862. During
and immediately following the Civil War the Federal Government
imposed a variety of specific ad valorem taxes on commodities, most
of which were shortly repealed. The World War again witnessed the
enactment of a series of manufacturers' excises on a strange conglom-
eration of ''nonessentials" ranging from chewing gum to life insurance
and from medicinal preparations to yachts. The coming of peace
and the return to ''normalcy" led to the automatic expiration or
repeal of many of these taxes. But others lingered on, for reasons
not overly clear. The record of Federal excises during the period
from 1918 to the present, as reported in tax-collection figures, is wildly
erratic, and this may be an understatement.
Electric fans and lighting fixtures were taxed from 1920 through
1924, but electrical energy remained tax free until 1933. Firearms
were free in 1918 and 1919, and again between 1927 and 1932, v/hile
knives (including hunting, bowie, dirks, and daggers) were taxed only
in 1920-24, as well as the hunting garments presumably worn with
them. Sculptures, etc., were a taxable luxury until 1927. From
1925, the excise on manufacturing opium for smoking was lifted.
The adulteration of foods has been sporadically permitted, fiscally
speaking, by little loopholes, such as the nontaxing of adulterated
butter in 1929 and in 1931, of its manufacturers in 1931-32, of its
wholesale dealers in 1922, 1932, 1926-30, and of retail dealers for even
longer. Various lapsed entertainment excises were never resuscitated,
being succeeded by levies on checks and safety-deposit boxes.
In table IX is presented the actual Federal excise tax experience
of 5,328 manufacturers in 1938, as reported by questionnaire to
Dun & Bradstreet in its recent survey of business taxation. The
magnitude of the tax is measured in percent of sales and in percent of
total tax payments. The highest tax-sales ratios are reported for the
liquor, tobacco, and oil industries. Federal excise taxes also plaj^ an
important role in adding to business costs in canning, drugs, autos,
transportation equipment, and electrical apparatus, in the order
named. In the case of most other manufacturing industries Federal
excise taxes are either relatively unimportant or nonextant. It is,
of course, quite improper to draw any conclusions from these figures
as to the "tax burden" on the industry, for most Federal excises do not
ordinarily rest on the legal taxpayer but are passed along via a complex
and subtle process of shifting to the ultimate consumers of the manu-
factured product. The only comment that can be accurately made in
this frame of reference is the marked contrast in the degree to which
Federal excises contribute to business costs in different industries.
OONOENTRATION OF ECONOMIC POWER ][Q3
Table IX. — Federal taxes on manufacturing industries, 1938
Federal excises as per-
cent of—
Sales
Total taxes
paid
Canning . _-. - .-. -. .. . . . .. . .
3.71
3.02
.59
1.78
.82
.43
49.10
32.67
7.91
31.26
3.01
61 3
Drugs
Electrical apparatus
65.9
11 2
Autos .- - .- - . . ._ _ - .
35 4
Transport equipment
Total manufacturing excluding. _. ... . .. . ..
14.8
11 9
Distilleries and wineries . . . ......_.
98 0
Breweries
Petroleum refining. ..... . .. . . . .. _
79.3
34 5
Tobacco products . .. .. ... .
93 9
All manufacturing... . . ... .. . .
43 6
Source: Dun's Review, July
p. 14.
Federal excise tax payments of most manufacturing and trade
corporations, as reported by 362 identical corporations to the Depart-
•ment of Commerce in its questionnaire survey of business taxation for
the Temporary National Economic Committee, appear to have been
markedly declining in recent years. This fact is readily apparent from
an examination of table X which gives the ratio of Federal excise tax
payments to sales for tlie years 1934-37 by 16 manufacturing industries
;and 4 trade groups. Taking manufacturing as a whole the Federal
excise tax ratio declined from 4.24 percent in 1934 to 3.57 percent in
1935 to 3.16 percent in 1936 to 2.98 percent in 1937, or a decline of
"30 percent. This trend is found for most industries (except transpor-
tation equipment). This table also shows the marked industry differ-
ences in Federal excise taxes, as noted in the preceding paragraph.
Table X. — Federal excise and State sales taxes as percent of sales of 362 manufac-
turing and trade corporations, 1934-37
Industry
Num-
ber in
sample
Year
Total sales
(millions of
dollars)
Federal
excise
(percent
of sales)
State
sales taxes
(percent
of sales)
Food
30
1934
1,040
1.60
0.07
1935
1,175
.46
.06
1936
1,228
.01
.17
1937
1,255
.40
.16
leverages ...
12
1934
1935
20
25
30.94
33.63
4.25
3.75
1936
33
31.62
3.76
1937
36
28.59
3.35
Tobacco...
10
1934
353
44.27
.29
1935
360
43.61
.31
1936
392
42.60
.29
1937
429
42.81
.31
Textiles
22
1934
200
1.76
.00
1935
252
.69
.01
1936
281
.00
.01
1937
281
.00
.01
Lumber ..
1
1934
1935
4
5
.30
.35
1936
7
.40
10
1937
1934
i
.36
Paper
.16
.01
1935
79
.03
.01
1936
93
.00
.15
1937
117
.00
.01
IQ^ CONCENTRATION OF ECONOMIC POWER
Table X. — Federal excise and State sales taxes as percent of sales of 362 manufacr-
turing and trade corporations, 1934-37 — Continued
Industry
Num-
ber in
sample
Year
Total sales
(millions of
dollars)
Federal | State
excise sales taxes
(percent (percent
of sales) of sales)
Printing
Chemicals
Petroleum
Rubber
Leather-.
Building products
Iron, steel
Nonferrous metals
Machinery and tools
Transportation equipment,..
Miscellaneous manufacturing
Total manufacturing
Chain stores.-.
Department stores
Wholesale
Miscellaneous trade
Total trade
Total
19
18
62
47
22
312
26
362
1934
193.5
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
1934
1935
1936
1937
91
100
107
283
313
357
398
740
753
836
925
108
132
164
189
5
22
' 23
26
28
2,319
2,568
2,953
3,213
8,139
9,456
11,234
12, 885
3.74
3.25
3.13
2.86
1.64
1.51
1.14
.98
4.79
4.98
4.94
4.70
4.96
4.79
4.16
3.52
6
8
6
142
.02
163
.01
221
.02
266
.02
554
.01
716
.01
1,013
.01
1, 269
.01
387
.01
436
.01
341
.01
741
.00
691
.22
920
.21
1, 175
.19
1, 521
.17
705
1.58
965
1.71
1.261
1.81
1, 503
1.74
435
.67
498
.68
572
.58
621
.57
5,821
4.24
6,888
3.57
8,282
3.16
9,672
2.98
1,496
.05
1,598
.01
1,764
.00
1,864
.00
727
.01
867
.03
1,069
.03
1,184
.02
74
80
94
136
.16
.28
.03
.01
.34
.21
.13
.10
30.45
26.07
23.32
22.42
Source: Department of Commerce Survey of Business Taxation.
OONCENTRATION OF EOONOMIC POWER 105
STATE SALES AND GROSS INCOME TAXES
The trend toward taxation of the consumer is particularly evident
in the recent history of State sales and use taxes. Confronted with
seriously curtailed revenues from property and income taxes, leo:is-
lators turned to sales taxes as a means of financing expenditures for
social welfare, particularly relief deficiencies and pensions. The high
point in sales taxes was in 1937, with 27 States, plus the District of
Columbia and New York City, levying it (against 6 States in July
1932). Although the number of States fell to 23 States plus New
York City in 1939, the proportion of State revenue derived from
sales taxes has risen, as a result of better enforcement, higher tax
rates, and the wide enactment of use taxes. Another manifestation
of the trend toward State taxation of the consumer is (a) adoption
by 5 States of new tobacco taxes in 1939, m.ake a total of 26 States
with tobacco taxes; (6) increase in or extension of motor-vehicle levies
in 22 States; and (c) raising or continuance of gasoline tax rates in 7
States.
There are distinct regional preferences apparent for certain taxes,
and their distribution will, of course, affect business costs to a con-
siderable measure, with the actual effect on sales dependent on in-
dustrial location or proximity to nontaxed areas. Thus, none of the
Western States except Washington, Utah, and Arizona tax tobacco,
while this tax is particularly popular in the South and more recently
in the East. The sales tax is found in no Atlantic Seaboard State,
but originated in and is most represented by the Middle West, where
in certain sections it has expanded into a gross-receipts tax on busi-
ness. A special study by the Department of Commerce indicates
that regional differences in State sales taxes affected the transfer of
business only under particularly favorable conditions for such transfer,
i. e., conveniently located retail establishments across a State border
within easy reach. Since the tax is usually in fact as well as by law
transferred to the consumer, the transfer of business is obviously
limited.^
Table XI gives the sales- tax experience for 6,000 manufacturing,
2,000 wholesalers, and 16,000 retailers as reported to Dun & Brad-
street for 1938, measuring sales as percents of {a) sales and (6) total
taxes. The record for any specific industry is apparent upon inspec-
tion. It is quite evident that, although m.anufacturing in general
pays a higher percentage of aggregate sales in the form of State sales
taxes, such taxes nevertheless are of less importance in adding to
business costs, as other taxes are substantially larger. Only 12.3
percent of its tax costs are due to these taxes, while 32.7 percent of
all retailers' taxes are caused by them. Thus, although the percentage
of aggregate sales taken by these taxes is only 0.70 percent, they are
more noticeable in view of the lesser role of other taxes, since all taxes
on retailers are only 2.14 percent. Wholesalers, who pay only half
the total taxes on aggregate sales that manufacturers do, must reckon
with sales and excises as a prime business cost, as they are 61 percent
of the total taxes paid.
5 H. P. Warhurst, "The Effect of General States Tax Levies on Retail Sales Increase, 1933-35" (Bureau
of Foreign and Domestic Commerce).
IQQ CONCENTRATION OF ECONOMIC POWER
Table XI. — State sales taxes as percent of sales, 1936
PART I. MANUFACTURING
Percent
Meat packing 0. 01
Hosiery . 01
Nonferrous metal products .01
Transport and agricultural ma-
chinery .02
Textile weaving .02
Shoes . 02
Newspapers and periodicals
(large) . 02
Hardware .04
Canning and food manufacturing. . 04
Flour and feed milling .06
Dairies, cream.eries, m.ilk dealers. . 07
Drugs, perfumes, cosmetics . 07
Clothing . 07
Paper and paper products .08
Clay and glass products .08
"Other" manufacturing .08
Electrical apparatus and appli-
ances .08
Iron and steel . 08
Automobiles .08
Percent
Machine shop products 0. 09
Foundries . 11
Engines and machinery ,11
Newspapers (small) . 11
Baking and confectionery .12
"All other" forest products . 16
Stone and stone products . 19
Printing and bindery (book
jobs) . 21
Industrial chemicals . 21
Paints, varnish, and lacquers : .23
Furniture . 25
Distilleries and wineries .29
Lumber and planing mills . 35
Beverages — nonalcoholic . 73
Ice manufacturing . 87
Breweries 6. 48
Petroleum refining 11. 47
Total, except distilleries, petro-
leum, tobacco .09
All manufacturing .85
PART II. WHOLESALE TRADE
Dairy and poultry products
Produce and fruit
Meat and fish
Dry goods and apparel
"Other" wholesaling
Machinery and equipm.ent
Groceries
Lum.ber, building material, and
fuel
Hardware
Electrical goods and appliances.
Automotive equipment
Percent
0.00
.03
.04
. 12
. 12
. 15
. 17
. 19
.20
.20
.22
Percent
Paper and paper products 0. 23
Paints and varnishes . 25
Plumbing and heating supplies.. . 27
Drugs and industrial chemicals.. . 31
Other miscellaneous supplies .36
Confectionery and tobacco pro-
ducts .90
Alcoholic beverages 4. 65
Petroleum products 12. 38
All wholesale (except alcohol
and petroleum) . 19
All wholesale 2. 16
PART III. RETAIL TRADE
Percent
Drugs and cosmetics — chains.. 0. 15
Mail-order houses .20
Farm.ers supply stores . 26
Bakeries — independent .31
Florists and nurseries .32
Shoes — chains . 34
Bakeries — chains . 40
Filling stations .43
Groceries — independent . 45
Hardware and farm implements. . 49
Meats and fish .50
Other food and beverage stores. _ . 54
Auto accessories and parts — in-
dependent .59
Motor vehicle dealers .61
Variety stores — chains . 62
Department stores — chains . 63
Fam.ily clothing .70
Country general stores .72
Percent
Radio, electrical, gas household
appliances 0. 72
Jewelry .73
Shoes — independent .74
Paint, wallpaper, glass . 74
Groceries and meats — independ-
ent .74
Lumber and building materials.. . 75
Auto accessories and parts —
chains .75
Women's clothing, accessories —
independent 0. 77
Coal and other fuel .79
Variety stores — independent . 86
General merchandise and dry
goods .86
Department stores — independ-
ent .89
Furniture .89
OONOENTRATION OF EOONOMIC POWER 107
Table XI. — State sales taxes as percent of sales, 1936 — Contmued
PART III. RETAIL TRADE— Continued
Page Page
Farm implements 0. 93
Drugs and cosmetics — independ-
ent .94
Men's, boys' clothing, and fur-
nishings . 96
Groceries and m.eats — small
chains .98
''All other" retail stores 1. 00
Stationery, books, newsdealers. _ 1. 05
Source: Dun's Review, July 1938, pp. 14-15.
House furnishings and floor cov-
erings 1. 11
Restaurant, etc. — independent- _ 1. 14
Restaurant, etc. — chains 1. 55
Hardware .70
All retailing .70
Independent retailers .70'
Chain organizations .74
The role of State sales taxes throughout retailing is far more sig-
nificant than for wholesaling, where they account for only 13 percent
of total taxes (if alcoholic beverages and petroleum products are ex-
cluded), while they form about one-third of total retailers' taxes, and
fall below 25 percent for just over one-fourth of the types of retailing-
involved.
The effect on industrial activity depends on whether the variable-
cost tax is passed on to the consumer and in what form (lower quality^
lesser quantity, higher price) or absorbed by the manufacturer or
trader, or passed back as lower prices for labor or raw materials, a&
may be the case if a product is subject to elastic demand and if its
producer has a strong position vis-a-vis his employees or his supplier.
A shift in sales volume may affect business costs adversely; particu-
larly if fixed costs are large, the decrease in variable taxes resulting-
from a decline in sales may never compensate for the lower turn-over.
Contrariwise, the higher variable taxes on increasing sales may not
be a deterrent, since the margin increases with volume. Nor will
industry with high variable costs be discouraged from expanding by
commodity or sales taxes, but it will have to regard them as a basic
cost factor when it sets prices. For the fixed-cost industry, the
variable taxes are a secondary factor in price policy, since it must
first of all seek volume, and if demand is elastic, it may be preferable
to absorb at least some of the commodity and sales taxes for the sake
of expanding the market.
How each industry treats these variable taxes depends on its own
peculiar cost and competitive conditions. Nor is it known what th&
consumption of a product or group of products might have been in
the absence of a levy on it — although figures do show that the con-
sumption of the most heavily taxed commodities, viz, gasoline^
liquor, cigarettes, has risen steadily despite the onerous tax levies
imposed on them and almost certainly passed on to the consumer.
Concretely, it appears that the sharp and sudden increase of the
tobacco tax in Wisconsin last year led to only a temporary decrease
in State cigarette sales, and that tax receipts are now fulfilling-
expectations.
Other factors, apparently, play a prime role in determining sales
volumiC of semiluxury products at least, with tax rates only reinforc-
ing or temporarily counteracting a trend established by general in-
come level, custom, fashion, weather, etc. Fluctuations of business
costs therefore depend only indirectly on variable taxes, and the
relationship is further complicated by the effect of whatever policy
is followed on sales volume and its reaction on business costs. The-
effect on consumption must be regarded as the prime consideration.
CHAPTER X
FIXED-COST TAXES: STATE PROPERTY TAXES AND SPECIAL
TAXES ON CORPORATIONS
The ''fixed-costs" taxes appear to be ''fixed" in more senses than
one. They are termed as "fixed-costs" since their magnitude is
usually unrelated to the volume of industrial activity but is instead
based upon the value of property — real, personal, or intangibles (as
a "franchise"). In this respect they are assimilable to interest and
rent costs. But these taxes may be regarded as "fixed" in another
sense — their magnitude has changed very slightly over the recent
years. Thus the dollar amount of "fixed-cost" taxes of an identical
group of 362 large manufacturing and trade corporations increased
only 17 percent between 1934 and 1937, while sales increased 58
percent and net profits increased 112 percent. The ratio of such
taxes to sales actually declined from 1.19 percent in 1934 to 1.04
percent in 1935 to 0.90 percent in 1936 and to 0.83 percent in 1937.
This decline appeared in all size classes.^ Of course there have been
some variations in the magnitude of such tax payments — depending
upon the rate structure, the methods of assessment, and property
values, but these changes have been relatively minor in comparison
to changes in the volume of income, sales, and pay-roll tax payments.
PROPERTY TAXES
The oldest and still very important tax collected from business
enterprise is the State and local taxes on real and personal property.
It is a tax which is periodically and universally condemned. Its
relative position in the tax hierarchy has been steadily declining for
several decades. It was never employed by the Federal Government,
in part for constitutional reasons. It has been gradually abandoned
or sharply curtailed for purposes of State revenue.^ Yet the property
tax is still the main tax source of most local governments (as shown in
chart I, supra), whether they be counties, cities, school districts, park
districts, sanitary districts, health districts, mosquito-abatement
districts, or some other of the fabulously numerous types of special-
purpose, ad hoc authorities.
The magnitude of the property tax payments of a bsuiness enter-
prise is a function of three factors — (a) the legal rate of the tax and
the relationship between (6) the assessed value, and (c) the actual
value of the property taxed. The property tax rates vary from State
to State, from county to county, from city to cit^^, and from town-
ship to township, and so through that labyrinthine maze of 175,000
1 See Appendix D.
2 Nevada is the single State obtaining a major share of its revenue from property taxes, presumably m
substantia] part from mining properties. See U, S. Bureau of the Census, Financial Statistics of States,.
1937, table 1.
109
IIQ CONCENTRATION OF ECONOMIC POWER
units of government in the United States. The tremendous varia-
tion of the property tax rates occurs not only between different units
of government but may also be found within the same area (e. g.,
in the Chicago metropolitan area). These variations are so complex
and so sliifting that no general statement can at present be made
with an}^ degree of precision.^
Empirical studies of the administration of the property tax have
generally shown that the assessment of property tends to be regres-
sive—that is, ''a definite and pronounced tendenc^^ for the average
assessment ratio to decline as the value of the property * * *
increased." "^ The actual tax experience of 5,000 manufacturers,
1,900 wholesalers, and 16,000 retailers filing special tax data with
Dun & Bradstreet for 1938 confirm this generalization. The rela-
tive magnitude of the property tax (measured in percent of sales)
tends to vary inversely with business size (bp^sed on 4 sales classes) —
that is, the tax ratios are larger on the smaller enterprises and smaller
on the larger enterprises. See chart XXXV.
The property tax is ''regressive" in another sense — it is relatively
larger on the less profitable corporations and smaller on the more
profitable group. This fact is clearly apparent from an analysis of
the tax experience of 572 manufacturing corporations for 1937 which
have been grouped into 10 profit classes, based on the ratio of profits
to invested capital. In substantially each case the property tax is
relatively higher on the unprofitable and low profitable group and
relatively lower on the highly profitable group. See chart XXXVI.
BUSINESS PRIVILEGE AND LICENSE TAXES
Another type of the fixed-cost taxes is the group of special business
taxes which are imposed at either a flat rate or are based on some
capital magnitude. Nominally the Federal Government imposes a cap-
ital stock tax at the rate of $1 per $1,000 declared capitalization, but
as has already been shown in chapter V of this report, the Federal cap-
ital stock tax is probably more like an income tax than any other type
of tax. It is of coulee like the fixed-cost taxes in that it must be paid
regardless of the volume of business activity or the magnitude of
corporation profits, provided a positive capital declaration had been
filed with the Bureau of Internal Kevenue. If no profits had been
anticipated the corporation could have declared a capitalization of
zero or the equivalent, and no capital stock tax need have been paid.
The Federal capital stock tax is essentially like an income tax in that
its magnitude is more or less based on capitalized earning power, at
least as anticipated.
State and local taxes on corporations may be classified mto three
principal types, (a) corporation organization and entrance taxes,
(6) annual corporate taxes based on capital stock or some variant
thereof, and (c) annual corporate taxes based on or measured by net
income.
The initial tax costs of organizing a corporation are usually so small
in actual dollar outlays that they cannot be accurately said, to consti-
tute any substantial deterrent to the establishment of new enterprises
3 Special constitutional limitations may of course put upper limits to the range of the variations.
4 Joseph D. Silvcrherz, The Assessment of Real Property in the United States (Special Report of the
l^ew York State Tax Commission, No. 10), p. 213.
(J)
q: CO
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^ CC .
UJ CO
Q_ UJ
O fr
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< ~
o
o
<'5 8 8°.g-
J8 S~i8
ii
&
Chart XXXV — Continued
STATE AND LOCAL PROPERTY TAXES AS PER CENT OF SALES
INDUSTRIES, CLASSIFIED BY SALES
1938
PART E- 1,912 WHOLESALE CONCERNS
SALES CLASSES
PER C£NT FOOD
-
III!
ALCOHOLIC
^NT BEVERAGES
-
MM^M.
PER CENT WHOLESALE
I
Ui
PER CENT PETROLEUM
mllA
source: To. Su..«, -orl. sKaeli of Iht B
Department of Commerce.
d Stotiflict Divitionof Own and Bra
262098— 41— No. 9 (Face p. 110) No. 2.
XIjlil.^
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OONOENTRATION OF ECONOMIC POWER m
in the corporate form.^ Yet the small pecuniary or fiscal importance
of such taxes should not permit a disregard of the marked size dis-
criminations characteristic of the relevant statutory provisions of
most States. The corporate organization entrance tax is t3^pically
based on some element of the financial structure of the corporation
(e. g., paid-in capital stock). In more than half the States^ the tax
is regressive on the face of the statute; that is, the tax rate is relatively
lower on corporations with large capital. In one State (Georgia) the
tax is a flat amount ($15) while in another State (Arizona) the magni-
tude of the tax depends upon the number of folios filed. In 19 States ^
the tax is nominally proportional; that is, the rate of the tax is the
same irrespective of the amount of capital involved in the base. Only
in South Carolina is the tax rate progressive in form; that is, the statu-
tory rate is relatively higher on corporations with large capital.^
A maximum tax (ranging from $100 in Alabama to $2,500 in Louis-
iana, Texas, and Wasliington) is set in at least 7 of the 25 States where
the tax is regressive, while substantially all the States set a minimum
tax. The one feature operates in favor of large corporations while the
latter provision is somewhat to the disadvantage of small corpora-
tions. The problem of effective administration is usually weightier
than the potential yield of revenue, with the result that the actual
amounts collected are usually insubstantial in dollar magnitude.^
In a special study of corporate organization and entrance taxes, the
National Industrial Conference Board concluded that such taxes
are —
heaviest on corporations witii a small capitalization and light on corporations
with large capital -'= * * hearing down upon the small corporation, which
cannot easily avoid the tax, and treating gently the large corporation, which
might otherwise be induced to arrange its method of incorporation so as to avoid
a considerable part of tlio tax.'o
The State corporate privilege taxes (annual) are usually based on
capital stock, variously defined as ''authorized," ''issued," "out-
standing," "subscribed," "paid-up," or a combination of the fore-
going. In a few States surplus and/or undivided profits are also
included in the tax base. Indebtedness is specifically included only
in tw^o States. ^^ In no State is the corporation tax progressive in its
statutory terms. Regressivity appears on the statutory face of the
franchise tax in at least 21 States, in 12 of wdiich a maximum tax
limit is specified. ^^ To this group of 21 States should be added the
5 Accurate figures on tax collections from this source are unfortunately lacking. The Treasury estimated
that in 1938 the States collected only $313,000,000 in the form of corporate privilege taxes. Of this figure
approximately $200,000,000 were corporate income taxes. The greater share of the remaining $100,000,000
was presumably derived from annual franchise taxes other than on income. ,
6 Arkansas, California, Colorado, Delaware, Florida, Idaho, Kansas, Maine, Indiana, Mississippi. Mon-
tana, Nebraska, Nevada, New Hampshire, North Dakota, Ohio, Oregon, Rhode Island, South Dakota,
Tennessee, Texa.s, Vermont, Virginia, Washington, and Wj^oming. ,,. , . ,^-
^ Alabama, Connecticut, Illinois, Indiana. Iowa, Kentucky. Louisiana. Massachusetts, Michigan, Minne-
sota, Missouri, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Pennsylvania, Utah, and
Wisconsin. , , m n i
8 Apparently no tax is imposed bv the State of West Virginia. All statements are based on Tax Systems
of the W^orld (7th ed., 1938). pp. 17r,-80. . , , ^- ^v, ^ 4^u
e "The organization charges are so small an item in the budget of an individual corporation that they are
of negligible importance." National Industrial Conference Board, State and Local Taxation of Business
Corporations (1931), p. 42.
11 E. g'.', in Louisiana and Texas. See a special research bulletin issued by the Federation of Tax Ad-
ministrators on Annual Corporation Franchise Taxes CJanuary 21, 1939). ,,,.,. * TVT X, 1 *
12 Delaware, Florida*, Georgia*, Idaho*, Illinois*, Kansas*, Maine, Maryland, Michigan*, Nebraska ,
New Hampshire*, New Jersey, Oklahoma*, Oregon*, Tennessee*, Texas, Vermont*. Washington*. West
Virginia, and Wyoming. The asterisk identifies the States imposing a maximum tax. In Maryland,
Oregon, and West Virginia foreign corporations are taxed at somewhat higher rates than domestic cor-
Dorations.
112
CONCENTRATION OF ECONOMIC POWER
three States imposing a flat rate franchise tax ^^ and perhaps the two
States purporting to collect a franchise tax at general propert}^ rates/^
making a total of 26 States having ''regressive" corporation taxes. -
The franchise tax is nominally proportional in 14 States, ^^ but a
minimum tax is usually required, irrespective of the size of capital in:
the tax base.
The ''actual signiflcance" of these size differences in State cor-
porate privilege taxes were found by the National Industrial Con-
ference Board to be "relatively slight," except possibly in the case of
"the small corporation doing chiefly a local business that has grounds
for complaint because of the exemption of its unincorporated com-
petitors." ^^
The State corporate privilege taxes are also "regressive" in the
sense that they are relatively heavier on the less profitable corpora-
tions and lighter on the more profitable corporations. This statement
is graphically shown in table XII wherein are plotted the actual tax
experience of 572 manufacturing and trade corporations, classified by
10 profit classes (based on the ratio of "net before interest" to in-
vested capital, including long-term debt).
Table XII. — State corporate taxes as percent of gross margin, by profit rate classes ^
and industries, 1937
Part I. FRANCHISE TAX AS PERCENT OF GROSS MARGIN
Profit rate classes-
Industries
Defi-
cit
Under
5
5 to
10
10 to
15
15 to
20
20 to
25
25 to
30^
30 to
35
35 to
40
Over
40
Food
0.0
0.1
0.1
.3
.0
.1
0.1
.3
.0
.2
.1
.2
2.2
1.1
0.3
'"."3"
.2
0.2
. 1
.1
.0
0.0
0.0
0.1
0 0
Tobacco
.1
Bevera?es_ _ ... .. .._ .
.2
.2
'"."i"
"'.2'
.0
. 1
Textiles
Lumber,.- ... . ._ . . .
Paper
.4
.1
.2
.2
.0
.3
.3
.1
.1
.2
.1
.1
. 1
.2
.1
.16
.5
.2
.1
.4
'".2"
.2
.0
.0
Printing. ... .
.0
.3
.0
.2
Chemicals
.1
.0
Petroleum ....
Rubber
.2
.8
.2
'".'2'
.1
1.2
.1
.1
.4
.5
.28
.0
.1
.5
.1
.09
"'."6"
.1
.2
.0
.0
.1
.1
.18
.2
.0
.3
.1
Leather. .. ... .
Building products . ..
.1
.0
.1
.2
.1
. 1
.16
.2
.1
.1
.5
.2
. 1
.0
2
!03
.2
.1
.1
"'.'2"
. 1
Iron and steel
Nonferrous metals . .
-.1
:\
.26
.1
.3
Machinery
.2
.3
.5
.23
.4
.1
.1
.0
.08
.0
.1
.0
Transportation equipment
Miscellaneous manufacturing
.0
Total manufacturing . .
.07
.05
Chain stores
Department stores.. .
Wholesale
.1
Miscellaneous merchandise
.0
.13
.1
.20
Total merchandise
.30
.40
.14
.12
•3 Arizona, Connecticut, and Nevada.
" Minnesota and Indiana (said not to be enforced in the latter State).
•5 Alabama, Arkansas*, Colorado*, Kentucky*, Louisiana*, Mississippi*, Missouri, New Mexico*, North
Carolina*, Ohio*, Pennsylvania, Rhode Island, South Carolina*, and Wisconsin*. The asterisk indicates
that a minimum tax is required.
16 State and Local Taxniion of Business Corporations (1931), p. 127. This report added that the "ad-
vantages of large-scale operation more tlian offset the special burden of corporate taxation." On an earlier
page (12.5) it reported that "on the wliole, the taxes levied on corporations in the leading industrial States
appear to be heavier than those levied in the primarily agricultural States, a fact which suggests that such
factors as access to raw materials and markets, the character of transportation facilities, and the extent of
the supply of labor are usuallv more important considerations in promoting industrial growth than the-
matter of relative tax burdens."
CONOENTRATION OF ECONOMIC PO\\ER
113
1 ABLE XII. — State corporate taxes as percent of gross margin, by profit rate classes
and industries, 1937 — Continued
Part II. STATE INCOME
TAXES AS
PERCENT OF GROSS MARGIN
Profit rate classes
Industries
Defi-
cit
Under
6
5 to
10
10 to
15
15 to
20
20 to
25
25 to
30
30 to
35
35 to
40
Over
40
Food
0.2
0.1
0.3
.3
0.4
1.2
0.6
.2
.5
0.1
1.5
\ \
•Tobacco
0.4
Beverages
.0
.3
.1
1.0
'Textiles
.1
.2
.5
.1
"".'5'
.3
0.9
Lumber. - ..
Paper ..--.-.... -.. .
.1
.0
.1
.4
.2
2
'.2
.1
.2
.3
.1
.9
.3
.1
.3
.1
.3
.2
.0
.3
Printing.
.6
.6
.5
.1
Chemicals -
.0
.5
Petroleum --.-._
.3
Rubber
.0
.1
. 1
.2
.1
.1
.2
.0
,1
.3
.0
.1
.2
.1
.3
.2
.1
.3
.3
.2
1.4
.2
Leather ._
Building products j
.2
.1
.8
.5
.2
.6
.4
.2
.4
.8
.2
.3
.1
.2
.4
.0
.6
.2
.4
.1
.6
.5
.7
1.3
Iron and steel _- ._
Nonferrous metals ._ - .
Machinery ■,
Transportation eq uipment !
Miscellaneous manufacturing
.'0
.10 :
.2
.0
.2
.1
.6
.2
.1
Chain stores __ -
.1
Department stores. . _
Wholesale -_
.5
Miscellaneous merchandise
.3
. 1
. 4
1
Note.— The profit rate is based on the percentile ratio of net before interest to invested capital (includ-
: ing long-term debt).
Source: Department of Commerce Sirrvey of Business Taxation.
Somewhat offsetting this picture of regressivety in the State taxa-
tion of corporations is the fact that (a) in at least 8 States the fran-
chise tax on corporate capital has been practically superseded by a
tax on corporate income ^^ and (6) in some 24 States ^^ corporations
are subject to an income tax as well as the annual franchise and
privilege taxes.
The National Industrial Conference Board has commented on the
shift from a capital-stock tax to an income tax as tending ''to accen-
tuate the tax burden on business corporations."
Capital-stock tax bears on the prosperous and unsuccessful corporations alike.
The income tax relieves the latter and places a heavier burden on the former,
unless a capital-stock tax is used as a minimum for the income tax * * *_
[The income tax] bears more heavily than a capital-stock tax on large corpora-
tions, while for small corporations the reverse is true.^^
State taxes on corporate income have been steadily growing in
importance in recent years, w^hether measured in terms of the number
of States imposing such taxes or in terms of the dollar magnitude of
taxes collected from specific corporations. Between 1930 and 1940
more than 17 States 20 adopted taxes applicable to corporate income.
17 California, Iowa. Massachusetts. Montana, New York, North Dakota, South Dakota, and Utah.
In Massachusetts there is siill said to be a "corporate excess" tax but it is substantially merged with the
income tax. Under the so-called franchise tax of New York, which is fundamentally based on net income,
a minimum fax of $25 is requi-ed— in ofTect a privilege tax on capital for unprofitable corporatir ns. The
North Dakota and South Dakota taxes contain— progressive rate structures.
18 Alabama, Arizona,* Arkansas, Colorado, Connecticut. Georgia, Idaho,* Kansas. Kentucky, Louis-
iana, Maryland, Minnesota, Mississippi,* Missouri, New Mexico, North Carolina, Oregon, Oklahoma,
Pennsylvania, South Carolina, Tennessee, Vermont, Virginia, and W'sconsin.* The asterisk indicates
that the rate 'Structure is progressively graduated.
19 State and Local Taxation of Business Corporations (1931), p. 87.
20 1931— Idaho, Ohio, Oklahoma, Utah, and Vermont; 1933.— Alabama, Arizona, Kansas, Minnesota, and
New Mexico; 1934— Iowa and Louisiana; 1935— Pennsylvania and South Dakota; 1936— Kentucky; 1937—
Colorado and Maryland.
J^]^4 CONCENTRATION OF ECONOMIC POWER
Taking an identical group of 362 large corporations for a recent
4-year period (1934-37), State taxes on corporate incomes increased
217 percent, a rate of growth greater than that for any other type of
tax, while State franchise and privilege taxes increased only 125 per-
cent, or only half as rapidly as the former. Measured in terms of
sales, State taxes on corporate income steadily increased from 0.08
percent in 1934 to 0.12 percent in 1935 to 0.16 percent in 1936 and to
0.17 percent in 1937, while the franchise tax, measured in similar
terms, increased oidy from 0.07 percent in 1934 to 0.10 percent in
1935 and 1936 to O.l'l percent in 1937.^^
The fixed-cost taxes — the property tax and State corporation taxes
(except those on income) — are markedly regressive in at least two
senses — they are relatively heavier on small business and lighter on
big business and they are likewise relatively heavier on the less
profitable enterprises and lighter on the more profitable enterprises.
" See appendix D.
CHAPTER XI
CONCLUSIONS
The tax system is at once a source of public revenue and a technique
of governance. It is seldom exclusively one or the other. This is a
fact which has been clearly recognized by the lawmakers ever since
the inauguration of the Federal constitutional system. The tariff is
one of the outstanding examples of the use of taxation to effectuate
economic policies, i. e., the development of an industrial economy.
The enactment of the Federal corporation excise tax in 1909 was de-
clared by President Taft to be ^'a long step toward that supervisory
control of corporations which may prevent further abuse of power."
Other examples are readily available in American tax history.
In its fiscal aspects the tax system is designed to raise adequate
revenues for the great public heeds without harmful consequences to
the economy as a whole or to specific sectors of it. An equally im-
portant desideratum is that the tax system, as it works out, should
synchronously mesh with the broad social and economic policies that
have been democratically accepted by the Nation. The tax system
should not work at cross purposes with the objectives of the commun-
ity and should, moreover, affirmatively contribute to achieving what-
ever objectives the community has set before it, whether it be on
Federal, State, or local levels.
The problems of taxation are therefore not exclusively problems of
revenue — notwithstanding the traditional maxim that ''taxation for
revenue only" is best — but are also problems of government and its
relationship to economic enterprise.
Any student of government must be impressed with the powerful
tool that the modern state possesses in its tax system. The taxing
power can be easily demonstrated to have many advantages over
"ordering and forbidding devices" that are conventionally employed
by the police state. It does not ordinarily imply a vast bureaucracy;
it leaves the specific decisions in the hands of private entrepreneurs;
it is largely automatic and immediately effective. Its sanctions strike
at the very sinews of economic power — the payment of money. The
taxing power, however, is of course neither the exclusive technique
available to the modern state, nor one suitable for all ends of policy,
but it is one that must be skillfully blended with all the other powers
and instrumentalities of government in effectuating common objectives.
It is hazardous to specify in detail which social and economic ob-
jectives the Federal Government should at the present time try to
achieve through the exercise of its taxing powers. The prejudices of
personalities, occupations, and sections are so easily nationalized.
Yet it is probably possible to indicate in a broad way a few specific
objectives that have been sufficiently accepted by the American
democracy that any tax system which runs counter to such objectives,
is subject to serious criticism.
115
j^-j^g CONCENTRATION OF ECONOMIC POWER
Paramount among these nonfiscal desiderata of a ''good" tax system
within a democratic framework are the following:
(a) The discouragement of idleness, whether of men, machines, or
money, and, conversely, the encouragement of full employment and
utilization of resources;
(6) The preservation of opportunities, e. g., by encouraging small
business ;
(c) The curbing of m.onopoly or at least the profitable fruits of
m.onopoly, possibly including the sim.phfication of corporate struc-
tures and, conversely, the check of holding companies and related
forms of intercorporate affihation; and
(d) The support of persons in need (in addition to affirm.ative action
via relief and social security) by relieving the tax burden on persons
in the lowest incom,e brackets.
These social and economic objectives are frequently in conflict with
fiscal needs, e. g., the sales tax. No sim.ple or universal formula
can be drawn up and applied. It is always necessary to strike a
series of balances between the one and the other.
FEDERAL CORPORATE INCOME TAXES IN GENERAL
Corporate profits have been continuously subject to Federal
taxation since 1909. The highest effective tax rates on corporate
incom.e (tax as percent of legal income) occurred during the war
period (1917 to 1920) when the rates ranged as high as 37.8 percent,
while the present effective tax rate (in 1937) on corporate incom.e is
17.3 percent.
The catastrophic decline of corporate profits during the great
depression caused a substantial drop in the yield of Federal corj^orate
incom.e taxes. The subsecj[uent improvement of business conditions
and the resurgence of corporate profits led naturally to a rise in the
yield of Federal corporate incom.e taxes. In the downward spiral of
the depression the yield of Federal taxes declined much m.ore pre-
cipitously than did corporate profits, priro.ariiy because of the allow-
ance for prior years' losses in establishing the tax base. During the
recovery period the yield of Federal taxes increased more rapidly than
did corporate profits, reflecting the rise in statutory rates. But the
discrepancy between the respective rates of increase of taxes and
profits was substantially less than that which existed between the
rates of decline.
In 1937 corporations, after paying IK billion dollars in taxes to the
Federal Governm.ent, distributed 8)2 billion dollars to noncorporate
investors (stockholders and bondholders) and had 4K bihion dollars
available for reinvestm.ent or industrial replacement (i. e., profits
after taxes and dividends plus depreciation and depletion).
Corporate profits were reduced relatively less by taxes and dividend
paym.ents and consequently corporate funds available for reinvest-
m.ent were relatively larger in the sm.aller size classes, despite the
substantial undistributed-profits taxes to which the smaller cor-
porations were subject in 1936-37.
The Federal corporate tax systems contribute nothing to the
resolution of the ''m.onopoly problem.," since ''monopoly profits" are
taxed in the same way and at the same rates as other corporate
profits.
OONCENTRATION OF ECONOMIC POWER H'J
Creditor or debt financing is at present encouraged by the Federal
tax system through the deductibihty (and consequent exemption) of
ah interest paym.ents. Since dividends distributed are not deducted
from corporate net incom.e for Federal tax purposes, and interest pay-
m.ents to bondholders are so deducted, equity financing is discriminated
over against creditor financing. Bondholder capital is don^inant in
public utihties, service, and financial corporations but plays a relatively
minor role in m.anufacturing.
Fluctuating enterprise — which is largely identified with small
corporations and such industries as mining, construction, and forest
products — is discriminated against by any tax system, based on the
economic fortunes of a single year. This discrimination was sub-
stantially avoided prior to 1931-32 and will largely be eliminated in
1940 when tax-paying corporations will again be permitted to carry
over operating losses (for a 2-year period).
The Federal tax system, encourages (a) agiicultural cooperatives
(purchasing and m.arketing) and (6) various form.s of m.utuaJ insurance
companies (other than life) by exem.pting the same from all corporate
incom.e taxation, (c) Life-insurance com.panies benefit from, a special
deduction of all investment income under 4 percent of legal reserves,
which is practically tantam.ount to com,plete tax exemption of life-
insurance companies, (d) Operators of oil and gas wells benefit from
very substantial depletion deductions based on extraordmary discovery
values, the provision for which was introduced by the War Revenue
Act, when the opening of new oil and gas fields was essential to the
prosecution of the war, and has been retained, in the revenue law in
substantially unaltered form., long after the passing of the original
need.
NORMAL CORPORATE INCOME TAX
Small corporations (usually defined by law as having net income
under $25,000) were substantially favored by the Federal revenue acts
from. 1909 to 1912, inclusive, and from. 1918 to 1931, inclusive, by a
statutory exem.ption of the initial $2,000 to $5,000 of net incom.e.
The repeal of this exemption at the very nadir of the depression (1932)
vaulted the effective tax rates on sm.all corporations by fourfold and
fivefold .
Sm.all corporations were subject to the same statutory rates as large
corporations from. 1932 to 1935, inclusive. The special credits for
investm.ent incom.e (i. e., dividends received from, domestic corpora-
tions and interest received on governm.ental obligations) have been of
little im.portance to the sm.all corporations since little of their income
is derived from investm.ents. Such special credits for investm.ent
incom.e have been of considerable unportance to the large corporations.
Sm.all corporations have been somewhat favored by the Federal
revenue acts of 1936 and subsequent years through the introduction
into the corporate incom.e-tax system of a slightly graduated rate
structure, based on the m.agnitude of net incom.e. Available data for
1936-37 indicate that the graduated rate structure does not favor
small corporations to the substantial extent noted in the case of the
statutory exem.ption cited in paragraph 9. The revenue acts of 1938
and 1939 narrowed the range of the rate graduation, which was
already very slight, so that the favoritism, shown sm.all corporations
262698— 41— No. 9 9
llg OONCENTRATION OF ECONOMIC POWER
ill 1938 and 1939 is probably less than that found for 1936 and 1937..
As a consequence of the second Revenue Act of 1940 the range in
rates has again been increased, but it still remains substantially lesa
than in the period prior to 1932.
Between 1917 and 1933, inclusive, the Federal revenue acts per-
mitted the filing of consolidated corporate income-tax returns in which
the losses of individual subsidiaries were deductible from the profits
of other m. embers of the corporate group. This device substantially
facilitated the continued existence and rapid growth of vast networks
of interaffiliated corporate systems and pyramids of intertwined hold-
ing com.panies. A slight tax penalty (at the rate of 0.75 and 1 percent)
was im.posed on consolidated returns in 1932 and 1933. Starting in
1934 only railroads and related common carriers have been perm.itted
to file consolidated corporate incom.e-tax returns.
Except for the period from. 1913 to 1917, inclusive, intercorporate
dividends in the hands of the recipient corporation have been sub-
stantially exempt from Federal taxation. Between March 1913 and
1917 all intercorporate dividends were subject to taxation in the-
hands of the recipient at the sam.e statutory rate as other corporate
income. Starting with 1936, the exemption of intercorporate divi-
dends has been limited to 85 percent of the sam.e, which is equivalent
(at the present statutory rate of 24 percent) to a tax on intercorporate
dividends at the rate of 3.6 percent. By such treatment of intercor-
porate dividends, the Federal tax laws obviously do httle (at present)
or have done nothing (prior to 1936) to hinder the widespread and
rapid growth of holding com.panies and related forms of intercorporate-
affiliation.
Save for the corporate excise tax period (1909 to February 1913,
inclusive) corporate investm.ents in the securities of Federal, State,
and local governments have been continuously exempt from Federal
tax.
CAPITAL-STOCK AND EXCESS-PROFITS TAXES
The Federal capital-stock tax is based on an evaluation of capital
in term.s of corporate earning power rather than in terms of th&
capital actually invested or tangible net worth. The present ''excess-
profits" tax is nothing m.ore than a penalty tax on those corporations
which guess badly in declaring their capital stock for tax purposes.
Despite its name, the to,x has nothing to do with ''monopoly" profits.
The com.pound capital-stock excess-profits taxes discriminate
m.arkedly against corporate enterprises with fluctuating profits, in-
cluding small corporations and corporations in particular industries
the profits of which cannot be accurately forecast. The excess-profits
tax is substantially nonexistent on m.ost large corporations.
UNDISTRIBUTED-PROFITS TAX
The undistributed-profits tax, as enacted by Congress, was designed
to (a) remove existing tax inequahtics arising out of the nondistribu-
tion of corporate profits and the consequent avoidance of individual
surtaxes and (b) reduce corporate savings and thus prevent circum-
vention of the capitol market with respect to industrial expansion.
The tax probably achieved these twin objectives to some extent, but,
in so doing, entailed several undesirable consequences (the principal
of which are cited in the following paragraph).
1
OONOENTRATION OF ECONOMIC POWER 219
The undistributed-profits tax of 1936 tended to fall on small- and
medium-sized corporations without adequate allowance for the length
of the accounting period, the pressing debt structure of individual
concerns, and the differential accessibility to the capital market.
By applying to all corporate income (including intercorporate
dividends) except interest received on governmental obhgations, the
undistributed profits did operate som.ewhat to hinder holding com-
panies and other form,s of intercoi-porate affiliation.
The most profitable corporations tended to report higher undis-
tributed-profits tax paj^m.ents and, to this extent, the surtax
tended to curb monopoly profits, except in the case of the largest
corporations distributing m.ost their profits since they had ready
access to the capital m.arket. The tax was hardly an attack on
existing ''monopolies," but, if retained, it probably would have con-
stituted a partial check to potential ''m.onopolies,'' the sheer growth,
of which from internal sources would have been made m.ore difficult.
Under the revisions of the midistributed-profits tax by the 1938
Revenue Act, sm.all enterprise (i. e., corporations with net incom.e
under $25,000) was com.pletely exempted, special deductions for debt
retirem.ent were broadened, the cany-over of prior year's losses was
introduced, and noncash distributions of corporate profits (i. e.,.
consent dividends, etc.) were permitted on a larger scale. These im,-
provements of the technical character of the tax were rendered in-
effective by the substantive emasculation of the rate provision, which
defeated the objectives of the tax. The repeal of the rem.aining-
stum.p of the undistributed-profits tax by the Revenue Act of 1939
essentially left the tax problem where it was before the enactm.ent of
the 1936 Revenue Act, except for the em.otional connotation of the
phrase ''undistributed -profits tax."
PAY-ROLL TAXES
The social-security taxes on pay rolls fall relatively lightly on
highly m.echanized enterprises and industries and relativel}^ heavily
on enterprises and industries employing labor to a substantial extent.
This differential arises out of the selection of pay rolls as the tax
basis, which is only one among several cost factors.
Sm.all enterprise is somewhat favored under the pay-roll tax
through the omission from, the tax base of the cost of all entrepre-
neurial labor.
As other cost taxes, the pay-roll tax is "regressive" in the sense that
it constitutes a relatively larger share of business costs in the case of
the less profitable enterprises than in the case of the moi*e profitable
group. The pay-roll tax is also 'regressive" in the sense that it m.ay^
in whole, or in part, be shifted to prices.
OTHER TAXES
The m.ajor share of Federal exise taxes are imposed on hquor and
tobacco industries. In other industries the course of such taxes has
been very erratic, with a present tendency to diminish both in volume
and in the variety of industries singled out for taxation. Such excises
are of course "regressive" in the m.ain part since they usually enter
into prices.
220 CONCENTRATION OF ECONOMIC POWER
General State sales taxes are presently imposed in 23 States, a
decline of 4 States from the peak of 27 reached in 1937. Such taxes
are probably most important to the retailer, since the producer and
intermediaries are not usually subject to the tax. Such taxes are
''regressive" in the sense that they must be paid by profitable and
unprofitable enterprises, and also in the sense that, if shifted to price,
they fall on the consumer, irrespective of his income.
The property tax and State corporate taxes are ''regressive" in the
senses that they are heavier (a) on smaller enterprise than large enter-
prise and (6) on less profitable corporations than on the highly profit-
able corporation.
These regressive patterns are only partially oftset by income taxes
in 32 States.
APPENDIX A.
WAR EXCESS-PROFITS TAXATION
The wartime excess-profits tax was designed to tax at steeply gradu-
ated rates the excess of net income over a presum.ed ' 'normal return"
on ''invested capital", while the war-profits tax aimed at recouping on
behalf of the Government exorbitant and costly charges for war
supplies via taxation rather than through shrewd bargaining which
m.ay be very time-consuming (at a period when tim.e was obviously
of the "essence").^ The concepts of "net income," "normal return,"
and "invested capital" obviously presented serious prob]em.s of inter-
pretation and enforcem.ent, although it may well be that these admin-
istrative difficulties have been exaggerated.^
In arriving at net income for excess profits tax purposes the tax-
payer was allowed a special deduction for the amortization of "build-
ings, machinery, equipment, or other facilities (including vessels), con-
structed, erected, installed, or acquired, on or after April 6, 1917, for
the production of articles contributing to the prosecution of the present
war * * *" insofar as the same had been "borne by the tax-
payer." ^ The amount of the cost to be amortized, it was provided by
the regulations, was the "excess of the unextinguished or unrecovered
cost of the property over its maximum value (either for sale or for use
as part of the plant or equipment of a going business) under stable
post-war conditions.^
The rate of "normal return" was flexibly defined under the 1917 act^
ranging from 7 to 9 percent, in accordance with "the average
amount of the annual net income of the trade or business during the
pre-war period" (1911-13).^ A more precise definition was given by
the 1918 act which, rejecting the concept of pre-war standards, pro-
vided that all net income in excess of 8 percent of "invested capital"
should be regarded as "excess profits" for tax purposes.
A more difficult problem, however, was the determination of "in-
vested capital." The most relevant experience at the time was dis-
tinctly discouraging — State regulation of public utilities frequently
1 Even prior to the entry of the United States into the World War on April 6, 1917, Congress had embarked
upon a special program of war taxation of corporate profits. The rate of the corporate income tax of 1916
was doubled, raised from 1 to 2 percent and, applicable to the following year (1917), was again doubled, raised
to 4 percent. The manufacturers of munitions were subjected under title II of the Revenue Act of 1916 to
a special tax of 121^^ percent "upon the entire net profits actually received or accrued for said year from the
sale or disposition" of "gunpowder, explosives, cartridges, projectiles, firearms, submarines," etc. The
yield of this tax was very disappointing, amounting to $42,000,000, largely as a result of an exceedingly liberal
allowance (sec. 302 (f)) for the "amortization of the value of buildings and machinery, account being taken
of the exceptional depreciation of special plants." See Regulation 39, arts. 20-21. Also see Commissioner
of Internal Revenue, Report for 1917, p. 195. The Revenue Act of 1916 (title IV, sec. 407) also introduced a
capital stock tax at the rate of "50 cents for each $1,000 of the capital actually invested in the transaction of
its business." See Regulation 38.
2 Supported by information obtained from Treasury sources. .
3 Sec. 214 (a) (9). Of course the amortization deduction should not include "any amount otherwise al-
lowed * * * as a deduction in computing net income." .
* Regulation 45, art. 183. See Regulation 62 (under the 1921 act) , art. 84 for more precise definitions. Some
available data on a small sam.ple of large corporations indicates that the amount of amortization finally al-
lowed was approximately one-tenthof taxable net income. The amortization provision was retained by the
Revenue Act of 1921 (sec. 234 (a) (8)), and continued for "any taxable year ending before March 3, 1924 (if
claim therefor was made at the time of filing return for the taxable year 1918, 1919, 1920, or 1921)." _
« Sec. 203. For method of determining "normal return" for corporations without pre-war experience, see
sec. 204 of the 1917 act and Regulation 41, arts. 22-23.
121
222 CONCENTRATION OF ECONOMIC POWER
ran afoul of circular difficulties in defining value, with long drawn-out
controversies in many courts. Yet the problem had to be faced. The
initial statutory attempt was a deceptively simple definition of ''in-
vested capital" consisting of three parts: ''(1) actual cash paid in, (2)
the actual cash value of tangible property ^ paid in other than cash, for
stocks and shares * * * and (3) pPtid in or earned surplus and
undivided profits used or employed in the business * * *"^ A
proviso added that ''invested capital" may also include (a) the actual
cash value of patents and copyrights paid in for stock at not m^ore than
the par value thereof, (b) bona fide payments (in cash or tangible
property) for goodwill, trade-marks, trade brands, and franchises or,
if acquired prior to March 3, 1917, bona fide payments of the same in
stock, not exceeding 20 percent of the total shares of stock.^ "In-
vested capital" specifically did not include borrowed money or prop-
erty or any assets the income of which was not subject to the excess-
profits tax.^
The definition of "invested capital" was som.ewhat clarified by the
Revenue Act of 1918, although the statutory phraseologj^ m.ay super-
ficioJly appear more complex. To the three constituent parts of
^•invested capital" were added intangible property bona fide paid in
for stock not exceeding (a) 25 percent of par value of total stock
outstanding, (b) actual cash value of such propert}^, or (c) par value
of the stock issued, whichever is lower. This new clause superseded
the vague "proviso" of the 1917 act anent specified types of intangible
property and the strained administrative definition of "tangible"
property. The new regulations under the 1918 act candidly pointed
out that "invested capital" had no relationship to "present net worth
of the assets" of the corporation but was rather based on "the capital
actually paid into the corporation by the stockholders." ^^
The actual operation of the war excess-profits taxes for seven major
industries is shown in table 1 hereof, for the 5-year period (1917-21)
during which the tax was in existence. ^^ The peak of the ratio of
the excess-profits tax to net income in each industry- was reached in
1918, the same year in which interindustry difierences were gTcatest.
Throughout the entire 5-year period the highest tax ratio was for the
construction industry (47.8 percent) with m.anufacturing (37.8
percent) a close second, while the ratio was consistently loAvest for
public utilities (8.6 percent) and finance corporations (8.9 percent).
The low ratio for public utilities is to be expected in view of their
regulation by public authorities which, if effective, cannot tolerate
excess profits, while the low rate for finance corporations reflects the
low but steady rate of return on investm.ent characteristic of that
industry. Service corporations (15 percent) tended to fall in the
lower group, while mining (25.1 percent) and trade (27.5 percent) fell
in the higher gi'oup. The percent in brackets indicates the 1918 tax
ratio for a given industry. Among the manufacturing industries the
highest tax ratios appeared for textiles and m.etals — both industries
characteristically playing a major part in the production of war
6 By re-^ulation "tangible property" was defined to include stocks, bonds, bills and accounts receivable,
note^ and other evidences of indebtedness, and leaseholds. Op. cit., art. 47.
»Sec. 207 (a).
•See arts, fy^-f^b of Regulation 41
» Sec. 207
10 Regulations 45, art. 831.
" No data are available for manufacturinc industries for 1917. The 1918 data do not permit a separation
of the war-profits tax payments from the excess-profits tax payments; the importance of the former was
largely confined to industries producing military supplies purchased by the Federal Government.
OONOENTRATION OF EOONOMIC POWER 123
supplies. The ratios for the other manufacturing industries were
fairly similar bo one another, with chem.icals high and printing low.
One of the fairly simple and safe methods of avoiding the war
excess-profits tax was for the corporations to expand their expendi-
tures for advertising, establishment of branch plants, renovations
and repairs of existing plant and equipment (if not already charged
off as depreciation), salary boosts for executives, and, allegedly,
depressed prices designed to build goodwill. But, as has been care-
fully noted by one observer, these techniques of avoidance "were
designed to postpone the yield of the business until the profits tax had
been abolished, and would have lost their efficiency if the tax had been
retained indefinitely at stable rates." ^^
Despite the large yield of the excess-profits taxes, the gradual reso-
lution of the initial administrative problems, and the Presidential
declaration of the desired permanency of the principle of excess-
profits taxation ^^ the Treasury and Congress grew increasingly critical.
Carter Glass in his 1919 report as Secretary of the Treasury castigated
the tax as follows:
The Treasurer's objections to the excess-profits tax even as a war expedient (in
contradistinction to a war-profits tax) have been repeatedly voiced before the
committees of the Congress. Still more objectionable is the operation of the
excess-profits tax in peacetimes. It encourages wasteful expenditure, puts a pre-
mium on overcapitalization and a penalty on brains, energy, and enterprise, dis-
courages new ventures, and confirms old ventures in their monopolies. In many
instances it acts as a consumption tax, is added to the cost of production upon
which profits are figured in determining prices, and has been, and will, so long
as it is maintained upon the statute books, continue to be, a material factor in
the increased cost of living. i*
His successor, Secretary Houston, also advocated the repeal of the
tax, urging in its stead a flat tax on ''profits in excess of the distributed
earnings" of corporations. His criticisms may be summarized in the
following quotation:
The reasons for the repeal of the excess-profits tax should be convincing even
to those who on grounds of theory or general political philosophy are in favor of
taxes of this nature. The tax does not attain in practice the theoretical end at
which it aims. It discriminates against conservatively financed corporations and
in favor of those whose capitalization is exaggerated; indeed, many overcapital-
ized corporations escape with unduly small contributions. It is exceedingly com-
plex in its application and difficult of administration, despite the fact that it is
limited to one class of business concerns — corporations. Moreover, it is rapidly
losing its productivity. The invested capital of the average corporation, earning
profits high enough to subject it to the excess-profits tax, is now estimated to be
increasing at the approximate rate of 12 percent a year, while the income of the
average corporation is almost certainly declining at as great a rate. Both move-
ments cut into the productivity of the tax. If the present changes in capital and
income continue for some time in the future, as now seems probable, a large reduc-
tion may be expected in the yield of the excess-profits tax. For the present fiscal
year, the profits tax, with collections of back taxes, is estimated to yield about
$1,250,000,000, and for the fiscal year 1922 about $800,000,000, as against an
estimated yield for the fiscal year 1920 of slightly over $2,000,000,000.15
12 R. M. Boeckel, Taxation of Excess Profits, Editorial Research Reports (1933), II: 73. For a critical
review of the role of taxation in controlling wartime profits, see the report of the Special Committee on
Investigation of the Munitions Industry on Wartime Taxation and Price Control (74th Cong., 1st sess.,
Report No. 944, pt. 2).
13 This declaration was made as late as May 20, 1919, in his first message to the special session of the 66tn
Congress. Conceding that the "excess-profits tax need not long be maintained at the rates which were neces-
sary while the enormous expenses of the war had to be borne," the President urged that the tax "should be
made the basis of a permanent system which will reach undue profits without discouraging the enterprise
and activity of our businessmen."
1^ Pp. 23-24.
i« Pp. 38-39.
]^24 OONCBNTRATION OF ECONOMIC POWER
On the other hand, David Friday wrote in his study of profits,
wages, and. prices:
If we are seeking taxes which will leave the income of the masses undisturbed,
and at the same time discourage industry and enterprise least, our present excess-
profits taxes are founded upon the correct principle. Tax only him who receives
m-ore income than is necessary to call forth the productive service which he renders;
he will not be discouraged. Do not levy heavy taxes upon the property or income
of those who are already laboring under financial difficulties because of insufficient
earnings; discouragement in that quarter is easy. Modern industry, with its fluc-
tuating markets, its ever-changing technique, its unstable price level, and its
sensitiveness to war and rumors of war is sufficiently risky without increasing
that risk by subjecting the businessman to taxes when his income is already
inadequate.i^
Unfortunately sufficient data are not at hand to reach a considered
judgment. For example, the Treasury figures on collections do not
segregate any of the war-income taxes on corporations and natural
persons but lump them in a single figure for the entire war period.
There are no figures on invested capital for 1918 — although there are
such figures for 1917 and 1919-21. Refunds are alleged to have been
very large, but precise data are again lacking.^"^
19 P. 190.
»' See footnote 2.
OONOENTRATION OF ECONOMIC POWBK
125
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APPENDIX B
FEDERAL CAPITAL STOCK AND EXCESS-PROFITS TAXES
1. Derivation oj the jormula for calculating the interlocking effective
rates oj the capital stock and excess-'profits taxes} — The problem: To
find the total tax payments of the capital-stock tax and the excess-
profits tax, measured as percentages of taxable net income, under
alternative declarations of capital (as times net income).
I. Definitions:
(7= declared capital (stated in dollars)
(72"= capital tax (stated as a decimal)
£'= excess-profits tax (stated as a decimal)
A^— net income (stated in dollars)
^7^= total tax (percentage of net income)
Since, by law, no excess-profits tax is payable whenever N is equal
to or less than O.IOC, and since the rate of the excess-profits tax shifts
as the relationship between A^ and C changes, it is advisable to work
with three different formulae, each applicable to one of the three pos-
sible assumptions.
II. Formulae to be used in computing TT:
A. When A^is less than or equal to 0.10(7, no excess-profits tax is
payable (case I).
TT, = CT=OmiC (1)
B. When N is greater than 0.10(7 but equal to or less than 0.15(7
TT2^CT-{-E2^
where
£-2=0.06 [N-OAQC]
.•.1^2=0.001(7+0.06 [A^-0.10(7]
= 0.067V-0.005(7 (2)
C. When A^ is greater than 0.15(7
rT3=(7r+£'3 where
£:3=0.06 [(A^-0.10(7)-(A^-0.15C)] + 0.12 (A^-0.1560
= 0.06 (0.05)(7+0.12(A^-0.15O)
= 0.12A^-0.015(7
.-. rT3=0.00lC+0.12A^-0.015(7
= 0.12Ar-0.014(7 (3)
III. Relation between C and TT for a given value of N (application
of the formulae): Assume that the declared capital of a corporation
is X times its net income, and then compute the total tax (as a per-
centage of net income) associated with values of X ranging from 0 to
20.
1 By Orvis A. Schmidt, Treasury Department.
2 The subscript 2 is here applied to E merely to keep the subscripts the same throughtout the equation.
There is thus no Ex.
126
OONOENTRATION OF ECONOMIC POWER 127
Formula (3) must be applied while
A^>0.15C, or while
X<6.7
Formula (2) must be applied while
0.10(7<iV<0.15O or while
10>X>6.7
Formula (1) must be applied when
X>10.
Applying formula (3):
rr3=o.i2iV-o.oi4 (xn)
X=0 =0.120iV
2 0. 12iV- .028A^= 0.092iV
4 0.12A^-.056A^=0.064Ar
6 0.12A^-.084.V=0.036A^
Applying formula (2):
rr2=o.o6A"-o.oo5(ZiV)
X=8 0.06A^-0.040A/^=0.020iV
Applying formula (1) thereafter to any value of X:
TT, = omi{XN)
X=:10 = 0.010A'
12 = 0.012A^
14 = 0.014A^
16 = 0.016A^
18 = 0.018A"
20-:0.020A^
Summarizing
the results :
Declared capital is X Total tax vvill be (as a
times
income where percent of income)
0 12.0
2 9.2
4 6.4
TTs
6 3.6
TT2
8 2.0
10 1.0
TTi
12 1.2
14 1.4
16 1.6
18 1.8
20 2.0
2.
Method of estimating the >
capital stock tax from StatisfAcs of Income
data,
1933-37.-
-The estimate started with the amount of net mcome
reported for corporations of varying size and capitalized it at 12.5
percent for the years 1933-35 and at 10 percent for 1936-37. The
resulting figure ^ was the ideal capitalization that should have been
declared in order to minimize taxes. This figure was deficient in
two respects — (a) corporations underdeclaring their capitalization
and (b) corporations overdeclaring their capitalization. The first
3 Tabulated in column 1 of appendix B, table 1, p. 285.
128
CONOENTRATION OF ECONOMIC POWER
deficiency was corrected by capitalizing the amount of the excess-
profits tax reported for corporations of varying size — that is, the
amount of the excess-profits tax was divided by 6 for 1933-35 and 9
for 1936-37 (the midpoint between 6 percent and 12 percent) and
multiplied by 100 — which have the amount of ^'excess profits.'^
This figure was in turn multiplied by 12.5 in 1933-35 and by 10 in
1936-37, giving the amount by which capital was undeclared (tabu-
lated in column 2 of appendix B, table 1). Deducting column 2
from column 1 gives the estimated minimum capitalization (column
3) from which the magnitude of the capital-stock tax (column 4)
was calculated at the rate of $1 per $1,000 of declared capitalization.
The relative magnitude of the capital stock tax is measured as a
percent of net income (column 5) .
This estimate is deficient only in the respect that it does not allow
for overdeclaration of capital. The chances are that the smaller
corporations and corporations engaged in industries characterized by
widely fluctuating profits will more likely err in this respect, and
that the larger corporations are not apt to be far oft' in their fore-
casting of profits. In view of the wide range of error permissible in
overdeclaring capital (shown in text diagram IV-1) without serious
tax penalties, it is difficult to believe that this error in the estimating
technique introduces any size bias into the estimated capital-stock
tax figures, except possibly a slight bias in favor of the larger
corporations.
Table 1, — Calculated capital-stock tax on corporations of varying size, 1933-37
[In millions]
Size classes (assets in thousands)
1
2
3
4
Ideal cap-
italization
Deficient
Estimated
Estimated
capital
capital
capital-
declared
declared
stock tax
$508
$90
$418
0.4
506
76
430
.4
1,136
145
991
1.0
1,236
134
1,102
1.1
1,525
155
1,370
1.4
3.810
258
3, 552
3.6
1,863
62
1,801
1.8
4,452
77
4,375
4.4
8,470
98
8,372
8.4
873
130
743
.7
879
94
785
.8
1,756
170
1,586
1.6
1,842
154
1,688
1.7
2,238
159
2,079
2.1
5,824
253
5,571
6.6
2,898
84
2,814
2.8
6,830
102
6,728
6.7
10, 570
75
10, 495
10.5
918
180
738
.7
952
176
776
.8
2,138
332
1,706
1.7
2, 250
340
1,910
1.9
2,722
372
2,350
2.3
7. 320
880
6,440
6.4
3.290
191
3,199
3.2
8, 520
549
7,971
8.0
11,910 1
909
11,009
11.0
Capital-
stock tax
as percent
of net in-
come
1933
Under .$50.
$50 to $100
$100 to $250
$250 to $500-
$500 to $1,000
$J,000 to $5,000 -.
$5,000 fo $10,000.
$10,000 to $50,000
Over $50,000
1934
Under $50
$50 to $100--.
$100 to $250.
$250 to $500
$500 to $1,000
$1,000 to $5,000
$5,000 to $10,000
$10,000 to $.50,000-
Over $50,000
1935
Under $50
$50 to $100
$100 to $250...
$2,Wto$500
$500 to $1,000...
$1,000 to $5,000..
$5,000 to $10,000
$10,000 to $50,000.
Over $50,000.
CONCENTRATION OP ECONOMIC POWER
129
Table 1. — Calculated capital-stock tax on corporations of varying size, 1933-37 —
Continued
[In millions]
Size classes (assets in thousands)
1
Ideal cap-
italization
2
Deficient
capital
declared
3
Estimated
capital
declared
4
Estimated
capital-
stock tax
5
Capital-
stock tax
as percent
of net in-
come
1936
Under $50
1,496
1,554
3,543
3,790
4,611
12, 671
5,893
13,980
5, 925
17,092
1,414
1,434
3,311
3,534
4,198
12, 242
5, 377
14, 795
6,387
20,518
222
186
319
263
267
560
183
157
52
74
271
232
452
418
373
1,075
372
810
141
376
1,274
1,368
3,224
3,587
4,344
12,111
5, 710
13, 823
5,873
17,018
1,143
1,202
2,859
3,116
3,825
11,167
5,005
13. 985
6,246
20, 142
1.3
1.4
3.2
3.6
4.3
12.1
5.7
13.8
5.9
17.0
1.1
1.2
2.9
3.1
3.8
11.2
5.0
14.0
6.2
20.1
.9
.9
.9
1.0
.9
1.0
1.0
$50 to $100
$100 to $250
$250 to $500 . -
$500 to $1,000
$1,000 to $5,000
$5,000 to $10,000
$10,000 to $50,000
$50,000 to $100,000
1 0
Over $100,000
1 0
1937
Under $50
$50 to $100
1
8
$100 to $250
$250 to $500
g
$500 to $1,000..
9'
$1,000 to $5,000
Qi
$5,000 to $10,000
9'
$10,000 to $50,000
0'
$50,000 to $100,000
^
Over $100,000
()
Source: Computed from Statistics of Income for respective years.
APPENDIX C
OLIPHANT'S STATEMENT ON HISTORY OF UNDISTRIBUTED
PROFITS PROBLEM
Brief History of Treatment of Business Income and of Attempts
to Prevent the Escape of Taxes Through the Retention of Corporation
Earnings (statement submitted by Herman OKphant, general counsel
of the Treasury Department, to the House Ways and Means Com-
mittee) .
An act of Congress passed June 30, 1864, provided that the gains and profits
of corporations should be inchided in the annual gains, profits, or income of any
person entitled to the same, whether divided or otherwise.
With the advent of the modern income taxes in 1913, a provision to prevent
the evasion of surtaxes through the use of corporations was introduced in the
1913 act, and was continued without substantial change in the Revenue Acts of
1916 and 1918. These acts provided for an addition to the dividend income of
the stockholders of a corporation which, for the purpose of evading surtaxes, accu-
mulated profits beyond the reasonable needs of the business, and the taxes of the
stockholders werethus determined as if distribution had actually been made.
Shortly before and while the Revenue Act of 1921 was under consideration, the
problem received much attention in Congress, by the Treasury, and by repre-
sentatives of organized business. At that time the repeal of the excess-profits
tax was being considered and the opinion was w^idely held that some measure
should be adopted to maintain the substantial balance which had existed during
the period of the war taxes when individual and corporate business enterprises
alike were taxed at high rates.
Secretary Houston in his annual report for the year 1920 recommended sub-
stituting for the then existing graduated rates, a flat tax on profits in excess of
distributed earnings. The object of this proposal, he said, was "to establish, so
far a.s possible, an exact equivalence between the taxation of corporation stock-
holders and other taxpayers."
So eminent an authority as the late Dr. T. S. Adams, former chairman of the
Advisory Tax Board in the Bureau of Internal Revenue and for many years a
Treasury adviser, as early as 1918 went on record in favor of the taxation of un-
divided profits at the rates which would apply if such profits were distributed
to the shareholders. "Fiscal necessity — and, personally, I believe, logic as Vv'ell,"
said Dr. Adams, "requires the taxation of all profits, whether reinvested or not."
The same thought was behind his recommendation in 1920 to the second national
industrial tax conference that the corporation income tax be raised from 10 to 16
percent, and his proposal in substance became a part of the majority report of the
conference board's tax committee.
Before the Senate Committee on Finance in the first session of the Sixty-seventh
Congress, the National Association of Credit Men proposed that there should be
no tax upon corporation income that is distributed, and opposed the flat corpora-
tion tax on the ground that it discriminated against small shareholders and violated
the principle of taxing the individual in accordance with ability to pay. A similar
proposal was made to the same committee by Mr. Frank H. Seidman, a leading
accountant and tax expert of New York, Chicago, and Grand Rapids, and Senator
Jones of New Mexico introduced an amendment to the 1921 tax bill substantially
along the lines recommended by the Association of Retail Credit Men. As finally
enacted, the Revenue Act of 1921 contained only a flat tax on corporation income
at the low rate of 10 percent for the year 1921 and 12^ percent for succeeding
years, while the maximum individual surtax continued through 1921 at 65 percent
and thereafter at 50 percent.
However, Congress recognized that the importance of the problem called for
some kind of legislative action. The result was section 220 of the Revenue Act
130
OONOENTRATION OF ECONOMIC POWER 13][
of 1921, which imposed a surtax of 25 percent on any corporation "formed" or
availed of for the purpose of preventing the imposition of the surtax upon its share-
holders. In 1924 the rate of tax was increased to 50 percent, which rate was con-
tinued in the law until the Revenue Act of 1934, Section 102 of the Revenue Act
of 1934 is substantially the same as the earlier sections, except that the rate of tax
is reduced to 25 percent and the tax is levied on net income less dividends
and taxes paid out rather than on the entire net income.
In 1926-27 the Joint Committee on Internal Revenue Taxation made a careful
study of the problem from the point of view of our experience and that in Great
Britain, but failed to recommend a tax on undivided profits because of the fear
that it might cause "unwise distributions and prevent the accumulation of a reason-
able and proper surplus." It recomm-ended instead the granting of a deduction
to encourage distribution of unneeded surplus. The committee, however, ap-
parently was influenced by the fact that at that time the maximum individual
surtax rate was only 20 percent, while the corporation rate was 13>^ percent.
The measures adopted by Congress to prevent evasion of the surtaxes proved to
be difficult to administer and were generally ineffective. This led Congress to
the 1934 act to impose a straight tax on personal holding companies, which were
among the worst offenders, in which no proof of intention to evade was required.
These companies are now taxed on their undistributed earnings in excess of
20 percent at rates running up to 60 percent on amounts in excess of $1,000,000.
In the 1932 act the surtaxes were increased to 35 percent, while the flat cor-
poration rate was raised only to 13^4 percent. This disparity between the indi-
vidual and corporation rates brought into sharp relief the fundamental inequity
of our treatmxent of individual business enterprises, as well as the unfairness to the
small stockholder, and early in the Roosevelt administration intensive studies
were undertaken by the Treasury, vvhose experts, with the cooperation of outside
consultants, considered the problem from every angle. While the unusual de-
mands for revenue may have been the immediate reason for the President's
proposal, the problem itself is as old as the income taxes and has had the con-
sideration of some of the ablest students of taxation. House Ways and Means
Committee, Hearings on the 1936 Revenue Act, pp. 658-659.
APPENDIX D
TAX EXPERIENCE OF 312 IDENTICAL MANUFACTURING
CORPORATIONS, 1934-37
Part 1. — In thousands of dollars
1934
1935
1936
1937
Percent
change
1934-37
Sales -..
$5. 820, 521
1, 910, 998
465, 761
$6, 888, 226
2, 244, 555
708, 379
$8, 281, 555
2, 736, 239
1,031,449
$9,672,339
3, 147, 285
1, 088. 927
66.18
Gross profits
64.69
133. 80
Federal income taxes. _ . ... .. .... ..-
56, 363
73, 148
129, 469
13, 359
14, 125
261,617
19. 608
13, 426
140. 198
66, 418
8,537
148, 589
20, 009
14, 072
288, 549
67, 695
16, 470
139, 826
69, 564
10, 612
163. 63
Capital-stock tax.. . . . ... ..
9,520
247, 038
11,413
245, 938
47.82
Federal excises
Pay-roll taxes
16.80
4,923
101, 928
64, 909
4,290
8,012
112,316
64,640
6,704
234. 55
State sales taxes
37.18
7.17
State corporation taxes
147. 37
Total taxes
488, 971
522, 171
666, 757
775, 386
58.57
Part II. — Taxes as percent of sales
ASSETS UNDER $1,000,000
1934
1935
1936
1937
Federal income taxes
0.73
0.68
1.30
.15
.14
5.61
.24
.14
.69
.41
.11
0.80
Undistributed-profits tax
.09
Capital-stock tax ... .. ._
.10
6.26
.11
6.04
.11
Federal excises
4.85
Pay-roll taxes. -- . ... .
.67
State income taxes
.05
.87
.57
.11
.06
.73
.47
.12
.09
State sales taxes ...... .... _ . . . ...
.66
Property taxes.. .. . ... . .. ..
.36
State corporation taxes ......
.08
Total taxes
8.69
8.21
8.79
7.71
ASSETS $1,000,000 TO $5,000,000
Federal income taxes .. . . ... ... .
1.10
1.33
1.63
.30
.17
2.21
.31
.14
.28
.58
.07
1.48
Undistributed-profits tax
.24
Capital-stock tax .... . . .
.14
2.73
.14
2.48
.14
Federal excises
2.16
Pay-roll taxes .. . ........
.84
State income taxes
.08
.32
.81
.08
.12
.23
.66
.08
.16
State sales taxes . . .
.27
Property taxes
.57
State corporation taxes . . . ....
.07
Total taxes
5.26
6.04
5.69
6.93
132
CONCENTRATION OF ECONOMIC POWER
Part II. — Taxes as percent of saZes— Continued
ASSETS $5,000,000 TO $10,000,000
135
1934
1935
1936
1937
Federal income taxes.- _ . ... .
0.65
0.84
1.28
.26
.14
1.06
.33
.10
.07
.62
.11
1 21
Undistributed-profits tax
23
Capital-stock tax
.12
.47
.13
1.04
12
Federal excises
72
Pay-roll taxes... . ... . ...
93
State income taxes. . .
.04
.06
.95
.09
.07
.09
.72
.09
u
State sales taxes. .. . .
06
Property taxes . . ...
60
State corporation taxes. .
09
Total taxes . . . .
2.38
2.98
3.97
4 07
ASSETS $10,000,000 TO $50,000,000
Federal income taxes .
1.12
1.15
1.61
.15
.17
1.01
.26
.19
.04
.73
.15
1 45
Undistributed-profits tax.. - . . . _ .
16
Capital-stock tax . . . ....
.16
3.00
.16
1.57
15
Federal excises _ . . . . .. ....
1. 14
Pay-roll taxes ... .
80
State income taxes . ... ..... . _. .. .... ... . ....
.08
.04
1.01
.07
.12
.03
.88
.11
.18
State sales tax... . ... . ..........
05
Property taxes
68
State corporation taxes. . .
. 13
Total taxes
5.48
4.02
4.31
4.74
ASSETS $50,000,000 TO $200,000,000
Federal income taxes .
1.10
1.07
1.70
.13
.14
2.62
.22
.16
.45
.70
.04
1 47
Undistributed-profits tax . _ .. . .. ... .
.17
Capital-stock tax.. ... ........
.13
2.57
.16
2.57
. 13
Federal excises.. - ... ..... . . . .
2.70
Pay-roll taxes... ... . . .. ....
.65
State income taxes
.08
.04
.95
.04
.12
.04
.82
.05
. 16
State sales tax... . .. . ......
.06
Property taxes . .
.61
State corporation taxes.. . ... . ...
.06
Total taxes
4.91
4.83
6.16
6 01
■
ASSETS OVER $200,000,000
Federal income taxes. -- . .
0.79
1.01
1.43
.16
.20
5.36
.22
.16
4.31
1.00
.14
1.71
Undistributed-profits tax
.26
Capital-stock tax. _. .. . ... .. ..... . .
.20
7.11
.18
6.23
.17
Federal excises
4.66
Pay-roll taxes... ... ... . . . .
.65
State income taxes
.09
4.67
1.38
.10
.11
4.54
1.16
.14
.19
State sales tax. _ _._ ............. ... . . ...
3.88
.89
State corporation taxes.- . . ...
.15
Total taxes
14.34
13.37
12.98
12.56
TOTAL
Federal income taxes
Undistributed-profits tax.
Capital-stock tax
Federal excises
Pay-roll taxes
State income taxes
State sales tax
Property taxes
State corporation taxes...
Total taxes.
0.97
.16
4.24
1.75
1.12
.07
8.39
1.06
.17
3.57
.12
1.63
r.59
1.56
.16
.17
3.16
.24
.16
1.69
.80
.10
i.Qi
1.54
.21
.15
2.98
.70
.17
1.45
.72
.11
8.03
262698 — 11 — No.
■10
APPENDIX E
SOURCES AND METHODOLOGY
SECTION I. BUREAU OF INTERNAL REVENUE DATA
1. The universe studied. — The size and industrial data on the opera-
tion of Federal taxes on corporate income for tlie period 1926-37 have
been computed from the published Statistics of Income and unpub-
lished tables of the Sourcebook of the statistical section of the
Bureau of Internal Revenue. Although these Treasury compilations
are based on returns from all existing corporations in the United
States, a part report no income data because they are inactive and
others fail to include balance sheets (not legally required in their
income-tax returns). The first group of corporations has been ex-
cluded from the study because it includes more legal frames, while the
second has been excluded from all size analyses (but not from the
detailed industrial comparisons) because of the nature of the size
classification which is based on assets (a balance sheet item). The
second group of excluded corporations is negligible in financial signifi-
cance, their receipts, net income, and Federal tax payments being
approximately 5 percent or less of the respective totals for all
corporations.
This study has been largel}^ limited to corporations pacing Federal
corporate income taxes. The study is still based on a universe and
not a sample, although it has shrunk to a universe of all net-income
corporations submitting balance sheets (table I).
Table I. — Number of corporations filing income-tax returns
Total
filing
Inactive
Lacking:
balance
sheets
Filin
g balance sheets
Years
No net
income
Net in-
come
Total
1931
516,404
508, 636
504, 080
528, 898
533, 631
530, 779
529, 097
56, 700
56, 752
57, 238
59, 094
56, 518
51,922
51,259
78, 616
39, 863
58, 278
59,178
61,908
63, 203
60, 936
237, 893
318, 730
287, 623
275, 662
262,130
227,101
237, 967
143, 195
73, 291
100,941
134,964
153,075
188, 553
178, 935
381,088
1932.
392, 021
1933
388, 564
1934 .
410, 626
1935..._
415, 205
1936
415,654
1937
416,902
Source: Statistics of Income for respective years.
2. The period covered and comparability from year to ifear. — The size
analysis is limited to the 7 3^ears of 1931, 1932, 1933, 1934, 1935, 1936,
and 1937 — the only years for which size tabulations by assets are now
(June 1-940) available. Previous to 1931 some data are available by
size of taxable income or deficits, but net income is sucli a shifting
criterion of size as to malve a structural study of taxation meaningless.
The 3 years of 1931, 1932, and 1933 are not strictly comparable with
134
CONCENTRATION OF EOONOMIC POWER 235
the succeeding 3 3^ears of 1934, 1935, and 1936, because of the aboli-
tion of the consolidated returns device (except for railroads) b}^ the
1934 Revenue Act.^ Likewise, the period 1926-27 is not entirely
comparable with the 1928-31 period (in the industrial analysis) be-
cause of the tightening of the affihation requirements for consolidated
returns under the 1928 Revenue Act. It is unfortunately not possible
to show the precise effects of the abolition of the consolidated returns
device upon the size composition of different industries, since no size
data of this character are available. By the nature of the case — the
requirement of separate returns for each corporation instead of a con-
solidated return for a group of affiliated companies — the change must
have been rather significant. The number of corporations in the
large size groups where the consolidated parent subsidiaries were
classified presumably decreased, while the number of corporations in
the sm_all and medium-sized groups wdiere the separated subsidiaries
are classifiable presumably increased. This reduction in the large-size
groups may have been partially off'set by the addition to the uncon-
solidated balance sheet of the parent of such new items as invested
securities (i. e., issued by subsidiaries) that has previously been rep-
resented in the consolidated balance sheet by the physical assets of
subsidiaries.
3. Validity of the data. — These data cannot presume to greater
validity than that which may be ascribed to the source, Statistics of
Income and the unpublished Sourcebook of the statistical section
of the Bui'eau of Internal Revenue, both of vrhich are equally valid.
The Sourcebook serves primarily to furnish additional balance
sheet, income, and tax items (a) by major industrial groups crossed by
size classes and (b) by more detailed industrial groups (v/ithout
crossing by size classes). Since Statistics of Income are largely
compiled from unaudited returns, changes made after audit (which
may stretch over several years and, in a few^ cases, decades), are
accordingly^ not reflected in the statistics. The item.s most susceptible
to revision are naturally the amount of tax liability, and incom^e and
deduction items upon which the former is based. These revisions
may be upward or downward. No adjustments for auditing have
been found possible and the figures have therefore been accepted at
their face value.
The item on taxes claimed as deductions appears to be very imsatis-
factory in certain industries characterized b}^ heavy Federal or State
taxes on sales or gross production — namely, beverages, tobacco,
rubber, petroleum (and therefore chemicals with which petroleum
was tabulated for the size series before 1936). Under the regulations
of the Bureau of Internal Revenue, taxes paid by corporations to a
governmental agency (except special assessments), during the year
covered by the income-tax returns, may be claimed as deductions in
three ways — as (a) ''taxes paid"; (6) part of ''cost of goods sold";
or (c) part of "cost of operations." If the corporation claims the
deduction in either of the two latter ways, it is not possible on the
basis of the present statistics to separate it from cost of materials,
wages, etc., and consequently the figures on "taxes paid" remain
incomplete.
1 For specific changes in the industrial classification of identical corporations in 1933 and 1934 resulting
irom the abolition of the consolidated returns see Statistics of Income for 1934, pt. II, pp. 25-27.
136 OONCENTRATION OF ECONOMIC POWER
The major changes in industrial classifications have fortunately
been in an expanding direction, so that items for later years can
usually be converted into com^parable items for earlier years; this
process, of course, cannot be reversed. Insofar as the size analysis
is concerned, such changed in industrial classifications are relatively
unimportant. Statistics of Income included beverages with food for
1931 and 1932 but thereafter kept them separate. Taking into
account the fact that 1933 was not comparable with succeeding years
because of the change in the consolidated returns device and that the
eighteenth amendment had just been repealed, it was decided to add
beverages to food for that year in order to make it comparable with
data for 1932 and 1931. From 1934 onward, however, food and
beverages have been kept separate. In the 1936-37 statistics clothing
was separated from textiles, petroleum from chemicals, and motor
vehicles from metals. In the case of industrial comparison, however,
considerable caution is necessary in interpreting the results, since
practically every year witnesses changes in the definition of industrial
categories and in the industrial classification of individual firms.
SECTION II. DUN & BRADSTREET TAX DATA
Dun & Bradstreet early in 1939 sent out a questionnaire attached
to all manufacturing, retailing, and wholesaling firms in the country^
asking for the dollar amount of their sales and various types of taxes
paid in 1938.. These returns were partially analyzed in the April,
June, and August issues of Dun's Review. Dun & Bradstreet gra-
ciously made the tax work sheets available to the Department of
Commerce and the Temporary National Economic Committee.
SECTION III. DEPARTMENT OF COMMERCE TAX SURVEY OF MANU-
FACTURING AND TRADE CORPORATIONS REGISTERED UNDER THE.
In September 1939 the Department of Commerce sent out a ques-
tionnaire (a copy of which is attached hereto) to all manufacturing
and trade companies which, as of June 30, 1939, had securities fully
listed on registered securities exchanges. The list of companies was
supplied by the Securities and Exchange Commission and is identical
with the firms appearing in the Commission's Survey of American
Listed Corporations.
The companies were asked to report their taxes for the last 5 years
on the same basis as that used in their annual report on Form 10-K
to the Securities and Exchange Commission. Most of the corporations
filed the tax questionnaire on a consolidated basis, comparable with
other data filed with the Securities and Exchange Commission. These
returns are as a whole not comparable to the type of returns given in
Statistics of Income, which have been on an unconsolidated basis
since 1934. Taxes reported included only such taxes as were paid
directly to a governmental body, even though the firm might be billed
for other taxes by a seller. The classification of taxes is apparent from
the attached questionnaire. Some companies reported taxes as
estimated for the year in question while others reported actual pay-
ments for the year. Others gave the payments as made and then the
adjustments that subsequently took place.
2 Primarily prepared by John Copeland.
OONOENTRATION OF ECONOMIC POWER 137
According to the instructions, the amount of taxes should coincide
with the sum of ''the taxes classed as (1) operating expenses and
(2) charges on net income" in the annual report on Form 10-K to the
Securities and Exchange Commission. If they did not, the company-
was requested to give a reconciliation. For most cases, taxes did not
agree with those listed for the firms in the Survey of American Listed
Corporations, and some returns gave no reconciliation. The greatest
number of discrepancies arose in the Federal income-tax item because
the Securities and Exchange Commission asks for ''provision for"
income taxes. Almost without exception, the companies reported
a lower payment than the amount set aside (except in the case of the
large steel companies, which gave the estimated payments). A
further discrepancy arose from the fact that the Securities and Ex-
change Commission included under this heading: "Federal taxes on
income, excess profits, and undistributed earnmgs; State taxes on
income; and foreign taxes on income."
Total taxes were usually greater than the amount as reported to
the Commission. A number of explanatory notes showed that many
taxes had been included in other operating expenses. Returns which
disagreed with the figures in the Securities and Exchange Commis-
sion's publication but had no explanation as to the discrepancy were
still assumed to be correct if (a) the total taxes did not vary by more
than 10 percent of the amount as reported to the Securities and Ex-
change Commission, (6) the discrepancy could be accounted for by
differences in the income tax, or (c) by the fact that some one other
tax item had apparently not been reported as a tax. For example:
Suppose total taxes as listed in the Survey of American Listed Cor-
porations for companj^ A were $50,000 with $15,000 of this allocated
to income taxes. Total taxes were given by the company in its ques-
tionnaire as $60,000 and mcome taxes in all categories amounted to
$7,500. This means that there is a sum of $17,500 in excess of the
tax payments as revealed by Form 10-K. Looking at the break-down
of taxes, we see that property taxes are about $17,000. The return is
marked correct on the assumption that property taxes v/ere not sepa-
rately reported to the Securities and Exchange Commission. When
this test was applied, very few returns seemed to be mcorrect.
All returns had to be examined to determine whether entries (whether
in dollars or as zero) were made for taxes that should have been paid.
Large companies doing business in a number of States supposedly
paid taxes under all the headings, except perhaps Federal excises.
In the case of smaller firms. State taxes that should have been paid
were checked against the tax system of the home office as outlined in
Tax Systems of the World.
Taxes included m the "all other" category were often identified
more specifically, which facilitated their being placed in the correct
bracket or else excluded. Only a few corporations listed large amounts
in this category without describing the payment.
Taxes recorded but excluded in editing included all payments to
foreign or territorial governments. In the case of companies doing a
large foreign business, such charges amounted to a large proportion
of the total tax bifi, but for the survey as a whole they were not
significant. To mclude foreign taxes would have been impossible
because (a) many companies which reported foreign taxes reported
only foreign income taxes, and (6) some of the companies paying
J38 CONCENTRATION OF ECONOMIC POWER
substantial sums abroad failed to report them because they assumed
that we were interested only in United States' taxes. Also excluded
were income taxes paid for bondholders under tax-free covenents.
Although paid by the corporation they were considered not tax
payments of the corporation, but in the nature of additional mterest
payments.
The entries most frequently missing were the Federal excises and
State sales levies, probably because they are so often passed on to the
buyer. Processing taxes were likewise often omitted. Breweries,
tobacco, and liquor companies made fairly complete returns on these
two types of levies, but petroleum refineries almost invariably failed
to report such expenditures or else combined the two so that the sum
was unusable. Very few of the automobile parts companies reported
the excises on their products.
Although one or more tax items may have been incorrect, the
schedule was of course usable insofar as the specific entries were
correct, except when tabulating "total taxes." Incomplete question-
naires could be used by tabulatmg separately the economic items
(which were copied from the Survey of American Listed Corporations)
for each tax item that was correct. For example: To get the ratio
of income taxes to net before interest, only cards reporting mcome
taxes correctly would be tabulated for net and income taxes. Then
the ratio would be calculated. If State sales taxes as a percentage of
sales were desired, only cards reporting sales taxes correctly would
be used; for the relation of property taxes to sales, only cards having
property taxes entered correctly. This would mean that there would
be a varymg number of cases used in the calculation of each ratio,
because not all of the same cards would be correctly filled in for
each item.
A small number of returns were unusable because taxes were reported
for the parent registrant only, while the economic data supplied by
the Securities and Exchange Commission covered subsidiaries as well.
The computation of wages for the purpose of estimatmg ''gross
margin" presented a special problem. The Social Security pay roll
and unemployment compensation taxes paid were used m the calcula-
tion. It was assumed that the tax payments were 1 percent of wages
in 1936, 3 percent in 1937, and 4 percent m 1938 (the 1938 material
was calculated to check the 1936 and 1937 figures). The payments
as reported for each year were divided by the appropriate percentages
and the resulting quotients multiplied by 100. This product was
used as the wage bill of the reporting concerns.
So far the problem seems simple, but there are certain complications.
The old-age annuity payment was 1 percent for 1937 and 1938. The
Federal unemployment compensation levy was 1 percent in 1936,
2 percent in 1937, and 3 percent in 1938, with a rebate up to 90 percent
of these sums of the amount paid by a company to a State unemploy-
ment fund. Thus a company in 1936 paid only 0.1 percent to the
Federal Government if there was a State system in which the rate
was at least 0.9 percent. No company could pay less than the rates
assumed, but there was a chance of its paying more. If a State had
a rate of 3 percent in 1938, the company would pay 3.3 percent because
the Federal Government rebated only 90 percent of its 3 percent rate
or 2.7 percent. Most States levied the tax at the rate of 2.7 percent
in 1938, with a few higher rates. In previous years there is more
OONOENTRATrON OF ECONOMIC POWEfR Igg
likelihood that the State tax was higher than the minimum assumed.
As a result, a larger wage bill would occasionally be calculated than
was actually paid. On the other hand, because Social Security
taxes are paid only on wages and salaries under $3,000, a wage bill
computed from the tax paid would have a tendency to be too smalh
When the 1936 and 1937 wage-sales ratios were calculated, there
was in m.ost cases very little variation between the 2 years. All
returns which indicated a year-to-year variation in. wage rates of more
than 10 percent were subjected to further scrutin3^ The fiscal year
for these companies was obtained from Moody's 1939 Industrial
Manual as also the 1938 sales figures if they were available. If the
fiscal year was the same as the calendar year, the wage-sales ratio was
calculated for 1938. Then if the ratio exliibited a trend up or down,
the calculated wages were allowed to stand, provided the trend was
within reason. Som.e did not seem to be, and the wages were not
entered.
Where the fiscal year ended in some other month than the calendar
year, wages had to be calculated by using the number of months of
each calendar year in the fiscal year times the rate of the tax levy in
the appropriate calendar year. For exam.ple, with a fiscal year
ending June 30, 1937, the Social Security tax paid in the fiscal year
was divided by 24 (6 months at 1 percent and 6 months at 3 percent)
and the quotient multiplied by 1,200 (12 months by 100) to get wages
for the 1936 fiscal year. This is a form of extrapolation. For 1937
the wages were gotten by dividing the tax paid in the 1937-38 fiscal
year by 42 and multiplying the quotient by 1,200. The 1937 wages
were obtained from. 1937-38 fiscal year figures rather than from 1936-
37 fiscal year returns, because most returns had m.ore m.onths in the
1937-38 year than in the 1936-37 one.
One check of the accuracy of tliis m.ethod was a comparison of the
wage-sales ratio for the 2 years. In most cases the ratio did not vary
much, although som.ewhat more than in the case where the fiscal year
and calendar year were the same. One error in the method arises
from_ the cyclical variation present. The calculation used assurned
that there was none. It is apparent, however, that in the computation
of 1936 wages from social security taxes paid in 1936-37, some account
should be taken of the fact that most businesses operated at a higher
level in the early pert of 1937 than in 1936. The wage bill as com-
puted for 1936 was larger than in actuality. When using the 1937-38
fiscal year to get 1937 wages, just the opposite would be true. Some
correction could have been made, at great labor expense. W^ages for
1937 m.ight have been calculated from the 1937-38 fiscal year tax
payments, and also from the 1936-37 payments. This would have
given in most cases a lower figure for the first computation than for
the second, because of the depression in the latter part of 1937 and in
1938. Then the figure could have been averaged on the basis of a
double system of weighting. The number of m.onths of 1937 contained
in the fiscal years and the rate of industrial activity for that industry
for each month in 1937 as given by some of the numerous indexes
available would have to be taken into account.
No attem.pt was made to adjust for the seasonal variation in business
which should be done where the fiscal year w^as not evenly divided
between the 2 calendar years.
240 OONGENTRATION OF ECONOMIC POWER
Gross margin is the sum of gross profits as reported to the Securities
and Exchange Commission, phis wages as calculated. This is not the
same item as 'Value added" as definited by the Census Bureau,
because there have been excluded from the cost of sales (which,
added to gross profits, give sales), not only the wages charged to cost
of sales but also the salaries under $3,000 included in selling, general,
and administrative expense. As a result, ''gross margin" may bo
larger than it logically should be. By how much is not known. An
additional unknown factor arises from the possibility of different
accounting concepts adopted b^ individual firms when charging items
to cost of sales, or selling, general, and administrative expenses.
Labor cost ratio. — This ratio is that of wages, as calculated from
social security taxes paid, to total sales.
Profit 7'atio. — This ratio was computed by taking the net operating
result for the period before interest, prior claims, and income tax,
and dividing this amount by the total of invested capital at the end
of the period. Invested capital consists of (a) long-term debt including
Treasury bonds carried as assets; bonds held in sinking funds; bonds
of subsidiaries consolidated held by subsidiaries consolidated, and long-
term debt due within 1 year for wliich funds had already been ear-
marked, and (b) net worth, i. e., capital stock and surplus less deficit
carried as an asset. Treasury stock carried as an asset, preferred stock
held in sinking fund, and discount on capital stock plus minority
interest.
Equity ratio. — Tliis ratio is that of net worth (as previously defined)
to total debt (nicluding long-term debt and current liabilities).
OONOENTRATrON OF BOONOMIO POWER
141
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OONGENTRATION OF ECONOMIC POWER 143
Exhibit 1
Dun & Bradstreet, Inc.,
The Mercantile Agency,
Dear Sir: Taxes are a vitally important business problem, yet no one actually
knows the present tax burden on trade or industry. This year's Dun & Brad-
street Survey, while continuing the main purpose of estimating sales and inven-
tory trends, asks you a series of questions on the amount of taxes your business
has paid.
The questions have been prepared with great care, to yield a maximum of
information with minimum effort on your part. The findings will show what
part business pays of the total tax bill — Federal, State, and local. This is the
first attempt on so wide a scale to obtain information of this nature, and it may
have very significant results.
The tabulations will be made by our research and statistical division, and the
information received on the questionnaire will not be available to our regular
reporting divisions. No individual figures will be published; the results will be
presented in totals and averages.
We shall send, without charge, a complete summary of the results to everyone
who participates by supplying us with the raw material. These survey findings
will be extremely valuable and convincing, as they will represent the experience
of thousands of businessmen.
The questionnaire has been prepared in tvv'o parts, which can be separated.
If there may be a delay in answering the tax burden questions, tear off the right-
hand sheet for later mailing. The value of sales and inventory information
depends upon the speed with which the results are available, so kindly send in
at least the business trend schedule as quickly as possible.
Very truly yours,
A. D. Whiteside, President.
For Research Purposes Only
Business Trend Survey
First : Kindly return this left half of sheet at the earliest possible date. Figures
from your income-tax return are not necessary.
Second: If tax figures are not yet available at the same time, detach right-
hand sheet and mail later.
1. Type of business:
'Describe type of operation and main line of products handled or service
rendered. (Examples: grocery and meat retailing, radio manufacturing,
coal mining, plumbing contractor, hotel).
1937 1938
2. Annual sales (or volume of business) $ $
3. Inventory (at end of year) $ §
(Do not include plant or equipment valuation. Give fiscal year closing
date if not December 31 )
(Give figures in dollars — omit cents)
Address for Mailing Residts of Survey
Name of concern (print or typewrite)
(If a subsidiary, please write name of parent company
at bottom of page.)
Attention of: (Department or individual).
Street address (print or typewrite)
City and State (print or typewrite)
Mail this sheet direct to Dun & Bradstreet, Inc., Research and Statis-
tical Division, 290 Broadway, New York City, or in the Enclosed Enve-
lope TO Our Local Office.
244 OONOENTRATION OF ECONOMIC POWER
For Research Purposes Only
Tax Burden Survey
The following taxes were paid during 1938 by this concern:
(Enter amount actually paid even though you keep books on accrual basis.
The desired figures will, in most cases, be m.ore readily available from tax schedules
than from the expense ledgers.)
(Make entry on every line — -"none," "no record," or dollar amount — omit cents)
1. Federal taxes on business incom.e:
(tt) Corporations: Include incom.e, undistributed profits,
corporation capital stock, and excess-profits taxes $
(6) Partnerships and proprietors: If there is other income
divide total tax proportionately and enter only total or
individual taxes paid on business incom.e $
2. Social security taxes and contributions, com.bined State and
Federal, both old-age and unemploym.ent:
(a) Employer's contribution $
(6) Employee's contribution $
3. Sales and excise taxes on outgoing goods — paid by you direct to
a Governm.ent body:
(a) Federal (m.anufacturer's excise taxes on gasoline,
cigarettes, liquor, etc.) - $
ih) State and local (retail sales taxes, tobacco, liquor taxes,
etc.) $
4. All other State and local taxes:
{a) State incom.e taxes — see instructions for item. 1 above-- $
(6) Property taxes, on business property only— exclude
special assessments $
Please indicate whether business quarters are: Owned D rented D
(c) Business franchises, chain-store taxes, etc $
{d) All other taxes and licenses $
5. If you have m.ade any special study or tabulation of your taxes, particularly
com.parisons of several years, we shall be grateful for a copy.
// this tax-survey sheet is returned separately, place name and address in the space
provided below.
THE TAX-BURDEN SURVEY
It is well known that the tax burden on business has grown heavier in recent
years, that taxes frequently absorb a large part of potential profits. Total tax
receipts of the country can be added up from. Federal, State, and local budgets,
but the tax burden on business is not known separately. Do taxes bear most
heavily on sm.all enterprises, the medium sizes, or the large ones? Which indus-
tries carry the heaviest burden? How much is Federal, how much State and
local?
Business can tell its story with more force, and seek relief from inequities with
more chance of success, if it has the facts.
Kindly return this sheet before April 1, 1939, to your local Dun & Bradstreet
Office, or Direct to Research and Statistical Division, 290 Broadway,
New York City.
Address for Mailing Results of Survey
Fill in only if this page is returned separately
Name of concern (Print or typewrite)
(If a subsidiary, please write name of parent company at bottom of page.)
Attention of: (Departm.ent or individual)
Street address (Print or typewrite)
City and State (Print or typewrite)
Exhibit 2
Department op Commerce,
Office of the Assistant Secretary,
Washington.
The tax payments of business enterprise are now being studied by the Depart-
ment of Commerce in connection with its work for the Temporary National
Economic Committee.
OONOENTRATION OF ECONOMIC POWER
145
Total tax receipts can be, and have been, estimated by adding the Federal,
State, and local budgets. But such figures are not enough to answer many of the
tax questions of business. Are some industries subject to heavier tax burdens
than others? What different types of taxes does American business pay? In
what ways has the business tax burden been increasing? In short, what are
the fundamental facts about business taxation today?
You have already filed detailed statements about the corporation's business
with the Securities and Exchange Commission. But we would like more details
about your taxes over the last few years than the filed profits-and-loss statement
provides. The Department is, of course, familiar with the general findings
of the recent tax survey conducted by Dun & Bradstreet, Inc., for 1938, but that
survey was based on returns principally from small and medium-sized business.
Again we would like more information.
You can help us to get these details b}^ filling out the attached one-page
schedule and mailing it, before October 1, 1939, to the Department of Com-
merce. A franked addressed envelope is enclosed for this purpose. Please note
that the schedule is to be sent to the Department of Commerce, and not to the
Securities and Exchange Commission, and its filing is of course not subject to the
requirements of the Securities Exchange Act of 1934. Your cooperation and
that of other business concerns is necessary if we are to get at the facts of business
taxation.
Sincerely yours,
WiLLARD L. Thorp,
Director of Economic Studies.
Department of Commerce
bureau of foreign and domestic commerce
^ Washington, D. C.
Business taxation schedule for years 1934-38
Name of corporation
Please enter the following information (in dollars, omitting cents) as fully as your records will permit and
according to the same reporting base as to subsidiaries that was used in Form 10-K of your aimual report
to the Securities and Exchange Commission. Where exact figures are not available and estimates have
been prepared, please identify the estimates by encircling the figures. Include only taxes paid direct to a
Government body. Do not include taxes paid in connection with the purchase of commodities, such as
customs and import duties, gasoline taxes, etc.
1934
1935
1936
1937
1938
1. Federal corporation income taxes, including ex-
$
XXX
XXX
$
$---
$
/l Fpdprfll panital stnck tax
5. Federal-State pay-roll taxes, including old-age
and unemployment taxes
6. State taxes on net income include "franchise"
taxes in Cahfomia, Connecticut, Montana,
New York, and Utah where ba.sed on net
inpnmp
XXX
XXX
7 Staf-p calpQ arns!<; rpppint<; crrn<;<? inrnniR taYP<?
8. Property taxes, including real estate and per-
9. Corporation franchise and privilege taxes other
than nri inrnmp
in Ol-hpr Ccnppifv^
Note.— The report on "total taxes" should agree with the sum of your taxes classed as (1) operating
expenses and (2) charges on net income in your annual report on Form 10-K to the Securities and Exchange
Commission. If not, please explain.
APPENDIX F
TECHNICAL TABLES
Table 1. — United States tax collections, 1860-1938
[All figures in millions of dollars]
IN CURRENT DOLLARS
Federal i
State
and
local »
Total
Per capita
Federal
State
and
local
Total
I860 ....--
53
379
311
372
526
624
663
626
5, 728
3,570
3,137
3,364
3,626
2,808
1,889
1,855
2,954
3,621
3,900
5,084
6,034
3 94
3 281
3 314
471
861
1,459
1,597
1,900
3,265
4,016
4,919
6,105
6,798
6,583
6,679
5,675
5, 855
6.102
6, 639
7,022
8,777
147
660
625
843
1,387
2,083
2,260
2,526
8,993
7,586
8,056
9,469
10, 424
9,391
8,568
7,530
8,809
9,723
10.539
12, 106
14,811
1.69
9.80
6.18
5.90
6.63
6.77
6.87
6.30
53.77
32.49
27.31
28.07
29.45
22.62
15.12
14.75
23.33
28.39
30.36
39.33
46.48
2.98
7.27
6.25
7.47
10. 85
15.81
16.55
19.13
30.64
36. 55
42.82
50.93
55.24
53.04
53.44
45.12
46.24
47.86
51.70
54.33
67 61
4.67
1870 -- -
17.07
1880 -- --- - -- --
12.43
1890
13.37
1902 -- - - -
17.48
1910
22.58
1913 - -- ---
23.42
1915 -- -- -- - --- -
25.43
1920 - --
84.41
1922 -. - - -
69.04
1925 - -
70.13
1928 - -
79.00
1930
84.69
1931
75.66
1932 -
68.56
1933
59.87
1934 '-
69.57
1935 .
76.25
1936
82.06
1937 ...
93.66
1938
114. 09
ADJUSTED TO 1926 DOLLARS (BUREAU OF LABOR STATISTICS WHOLESALE INDEX)
Federal
State
and
local
Total
Per capita
Federal
State
and
local
Total
I860
87
437
478
662
893
886
950
901
3,710
3,692
3,031
3,479
4,197
3,847
2,915
2,815
3,944
4,526
4,826
5,891
7,677
154
324
482
838
1,462
2,073
2,288
2,734
2,115
4,153
4,753
6,313
7,868
9,017
10, 307
8, 612
7,817
7,628
8,217
8,137
12, 404
241
761
960
1, 500
2,355
2,959
3,238
3.635
5,825
7,845
7,784
9,792
12, 065
12. 864
13, 222
11,427
11,761
12, 154
13, 043
14, 028
20, 081
2.78
11.30
9.49
10.50
11. 26
9.62
9.84
9.06
34.83
33.60
26.39
29.03
34.09
30.99
23.33
22.38
31.15
35.49
37. 57
45.58
58.96
4.89
8.39
9.60
13.29
18.42
22. 45
23.71
27. 52
19.84
37.80
41.37
52.67
63.93
72.65
82.47
68.47
61.73
59.82
63.99
62. 95
95.25
7.67
1870 -
19.68
1880 --- -
19.09
1890 -
23. 79
1902 -
29.68
1910
32.07
1913
33.55
1915
36.58
1920
58.25
1922
71.40
1925
67.76
1928
81.70
1930
98.02
1931
103.64
1932
105. 80
1933
90.85
1934
92. 88
1935
95.31
1936
101. 56
1937
108. 53
1938 - -
154. 21
1 Annual Report of the Secretary of the Treasury, 1938, pp. 410-413, on basis of warrants issued up to 1915
and on basis of dailv Trasury statements (unrevised) from 1916 onward.
2 For years 1860-1930, inclusive, Recent Social Trends, p. 1342. For 1932, Financial Statistics of State
and Local Governments, p. 7. For 1931, Cost of Government in the United States, 1935-37, p. 30. J^or
1933, 1934, and 19?.5, Facing the Tax Problem, pp. 576-577. For 1936 and 1937, Clarence Heer, Federal Aid
and the Tax Problem, p. 31. For 1938, Bulletin of the Treasury Department, August, 1939, p. 4. These
figures for State and local taxes are obviously not comparable in any strict sense, because of the divergent
sources employed, but they are believed valid for a broad comparison.
3 Includes ad valorem levies only.
146
OONCENTRATION OF ECONOMIC POWER
Table 1. — United States tax collections, 1860-1938 — Continued
[All figures in millions of dollars]
ADJUSTED TO 1913 DOLLARS (NEW YORK RESERVE BOARD INDEX)
147
Federal
State
and
local
Total
Per capita
Federal
State
and
local
Total
1860
75
372
379
477
626
643
663
608
2; 968
2,250
1,845
1,911
2,158
1,872
1, 431
1,438
2, 156
2,497
2,532
3,158
3,918
132
275
383
604
1,025
1,504
1,597
1,845
1,692
2,542
2,894
3,469
4,046
4,389
5,060
4,399
4,274
4,208
4,311
4,361
6,331
207
647
762
1,081
1,651
2,147
2,260
2,453
4,660
4,801
4,739
5.380
6,204
6,261
6,491
5,837
6,430
6,705
6,943
7,519
10, 249
2.38
9.61
7.54
7.56
7.89
6.98
6.87
6.12
27.86
20.56
16.06
15.95
17.53
15.08
11.45
11.43
17.03
19.58
19.71
24.43
30.09
4.20
7.13
7.62
9.58
12.92
16.30
16.55
18.57
15.88
23.14
25.19
28.94
32.88
35.36
40.49
34.98
33.75
33.01
33.58
33.74
48.62
6.58
16.74
15.16
17.14
20.81
23.28
23. 42
24.69
43.74
43.70
47.39
53.80
50.41
50.44
51. 94
46.41
50.78
52.59
53.29
58.17
78.71
1870
1880
1890
1902
1910
1913
1915
1920
1922 - . - - - - .
1925
1928
1930
1931
1932
1933
1934
1935
1936
1937
1938—
148
CONCENTRATION OP ECONOMIC POWER
o
co" -T <N.-rTjrrH
jg
i
i^
387
1,951
1,248
4,181
839
g
i
S|
328
447
846
5,006
803
00-
o
2
585
509
835
5,027
1,115
i
si
358
834
164
3,321
1,223
00-
CO J;;^
03
05 05 00 t^'O
CO CO CO(N
1
a
i
00
2
427
145
707
""i,"394"
1,188
4,892
997
oT
1
SI
pf
1
2
i
O
Is
1^ 00O-*
CO
2
s§
1 1 co""
CO
o
CO
2
<^s
|§"g2
§
i
i
2,623
417
743
359
1,406
293
"""40i"
i
co-
§g
387
1,285
272
'"""366"
co
i
f
IS ^
oq-
o
2
23
ic lo 1 !co
GO
i
2§^. i is
COOO 1 ICO
s
•*-
CO
CT>
^
2§ i is
CO CO 1 '
Sales
Highway
Property
Another
i 1
i !
1
(NiC.-H(N-^COQO»C
03 CO 05 (N' CO oi o oi
o
1
CO r^ coos 00
CO 00 .-J 00 1>;
o
s
co<m'
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1
fin
COrHOOt^
m5 O M O -^
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o
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coco "cooJ
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4.4
1.5
7.2
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12.2
50.2
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s
icot^oeo
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loioicco
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t^co i ioo
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d^!^
>cd
CO
r^ S .s 2
^ c a _ w w
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rS F-. K — .3 w
g Qj o ^« a
'-^ -^ XS o -J^ ►t^
03 C3 C 03 O 03
^2,9 S cm
° £ O g ry: ^
v.x:^ o 3i oi
"g ^ c3 03 w O
fiH U ,-^ ^ j::; ^
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tC C
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^^'a&al
^j03 03-55— ^^H
«f^S.2-9cg
_o o3 a
OONCENTEATION OF EOONOMIC POWER
149
Table 3. — Corporate gross and net incomes and Federal corporate income taxes,
1909-37
[In millions of dollars]
Gross in-
come (all
corpora-
tions)
War-
Net in-
profits
Undis-
come (net
Income
and
tributed-
mcome cor-
tax
excess-
profits
porations)
profits
tax
tax
3,590
21
(2)
(»)
3,761
34
(2)
(')
3,503
29
(»)
(2)
4,151
35
(})
(2)
4,714
43
(})
(»)
3.940
39
(?)
«
5,310
57
(»)
(2)
8, 766
172
(')
(«)
10, 730
604
1,639
(»)
8,362
653
2,506
(2)
9,411
744
1,432
(2)
7,903
637
989
(«)
4,336
366
335
(»)
6,964
775
8
(')
8,322
937
(})
(2)
7,587
882
(2)
(2)
9,584
1,170
n
(')
9,673
1,230
(«)
8,982
1,131
Q)
(2)
10, 618
1,184
(')
(2)
11, 654
1,193
(2)
(2)
6,429
712
(2)
(»)
3,683
399
(2)
(2)
2,153
286
(2)
(2)
2,986
416
7
(2)
4,275
588
8
(»)
5,165
710
25
(2)
9,478
1,035
22
145
9, 635
1.057
43
176
Total
tax
1910
1911
1912
1913.
1914
1915.
1916.
1917.
1918.
1919.
1920.
1921.
1922.
1923.
1924.
1925.
1926.
1927.
1928.
1929.
1930-
1931.
1932.
1933.
1934.
1935-
1936.
1937.
0)
(0
(0
0)
(')
0)
(')
35, 328
84,693
86, 465
99, 919
118,205
91, 249
100, 921
118, 563
119,229
134, 260
142, 130
144, 398
152, 782
160, 622
136, 062
107, 515
81, 084
83,642
100, 831
113,936
132, 278
141,967
21
34
29
35
43
39
67
172
2,142
3, 169
2,175
1,625
702
784
937
882
1,170
1,230
1,131
1,184
1,193
712
399
286
423
596
735
1,191
1,276
1 Unavailable.
2 No tax in force.
Source: Statistics of Income.
Table 4. — Federal taxes and corporate income available for reinvestment or
distribution to individuals, 1916-37
[In millions of dollars]
Total
Federal
taxes
(1)
Cash divi-
dend paid
out to
individuals
(2)
Interest
paid
(3)
Deprecia-
tion and
depletion
(4)
Corporate
profits
(excluding
intercor-
porate
dividends)
after Fed-
eral taxes
(5)
Corporate
income
available
for invest-
ment ((5)
less (2))
(6)
1916.
172
2,142
3,159
2,175
1,625
702
784
937
882
1,170
1,230
1,131
1,184
1.193
712
399
286
423
596
735
1,191
1.276
8,766
10, 730
3,362
9,411
7,903
4,336
6,964
7,721
7,107
8,808
8,842
8,259
9,922
10, 891
6.067
3,500
2.015
2,717
3.877
4.627
6.031
6,067
1917 -
1918. -..
1919
1920
1921
1922
1923
2,376
2,463
2,752
2,981
3,069
3.396
3.626
2,862
1,499
863
889
1.030
1,151
1,706
1,664
2,302
2,379
2,739
3,125
2,792
3,250
3,602
2,867
1.823
1.292
1,627
1.872
2,084
2,674
2,855
1924...
1925
1926
4,287
4,481
4,990
5,653
6,077
3,019
1,883
1,946
2,912
3,169
4,675
4,794
4,555
1927...
3,778
1928.
4,932
1929
5,238
1930
990
1931
481
1932
132
1933
771
1934
965
1935
1,468
1936
1,356
1937
1.263
Source: Computed from Statistics of Income for respective years.
262698— 41— No. 9 11
150
CONCENTRATION OP ECONOMIC POWER
Table 5. — Effect of 1932 abolition of minimum income exemption hy size classes and
industries
Federal tax as percent of
net income (after prior
year's loss)
Years
Under $50-
$50 $100
Size classes (based on assets in thousands)
$100-
$250
$250-
$500
$500-
$1,000
$1, 000-
$5,000
$5, 000-
$10,000
$10,000-
$50,000
Over
$50,000
Mining
Trade
Service
Construction.
Public utilities
Finance
Total manufacturing
Food and beverages..
Tobacco
Textiles
Leather
Rubber
Forest products
Paper
Printing
Chemicals
Stone, clay, glass
Metals
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
1931
1932
6.7
13.4
2.5
13.1
4.0
13.3
3.0
12.9
3.7
13.3
3.0
13.6
3.4
13.5
4.8
12.2
7.2
13.8
2.0
12.8
3.4
13.1
5.0
14.0
2.1
13.0
3.2
13.4
2.9
13.5
4.4
13.5
1.5
12.7
2.9
13.6
7.8
13.7
5.4
13.4
7.2
13.6
7.3
13.5
7.5
13.5
4.2
13.6
13.4
7.2
13.4
4.4
12.8
6.0
13.3
6.6
13.5
6.3
13.0
6.8
13.9
5.9
13.1
6.6
13.5
6.9
13.6
6.6
13.8
6.9
13.0
13.7
8.4
13.5
9.3
13.6
9.9
13.5
9.1
13.6
6.3
13.6
9.5
13.5
9.8
13.4
10.8
13.8
8.8
13.3
9.3
13.5
12.0
13.6
8.8
13.4
9.4
13.9
9.6
13.7
10.2
13.4
9.0
13.7
9.0
13.4
11.2
13.6
10.6
13.5
11.3
13.5
11.4
13.6
11.0
13.6
8.4
13.5
11.2
13.4
11.4
13.2
11.0
14.2
11.0
13.5
11.2
13.0
11.4
13.6
9.9
13.5
11.2
13.5
11.3
13.7
ll.fi
13.5
10.8
13.5
11.1
13.6
11.4
13.7
11.5
13.6
11.5
13.7
11.7
13.6
11.7
13.6
9.7
13.7
11.7
13.7
11.7
13.6
11.8
13.9
11.5
13.6
12.0
13.0
11.5
18.2
12.0
13.7
11.7
15.0
11.8
13.7
11.8
12.5
11.5
13.5
11.7
13.6
11.6
13.8
12.0
13.5
12.0
14.2
12.0
13.8
12.0
13.7
11.4
13.5
12.0
13.7
12.0
13.7
11.6
13.8
12.0
13.5
11.9
13.6
12.0
115
11.9
13.7
12.0
13.7
11.8
13.8
12.0
13.6
11.7
13.7
12.0
13.7
12.0
13.8
11.9
13.9
12.0
13.9
12.0
13.7
12.0
13.8
11.9
13.7
12.0
13.7
12.0
13.7
12.1
13.8
12.0
12.8
12.0
13.8
12.0
14.4
11.8
13.9
12.0
13.5
12.0
13.8
12.0
13.8
12.0
13.8
12.0
13.6
12.0
13.9
11.7
13.9
12.0
13.7
12.0
13.8
12.0
13.8
12.0
13.8
12.0
13.8
12.0
13.9
12.0
14.0
12.0
12.7
12.0
12.5
12.0
14.5
12.0
14.1
12.0
13.6
12.0
12.0
14.1
12.0
13.8
12.0
13.9
12.0
13.9
12.0
13.7
12.0
13.0
12.0
13.6
12.0
14.1
12.2
12.0
13.7
12.0
14.0
12.0
14.0
12.0
13.8
12.0
14.1
12.0
13.8
12.0
13.9
12.1
14.3
12.0
13.9
12.0
14.0
Source: Computed from the Sourcebook of the Statistical Section of the Bureau of Internal Revenue.
Table 6. — Statutory deductions as percent of corporate receipts hy size classes, 1937
Size classes (assets
in thousands)
Cost of
goods
and op-
eration
Com-
pensa-
tion of
officers
Rent
paid
Bad
debts
Interest
paid
Taxes
paid
Depre-
ciation
Deple-
tion
Other I
deduc-
tions
Total
deduc-
tions
Under $50
73.2
75.2
74.4
72.6
71.5
68.5
65.9
63.6
64.0
62.2
6.3
4.4
3.6
2.9
2.4
1.6
1.1
.7
.5
.3
2.8
1.6
1.3
1.1
1.0
.9
.9
.9
.7
.8
0.6
.6
.6
.6
.6
.6
.6
.5
.4
.4
0.5
.8
1.0
1.3
1.4
2.2
3.0
4.0
1.2
1.4
1.6
2.0
2.3
2.6
2.8
2.8
3.6
3.5
1.2
1.4
1.5
1.7
1.9
2.3
2.6
2.9
2.9
3.1
0)
0.1
.1
.2
\l
.5
.6
.8
.6
15.2
14.1
14.3
15.0
15.3
16.3
17.0
17.2
16.0
14.6
101.2
$50 to $100
99.5
$100 to $250
98.6
$250 to $500
97.5
$500 to $1,000
$1,000 to $5,000
.$5,000 to $10.000....
$10,000 to $50,000. . .
$50,000 to $100,000..
Over $100,000
96.8
94.9
93.6
91.6
91.9
89.4
Total
67.8
2.0
1.1 .5
2.1
2.6
2.3
.4
15.5
94.4
» Includes contributions and capital losses.
Source: Computed from Statistics of Income.
CONCENTRATION OF ECONOMIC POWER
151
Table 7. — Statutory deductions as percent of total corporate receipts, 1936, hy
size of corporations and industries
[All corporation Income-tax returns subject to the 1936 Revenue Actl
PART I. MAJOR INDUSTRIES
Si7e classes based on total
assets (in thousands)
Manufac-
turing (in-
cluding
miscel-
laneous
manufac-
turing) 1
Mining
Trade
Service
Construc-
tion
Public
utilities
Finance
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1.000
$1,000 to $5,000-...
$5,000 to $10.000. . .
$10,000 to ,$50,000..
$50,000 to $100,000.
Over $100,000
Under $50
$50 to $100
$100 to $250
$250 to $500
.$500 to $1,000
$1,000 to $5,000
$5,000 to $10.000
$10,000 to $50,000....
$50,000 to $100,000...
Over $100.000
Under $50..
$50 to $100
$100 to $250
$250 to $500..
$500 to$j,000
$1,000 to $5,000--..
$5,000 to $10,000...
$10,000 to $50.000..
$50,000 to $100,000.
Over $100,000
Cost of goods sold as percent of corporate receipts
Under $50
$50 to $100
$100 to $250
.$250 to $500
$500 to $1.000
$1,000 to $5,000...
$5,000 to $10,000-.
$50,000 to $50,000.
$10,000 to $100,000
Over $100,000
70.1
73.9
74.9
75.0
74.0
72.4
71.6
67! 1
76.2
29.1
77.8
(2)
44.4
(2)
40.2
79.5
(2)
42.3
i})
46.4
79.2
(2)
35.1
(2)
62.5
78.0
(})
23.6
(2)
65.1
77.5
(2)
24.3
(2)
58.8
78.1
(2)
21.6
(2)
56.4
77.8
(2)
28.7
(2)
58.6
74.6
(2)
.1
(?)
48.4
69.1
(2)
(3)
(2)
54.1
70.6
i?)
(?)
(2)
Cost of operations as percent of corporate receipts
7
32.3
2.5
47.4
30.8
54.8
9
23.9
1.7
40.6
33.2
57.4
2
17.9
1.1
38.4
41.3
58.9
3
.9
.3
29.1
53.2
60.9
3
.1
.2
26.1
50.6
59.6
3
.6
.3
28.8
48.2
55.4
1
.2
.3
25.4
44.5
52.0
1
.2
{')
32.2
82.7
45.3
4
1.2
4.0
52.0
(3)
49.9
4
.1
.2
71.3
Q)
52.6
Compensation of officers as percent of corporate receipts
1
6.9
4.9
9.6
9.0
7.6
6
5.1
3.4
7.3
6.7
5.6
3
4.1
2.8
5.6
5.5
3.9
0
3.2
2.0
3.9
11.0
2.8
4
2.3
1.6
3.6
3.6
2.0
5
1.7
1.0
2.1
2.4
1.2
0
1.1
.5
1.0
1.4
.8
7
.4
.7
.7
.5
4
.5
.4
.6
Q)
.4
1
.4
.1
(?)
i?)
.1
Rent paid as percent of corporate receipts
1.9
1. 1
.8
.5
.4
.4
.3
.4
,1
2.2
7.6
0.9
3.6
,6
1.3
5.8
.6
2.9
.7
1.2
4.8
.4
2.4
.4
1.2
4.1
.3
1.9
.4
1.2
3.8
.3
2.1
5
1.3
4.0
.4
1.2
.4
1.2
3.6
.2
1.1
.4
2.1
4.1
.7
,7
.2
1.3
6.7
(3)
.8
.1
2.6
.8
(3)
.9
56.5
62.4^
41.9
2.1
1.5
.3
.8
.9
.8
1.5
11.3
7.8
9.1
11.8
10.4
7.0
3.7
2.2
2.2
2.2
3.6
1.7
2.6
2.1
1.5
1.7
See footnote at end of table.
152
OONOENTRATION OF ECONOMIC POWER
Table 7. — Statutory deductions as percent of total corporate receipts, 1936, by
size of corporations and industries — Continued
[All corporation income-tax returns subject to the 1936 Revenue Act]
Size classes based on total
assets (in thousands)
Under $50
$50 to $100
$100 to $250
$250 to $500
$600 to $1,000
$1,000 to $5,000^..
$5,000 to $10,000..
$10,000 to $50,000.
$50,000 to $100,000
Over $100,000
Under $50
$50 to $100
$100 to $250.
$250 to $500
$500 to $1,000
$1,000 to $5,000...
$5,000 to $10,000- .
$10,000 to $50,000.
$50,000 to $100,000
Over $100,000
Under $50
$50to$100_
$100 to $250
$250 to $500...
$500 to $1,000
$1,000 to $5,000
$5,000 to $10,000...
$10,000 to $50,000..
$50,000 to $100,000.
Over $100,000
Manufac-
turing (in-
cluding
miscel-
laneous
manufac-
turing)
■ Mining
Trade
Service
Construc-
tion
Public
utilities
Finance
0.7
.9
1.2
1.5
2.1
2.1
2.2
2.6
2.3
1.4
Under $50
$50 to .$100
$100 to $250
$250 to $500
$500 to $1,000
$1,000 to $5,000...
$5,000 to $10,000..
$10,000 to $50,000.
$50,000 to $100,000
Over $100,000
Bad debts as percent of corporate receipts
0.6
0.7
0.5
.5
.6
.6
.5
.7
.7
.5
.4
.6
.6
.7
.4
.4
.6
.4
.3
o
.3
.4
.5
.3
.2
.2
.3
.2
.3
.1
0.6
.8
.7
.7
1.0
1.1
.8
1.9
.3
3.0
0.5
0.7
.4
.6
.4
.5
.3
.5
.6
,4
.7
.4
.1
.2
.1
.2
)
.2
Interest paid as percent of corporate receipts
0.4
1.2
0.3
0.7
0.3
0.9
.5
1.2
.4
2.2
1.0
.6
1.5
.4
4.1
1.6
.6
1.6
.4
7.5
3.0
.6
2.2
.4
8.6
3.7
.5
2.2
.5
8.2
7.0
.6
3.0
.3
14.6
.6
8.8
.7
2.2
.5
9.3
.9
10.3
.9
3.5
.3
8.4
(3)
12.9
.5
2.9
.3
2.7
(')
11.9
Taxes paid as percent of corporate receipts
0.9
0.6
1.5
0.6
1.9
.8
.6
2.8
1.1
2.5
1.1
.6
4.2
1.1
3.1
1.1
.7
6.8
.8
3.8
1.0
.8
7.7
.9
3.9
1.0
.7
7.3
1.0
5.1
1.1
. 7
10.6
1.3
5.6
1.0
1.1
6.9
1.7
6.8
4.5
.9
4.4
(3)
7.4
8.5
.9
.3
(3)
7.4
Depreciation as percent of corporate receipts
1.4
4.7
0.6
2.6
1.0
5.0
1.5
4.9
.6
4.2
1.6
5.6
1.5
5.1
.6
5.2
1.8
5.8
1.7
5.7
.5
7.2
2.1
6.4
1.8
5.2
.6
8.1
2.8
6.9
2.2
5.9
.6
7.6
3.2
8.7
2.4
5.9
.7
10.9
2.9
9.8
2.7
5.7
1.0
7.0
2.1
10.8
2.9
6.7
.7
4.5
(3)
9.1
2.6
4.2
.7
.2
(')
6.6
0.7
.7
1.4
3.6
3.8
3.5
3.0
2.2
2.3
3.7
1.6
2.5
5.5
12.2
11.3
9.0
8.4
6.1
6.2
12.4
6.6
7.4
10.1
12.5
9.9
7.8
5.9
10.6
3.0
4.5
1.2
1.8
3.0
4.7
4.1
3.0
1.9
1.4
.9
1.7
See footnotes at end of table.
GONOENTRATrON OF EOONOMIC POAVER
15S
Table l.Statutory deductions as percent of total corporate receipts, 1936, hy
size of corporations and industries — Continued
[All corporation income-tax returns subject to the 193G Revenue Act]
Size classes based on total
assets (in thousands)
Manufac-
turing (in-
cluding
miscel-
laneous
manufac-
turing)
Mining
Trade
Service
Construc-
tion
Public
utilities
Finance
Depletion as percent of corporate receipts
Under $50 -.
(')
(0
0.1
.1
.2
.2
.6
.7
3.7
4.0
4.5
6.3
6.4
7.6
9.0
7.2
11.7
6.8
(^)
(*)
(*)
(')
(*)
(')
(*)
(<)
(*)
(*)
(0
0.1
0)
.1
{*)
(')
(*)
8
(*)
(*)
(*)
0.1
.1
.1
.4
.3
.2
.1
i
(*)
(^)
(<)
0)
$50 to $100 -
$100 to $250
$250 to $500
$500 to $1,000
$1,000 to $5,000
$5,000 to $10,000
$10,000 to $50,000
(4)
$50,000 to $100,000
(*)
Over $100,000
(<)
Net capital loss as percent of corporate receipts
Under $50
0.1
(*)
(*)
(*)
0.1
.1
.3
1.1
.4
.4
.3
0
(0
8
0.1
.1
.1
.2
.2
.2
0)
(')
(')
0.6
.4
.3
.1
.1
.2
(3)
0.7
.1
.2
.1
(*)
(*)
(*)
0.1
$50 to $100 -
.1
$100 to $250
.2
$250 to $500
.5
$500 to $1,000
1.0
$1,000 to $5,000
.5
$5,000 to $10,000
.3
$10,000 to $50,000
.1
$50,000 to $100,000
.1
Ovpr $100,000
(*)
other deductions as percent of corporate receipts
Under $50
13.1
12.7
12.4
12.9
12.9
13.4
13.2
13.6
14.8
9.7
23.0
18.7
15.2
13.6
13.7
14.1
11.7
12.3
14.1
8.6
10.9
11.1
12.1
13.3
13.7
14.3
14.9
16.4
25.0
17.5
30.7
35.5
35.2
39.7
41.3
40.1
37.9
39.2
15.4
26.6
14.7
12.3
11.7
11.3
10.3
12.6
13.6
4.0
(3)
(3)
27.6
22.2
19.1
14.0
14.1
13.5
11.6
13.0
12.1
11.7
15.4
$50 to $100
12.9
$100 to $250
18.2
$250 to $500
27.0
$500 to $1,000
31.1
$1,000 to $5,000
32.3
$5,000 to $10,000..
43.9
$10,000 to $50,000
49.6
$50,000 to $100,000 .
30.7
Over $100,000
28.6
1 Includes income-tax returns with fiscal year ending July-November 1936.
2 All reported as "cost of operations."
3 No corporation.
* Less than 0.05 percent.
' No deduction claimed.
Source; Computed from the Sourcebook of the Statistical Section of the Bureau of Internal Revenue.
154
GONOENTRATION OF ECONOMIC POWER
-2-3
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CD f-i C^' r-i
»o t^t-» 000 05
CJ CO '*■ -^ C^ rH
05 Ttl Tf 00 o> o
o4 oi t^ ui eo oi
rHeO00 00>Ot>.
CO CO ■* CO Ci rH
t- ■<*<■«*< CO CO CO
t^ «d •*■ CO <N rH
»o e^ o> t^QO ■*
00 CD ■<^' CO C^ rH
»O05C0 00OC0
t>^ ■<*; CO IN Ci rH
W rH CO t^ ■* t^
CD ■*■ CO C^' C^' rH
N »0 CT> t^ C<1 ■*
00 »d CO C4 N rH
00 CO IM CO O i-O
t>^ i*< ^' CO CO rn'
oseorHr^eoe^
CO O CO C^ C^' rH
C0'<*<t^0'00
■^ CO C^' C<i r-i rH
' 'ooo
h-* «^ ««^ «<^ «^ «^ «/? ^ €«^ O
ooo
o o _r-
,_ ,^ ._^ -OlOrHj
a- o+j-i-^+joooo .
fl o o lo o '^'-io o >
€» €^ 6^ «^ €^ ««^ «^ «» O
; i i ;dg
5|rH€l^€^€«^ O
P lO rH d lO rH
OONOENTRATION OF ECONOMIC POWER
155
NC^OOtOCOCOlClOCO
oot^Tftcoe^(Ncio<
00t>.»O-<»(CSf0t^(Nrt<CJ
OC^TjiC^CO-^l^OOt^t^
M.-H 1
N (N 1-5 1-; -5 i4 ■ r-J ' r-i
fOQO»o-^-^eoeonc^r-i
»-io005t^eO«^rt<i-(irtiO
CD O 00 >0 Tf( CO 00 f
OSt-HOt^OOOOt^O
I ^ 00 Tji CO C» C« C^ 1
W r-i
C<«0>»OiOC^C>^^C<)i
cot^cOTt<e<ST(<eo>0'^c»
) lO »OUOM<M (M rS »H
iCOOiOTfliOCOTj<C^C«5
0500t>-0000>OC^iC
iO(NCD00iMCOTt<C^i-lN
it>-oooe^OTt<fOi-<i-i
ooiooooooocDcoi-Hio
1 CO Tt< "O e<i c<no w .
^^ooooooo5l>•oo
C5 ' ' "rH * ' ■
OOUSCOt^^COeOrHC^'*
,j< T^ CO « (N C>» S^
> C35,
cc CO eo CO CO »o N
■^c<5eccoc^i-i^c<»i-i
ioco»ooooooeocoi
o
■^•<*i'^cococ<i.-ie^'
o
»ot^t^t^t^»oe<>»o
«3 O CO iO CD ■«*< O <
OOCOlOOOCDlCt^OOCOlO
i0Oi0>O>CiC0t>.t^Tti00
»OCO00t>-O5t^r-<O>O5b»
o >-J ■ 1-5 id
Tj<'il<»CiOC0000500i>0
O i-I t^ T}<
CDOC'OiOOQOC^-«*<CO(N
Tj* Tjt >o ■* lo CO eo T-io
O _ -N
eo»0'tiioio>OT»<M
iM CO CO Tt< eo CO »
iOCO««Ol^t^O>'*N
c5
ioio«o«D«oc<'<»<N»-<eo
o '^ '
n<iOCOt>.t^CO00'^00
o ,
eoio>o«oio»oco»ot^c^
§8
t-^ o o o*f *f oo«
-O +^ o o o § g ^.==2- !
ss
= 88
Loog
. i <5 g o "o^ ^^=i
g8c^S^*^^oog
S o-ii+^-MOOOo ^^
-O^ooogg^-^-o
lt^OT-((MlOr-(10— 1>0— .
I-' ee- ^ ««■ -ae- se- ««■ «/^ ««■ ^
oo _r
- go§g§8
O O O lO r-l %^««.0
ISO r«/r6e^ r^
"O ■'^ o o o S ^^ S
fl o o «o o '^ -oo t>
t^ «l fiS- ^ ««• s?- ««■ ^ «^ o
156
CONCENTRATION OF ECONOMIC POWER
CO
•1
2
a
1
'3
P.
1
O^C«Tf<«>OrHOt^Tj<
i2
.S*
1
o
o
a
o
1
1
<NU5OOO>0rHt^»CO
^' ^ ^ Ci rn" rA ciC^rArA
££SSSSS
1
00Oi-lN<NC<5C0«0000
O rM rH T-i r-; ,-; rH .-; rH >-;
i>ooo50'-i-*t^oe^co
i-i I-; rH (N es c4 c<i im' o -^^
oec-^iO"5t^ooooooc<
«5 (N r-l <N CO (N 00 05 00 rH
,-1 ,-i,-i,-iio
Neococo'coo-d^-^eo
££
2S
oooeoooi>oo05«o-*»o
»OC<JO00f-iOO-<*»CO
w c<i (N (N co' CO CO co" »c lo
i-(IN;Ot>.0
to Ad 'i-H • •ntJh'csi
££
1
o
(N M< TJH O 00 O <N <© 00 »0
^co
,_ii-<i-ii-ir-(e^c^coc<)iM
£ £££
1
.9
Ph
Or-Hl-Hi-HrSi-Hi-Jc^iT-icO
CO<NrHO<Ni-(005Tf<l>
.1
C<i C4 (N C^ <M (N (N r-; r-; C<«
■^v-^WWWWW
1
«t^O5Oe0-*0000rH-<*<
tot>.ooojeo»oc<ic^e<3o
pHrHrMr-5c^CO-<l'-<i'lO-*
1
^rH
C5 • • ^' rt" ,4 ^- ,-i (M* <N
1S§
^1
ciooi-iT»<ioooMiNooeo
O ^ r^ r^ -; ,-; C4 (M" (N M
Tl<iC<DC»<NO5-*i«O00C^
8
iH .1 CO «5 00 ■* Tti
^rHrHrtC^deOTjJ^'^O
o • • • -c^co
H
1
»^ooa)0»ooi»ccoc<«eo
T*4 05 oj .-I Tj< t^ c^ t> eo
c5 r-;.HtHe<5CO»rf«c5
r-J 1-5 i-H cs c^' c4 c<i c>i w
C^S^S^S^S^C^ S^
1
iot^ot^ccoooo
t^Ol^t^OOOSOSt^
c5^ -^"^^
£££££££
1
•^eoeo-*iot>t^05
o
£££££££
S
2
^
U5 O 00 O rH CO T»< »C (N
0'-H-<J<Or-tTt<i-l050
I-H r^ rl r-l CSJ (N eo* M rj; ^
c^c^c^c^s^s^s^
1
Mt^00rH»Oe0O00«Oa5
on>oooooo3oot^-<i<
O • 'rn'r^,-; ■ • ■
(N CO od CO (N t>-" iM' M rt' ^_^
WWS^WWWW
^
«>r^0000t^iMCOiO(NC<»
l:^ 00 00 >0 -* «>0 (N (N CO
O • rt rt rt CO M
^ ^ ^ ^ pH* ^ ^' C^ ^' ^
^
s
ilfli
Si
8
«
5
ill
CONCBNTKATION OF ECONOMIC POWER
157
r-4C005C0000iCT>t>.Oa>
»0 u-5 ro lO »0 iO 00 CO OS o>
coeo(M-^M050500(No
•^' fO 00 05 I© 05 IN CO 00 «6
i-ir>.i-i->*ooo«oooi>->o
^i 00 00 1> 05 o o o rt' im'
(M_r-H^r-(Oq(MrH<Nr-l
ooododooodoooio^'
r-HrtrHr-fr-((Mrtr-ieOM
eo<M*c<icoodo«>05t^e<i
,-|rH,-(r-l,-((Mr-l,-l CO
COOOO'*OOOi-IOCO»
0^rHrHO^CO-<*'oCO
(Meoco»ca>u50oocoio
.-lrHi-lrHr-l,-lrHf-l(N<N
ONt^coococ^o
c>05o6odoJoJt>^«d
OO^OOOOOOOCO
o o o o -! (m' c3 00 ^_,^_^
(MOt^-^i-KN'^'l^O
cJoooododooooi-JoJ^^
lO-^oiciN-^oo-^oai
coooot-^Mt^coodio
loi-ioioo'^t^cioo
to l>^ CO t^ t^ 00 Co' rj< 00 ^^
cot^or^-^oowoorH
^ ^' rH ^' r-J •^' i-I CC5 lO OS
o_o§
Sr2.««-««-«^ o o -is is o
« o+-=-w*^oooo t^
fl o o »g o '<'r-o o t>
I— ' «^ ««■ €/^ ^ ««•««•««• se- V
o o
O O o lO '
««^«^«j o o -w +^ 2
o o 0"^*^00€«-
o>oo^ -oo >
r-t(NlO.-|lOrHlO/-s
€i9^ ae- €«■€©■ «^ €^ ^ '^
P 0)
o
^a
^
S-3
V,
i
^o-y
^
8
o S o
158
Table 8,
CONCENTRATION OF ECONOMIC POWER
— Deductions for prior years' losses as percent of taxable net income, by
industries.
[Net returns only]
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
Manufacturing
9.3
7.6
6.8
12.0
55.6
11.7
10.1
2.4
5.8
3.2
13.1
10.6
9.6
2.1
6.3
1.8
2.2
8.2
10.3
6.1
6.7
51.1
8.5
13.1
2.0
5.3
6.0
9.5
12.7
7.6
3.9
17.0
2.5
2.7
2.7
3.6
2.3
4.2
19.9
2.4
6.3
1.4
2.0
1.8
2.0
3.8
2.7
3.2
7.6
2.3
3.0
2.5
1.8
6.6
4.9
1.8
2.9
1.7
1.7
2.6
1.3
1.9
5.5
2.7
3.5
5.6
1.2
2.1
2.2
1.6
3.1
3.8
2.2
3.2
2.9
1.9
2.4
1.2
1.7
5.6
3.0
4.3
5.7
.9
2.8
2.5
2.0
8.2
7.1
5.8
3.6
2.6
2.0
1.7
1.1
1.0
4.6
3.4
4.6
5.7
.8
3.4
2.5
2.7
3.9
2.2
3.1
5.9
1.7
1.9
1.7
2.0
2.2
5.8
3.4
5.4
6.4
1.6
3.2
3.8
2.3
3.5
1.8
1.9
5.5
2.3
1.8
1.8
1.9
5.5
4.8
3.7
5.4
6.4
2.3
2.2
1.8
1.4
3.6
1.4
6.3
5.7
1.6
1.5
.8
2.7
2.2
4.5
3.1
4.2
6.8
1.0
4.0
3.4
3.6
13.1
4.3
17.1
10.3
2.6
2.1
1.9
4.1
3.0
8.8
4.2
5.9
11.2
1.2
6.7
4.3
Food and beverages
8 2
Textiles
Leather
Rubber
Forest products -_
7.1
3.6
21.0
7.5
Paper
2.8
3.9
Chemicals
Stone, clay, and glass..
Metals
Mining
3.3
3.1
3.1
13.8
Trade
5 2
Service
5.9
Construction
Public utilities....
Finance
13.3
.8
7.1
J The deduction of prior years' losses expired with the year 1932.
Source: Computed from Statistics of Income.
Table 9. — Deductions for prior years' loss as percent of taxable net income, 19Sl-t
by size, classes and industries
[Net income returns only]
PART I. 1931 (2-YEAR CARRY-OVER PERMITTED)
Manufacturing (including
miscellaneous manufactur-
ing)-.
Food and beverages
Tobacco. _-
Textiles
Leather
Rubber
Forest products
Paper
Printing.
Chemicals
Stone, clay, and glass
Metals
Mining-.
Trade
Service
Construction
Public utilities
Finance
All corporations (including
agriculture and miscella-
neous)
Under
$50
8.7
4.0
5.8
13.7
12.5
4.1
16.5
3.4
7.4
8.0
8.5
11.5
13.4
7.9
8.5
18.8
7.0
6.7
8.6
Size classes (based on total assets in thousands)
$50-
$100
10.2
7.9
27.4
16.0
27.6
5.1
12.1
6.6
2.9
8.1
8.8
13.3
8.3
10.6
10.0
20.6
8.8
6.4
$100-
$250
6.3
14.5
22.7
47.6
n.3
6.4
4.6
11.7
7.8
7.2
12.3
9.1
7.0
17.4
7.5
6.3
8.8
$250-
$500
5.5
4.5
2.2
12.6
16.3
3.8
10.7
4.6
4.3
8.7
8.3
6.9
12.2
6.8
5.3
12.7
3.7
8.4
7.6
$500-
$1,000
6.3
6.1
0)
12.2
9.6
30.9
7.0
6.8
6.2
9.6
6.6
4.6
12.9
1.4
10.0
7.3
$1,000-
$5,000
4.5
2.7
.4
10.3
3.3
16.2
5.0
2.4
3.
4.
5.7
$5,000-
$10,000
3.8
.8
(1)
34.8
4.7
40.6
22.5
2.1
0)
1.1
9.3
6.6
13.0
.4
18.3
4.8
1.2
3.6
$10,000-
$50,000
3.1
5.7
0)
10.2
0)
(2)
60.2
2.4
.7
1.4
13.6
9.9
3.2
2.0
Over
$50,000
1.0
2.5
0)
(0
0)
13.2
(')
0)
(')
(8)
9.4
1.4
4.8
.1
(')
(0
.4
3.8
1.1
Total
3.2
3.5
.1
12.5
4.0
15.3
10.0
2.6
2.0
1.8
4.1
3.0
8.5
4.0
5.8
11.2
1.2
5.7
3.6
1 No loss claimed.
2 No corporation.
2 Less than 0.05 percent.
CONCENTRATION OP ECONOMIC POWER
159
Table 9. — Deductions for prior years' loss as percent of taxable net income, 1981-82
by size, classes and industries — Continued
PART II. 1932 (1-YEAR CARRY-OVER PERMITTED)
Size classes (based on
total assets in thousands)
Under
$50
$50-
$100
$100-
$250
$250-
$500
$500-
$1,000
$1,000-
$5,000
$5,000-
$10,000
$10,000-
$50,000
Over
$50,000
Total
■Manufacturing (including
miscellaneous manufactur-
ing) -
Food and beverages
Tobacco
21.5
12.0
7.8
25.3
16.7
21.9
33.2
8.9
25.2
15.4
31.8
34.7
16.4
20.2
16.1
45.7
9.4
11.9
18.0
13.4
8.7
13.3
17.5
20.0
5.7
27.4
10.6
7.0
8.5
15.9
22.4
18.4
13.7
12.5
30.9
5.8
7.9
12.6
8.6
4.6
1.5
10.9
13.0
12.3
11.0
5.4
6.7
7.3
9.4
16.4
8.9
8.5
5.7
18.3
4.5
7.9
8.3
4.5
2.9
7.0
5.2
6.4
5.4
10.5
3.5
3.8
3.7
11.0
6.6
11.1
6.0
4.3
8.0
3.8
8.9
6.3
4.2
3.6
12.2
8.9
2.1
21.4
4.1
.3
3.9
2.1
10.7
4.3
7.8
6.4
3.1
10.7
4.5
10.9
6.5
3.3
1.7
.1
8.9
11.1
2.7
1.6
3.5
4.2
1.4
.3
5.3
7.5
2.4
4.9
5.4
1.3
11.0
4.6
1.6
2.4
0)
2.0
0)
78.0
<'L
(')
1.0
0)
.7
3.1
4.6
(1)
7.5
2.8
1.6
3.5
0)
2.7
0)
i
6.7
.2
(•)
0)
.1
2.3
2.0
15.1
.1
8.5
2.4
5.4
14.6
^8
(»)
0)
(0
6.5
?!
91.6
2.5
.6
6.6
2.7
4.3
8.2
Textiles
3 5
Rubber
21 0
Forest products
Paper -
7.5
2 8
Printing .
3.9
Chemicals
3.3
Stone, clay, and glass
Metals ---
2.9
2.9
Mining
13.9
Trade
5.0
Service
4.9
13.3
Public utilities
.8
6.5
All corporations (including
agriculture and miscella-
neous) - --
4.0
1 No loss claimed.
» No corporation.
Source: Computed from the Sourcebook of the Statistical Section of the Bureau of Internal Revenue.
Definition of terms: Taxable net income is the excess of receipts over deductions less tax-e.^empt income
a. e., intercorporate dividends and interest on government securities) before the deduction for prior years'
losses.
Table 10. — Consolidated returns in Federal corporate income taxation; number of
returns, gross income, net income, and Federal tax, by industries, 1928-86
PART I. NUMBER OF CONSOLIDATED RETURNS AND SUBSIDIARIES
1928
1929
1930
1931
1932
1933
1934
1935
1936
Manufacturing (including
miscellaneous)
3,237
I 502
357
100
54
289
105
227
405
130
830
526
1,731
549
198
789
2,121
9,300
(0
443, 611
2.1
3,216
498
363
96
43
278
105
228
398
140
844
509
1,450
554
194
806
1,907
8,754
30, 112
456, 021
1.9
3,277
488
384
98
48
282
107
253
409
136
837
502
1,520
582
187
789
1,982
8,951
32, 209
463,036
1.9
3,093
} 431
20
365
96
41
253
96
257
382
145
795
469
1,445
526
182
774
1,895
8,495
31, 307
459, 704
1.8
2,542
352
15
300
69
37
206
84
224
308
100
661
425
1,278
551
176
637
1,707
7,426
29, 232
451,884
1.6
2,455
f 308
1 53
15
287
75
38
195
85
213
298
102
642
397
1.135
533
169
639
1,665
7,101
28, 589
446, 842
1.6
201
33
5
Food
Beverages
Textiles
41
8
6
7
5
4
26
3
54
7
66
41
2
76
50
445
2,522
469, 804
.1
Leather
Rubber
Forest products
Printing
Stone, clay, and glass.. .
Metals
Mining
Trade
Service
Pubhc utilities
63
98
Finance
All corporations (including
miscellaneous)
63
0)
477, 113
(»)
98
Number of subsidiaries
All active returns
0)
478,857
Consolidates returns as per-
(?)
1 Not available.
» Less than 0.05 percent.
160
OONCENTRATION OF ECONOMIC POWER
Table 10. — Consolidated returns in Federal corporate income taxation; number of
returns, gross income, net income and Federal tax, by industries, 1928-36 — Con.
PART II. GROSS INCOME REPORTED ON CONSOLIDATED RETURNS AS PERCENT
OF TOTAL GROSS INCOME REPORTED ON ALL RETURNS
1928
1929
1930
1931
1932
1933
1934
1935
1936
Manufacturing (including
52.7
20.7
38.7
79.7
26.7
40.0
32.7
69.3
35.0
62.7
54.1
21.3
25.6
10.3
80.7
45.1
45.6
57.2
62.0
23.1
43.1
81.7
26.8
42.0
33.2
78.6
40.0
67.3
57.1
22.0
27.8
14.6
83.0
20.8
43.6
60.0
63.3
23.4
43.6
84.2
28.8
43.2
33.4
85.2
42.5
66.5
58.3
25.7
79.0
15.3
84.1
19.8
47.6
56.7
1 61.2
35.0
23.3
44.1
82.6
63.3
36.0
34.6
79.2
45.5
65.7
60.8
27.6
34.3
15.0
84.9
21.7
46.7
49.2
53.7
9.5
15.9
23.9
82.8
26.1
33.9
28.3
76.6
31.7
57.9
56.1
21.5
27.8
15.5
68.9
19.0
39.6
46.3
r 52.1
\ 22.2
9.0
15.5
21.0
77.6
27.4
31.7
27.9
70.6
31.1
57.4
59.3
19.1
26.6
13.7
68.9
17.1
37.9
7.6
23.7
.7
Food
Tobacco
Textiles
i.3
2.3
26.3
1.7
2.4
Leather
Rubber
Forest products .
Paper
Printing
Chemicals
Stone, clay, and glass...
Metals...
1.6
11.4
.1
5.5
Mining
Trade
Service
Construction
Public utilities
6.4
18 1
Finance . .
All corporations (including
miscellaneous) . .
PART III. TAXABLE NET INCOME REPORTED ON CONSOLIDATED RETURNS AS
PERCENT OF THE TOTAL TAXABLE NET INCOME REPORTED ON ALL NET
RETURNS
Manufacturing (including
miscellaneous)
53.4
■ 50.7
40.6
49.2
55.7
30.6
31.7
35.9
64.1
41.9
62.4
54.4
30.4
28.6
16.0
78.6
20.7
47.6
58.4
54.8
31.6
53.5
64.4
27.1
39.2
34.6
78.2
44.9
64.7
56.4
30.5
36.3
21.5
79.6
21.1
5L1
60.3
56.0
31.3
64.4
52.1
17.6
37.0
26.9
78.3
48.1
66.7
47.7
37.4
39.2
16.7
78.1
19.0
52.5
55.6
} 66.1
26.1
30.5
70.8
69.8
17.8
20.4
25.0
64.2
52.5
72.1
27.2
48.2
27.9
11.1
74.0
15.1
50.1
23.1
31.0
3.2
7.1
13.5
45.2
3.2
5.2
13.1
37.4
1.2
26.9
17.6
23.7
18.2
7.3
32.7
4.6
23.3
29.8
f
Food
.
13everages
1 26.8
6.2
13.2
17.2
41.4
23.6
15.3
16.1
36.9
18.4
52.2
14.3
19.4
18.9
1.5
38.8
10.7
27.9
7.0
Tobacco - —
Textiles
1.6
LI
3.6
.8
.6
(')
.4
(0
.9
(0
1.3
7.8
.1
L2
(0
L6
Leather ..
Rubber
Forest products
Paper
Chemicals
Stone, clay, and glass...
Metals
Mining
Trade
Service
Public utilities
0.6
8.3
Finance
All corporations (including
PART IV. FEDERAL CORPORATE INCOME TAXES REPORTED ON CONSOLIDATED
RETURNS AS PERCENT OF TOTAL FEDERAL CORPORATE INCOME TAXES RE-
PORTED ON ALL RETURNS
Manufacturing (including
miscellaneous)
Food
Beverages
Tobacco
Textiles
Leather
Rubber
Forest products
Paper
Printing
Chemicals
Stone, clay, and glass..
Metals
Mining
Trade
Service...
1 Less than 0.05 percent.
54.6
51.9
30.4
51.4
57.4
32.2
31.7
37.9
64.7
43.4
63.0
64.7
33.9
32.5
58.9
52.3
32.7
57.1
65.4
28.7
39.7
36.7
78.7
46.4
64.1
58.9
35.3
40.5
61.8
67.5
35.3
67.6
51.7
19.9
38.1
28.3
79.1
58.1
67.6
50.4
44.5
44.9
57.7
26.1
34.9
75.7
67.6
20.9
20.8
26.2
65.2
55.0
74.4
29.8
57.4
33.1
22.2
27.2
3.3
8.2
12.9
33.7
2.8
5.6
12.6
37.2
L4
28.7
10.9
25.3
17.6
30.5
27.8
27.3
6.7
13.4
18.0
41.5
23.9
15.8
16.7
37.6
18.9
53.0
14.6
19.8
1.5
5.0
17.0
.2
15.7
7.0
30.5
2.0
3.0
(')
3.7
1.6
(')
7.6
30.9
CONCENTRATION OF ECONOMIC POWER
161
Table 10. — Consolidated returns in Federal corporate income taxation; number of
returns, gross income, net income and Federal tax, by industries, 1928-36 — Con.
PART IV. FEDERAL CORPORATE INCOME TAXES REPORTED ON CONSOLIDATED
RETURNS AS PERCENT OF TOTAL FEDERAL CORPORATE INCOME TAXES RE-
PORTED ON ALL RETURNS— Continued
1928
1929
1930
1931
1932
1933
1934
1935
1936
Construction.
18.5
79.4
22.2
49.9
24.8
80.2
22.2
62.9
19.2
79.1
21.2
55.9
12.2
75.4
14.5
54.3
3.8
33.8
4.1
23.5
19.4
40.0
11.3
28.6
1.2
2.9
0)
Public utilities.
Finance ....
0.7
7.9
All corporations (including
miscellaneous)
1 Less than 0.05 percent.
Source: Computed from Statistics of Income for respective years.
Table 11.
■Comparison of corporations filing consolidated and unconsolidated
returns in 1933 and 1934 by industries
PART I. MAJOR INDUSTRIES
1
tJO
a
'S
S
1
.1
>
1
1
6
1
i
C3
a
<
A. Taxable net income as percent of corporate
receipts:
1. Consolidated corporations:
(a) All returns (net and no net) :
1933
2.7
3.8
0.9
3.9
1.8
2.4
1.5
3.2
0.2
2.4
3.5
5.3
2.C
6.2
2.6
1934
4.0
Increase or decrease
1.1
3.0
.6
1.7
2.2
L8
4.2
1.4
(6) Net returns only:
1933
4.4
6.0
5.9
9.1
2.8
3.2
5.7
5.2
L3
6.0
9.7
12.0
7.3
15.2
5.1
1934.
6.8
Increase or decrease
L6
3.2
.4
-.5
4.7
2.3
7.9
L7
2. Unconsolidated corporations:
(a) All returns:
1933 .
5.4
5.4
7.7
9.7
L8
2.0
2.4
3.1
2.5
2.6
12.2
12.2
3.6
5.1
4.1
1934
4.3
Increase or decrease
2.0
.2
.7
.1
1.5
.2
(b) Net returns only:
1933
8.2
7.6
16.0
16.4
2.9
2.9
7.4
7.6
6.7
5.6
18.6
18.8
9.6
14.4
7.1
1934. ..
6. a
Increase or decrease
-.6
.4
.2
-11
.2
4.8
-.a
3. All corporations (consolidated and uncon-
solidated) :
(a) All returns:
1933...
4.1
4.6
3.6
6.2
1.8
2.1
2.2
3.1
2.2
2.6
6.2
7.3
3.4
5.3
3.5
1934
4.2:
Increase or decrease
.5
2.6
.3
.9
.4
1.1
1.9
.7
(6) Net returns only:
1933
6.5
6.9
12.8
12.6
2.9
3.0
7.0
6.7
6.3
5.6
13.7
14.6
10.3
14.3
6.4
1934
6.S
.4
-.2
.1
-.3
-.7
1.1
1
4.0
.4
—
162
CONCENTRATION OF ECONOMIC POWER
Table 11. — Comparison of corporations filing consolidated and unconsolidated
returns in 1933 and 1934 by industry — Continued
PART I. MAJOR INDUSTRIES— Continued
CUD
a
1
"3
'5
s
1
a
o
1
§
.2
3
.2
§
0
<
B. Federal taxes as percent of taxable net income
(net returns only) :
1. Consolidated corporations:
1933- -.
14.5
13.9
14.5
13.8
14.5
14.0
14.6
14.2
14.5
13.8
14.5
13.8
14.7
13.9
14.5
1934 ....
13.9
Increase or decrease
-.6
-.7
-.5
-.4
-.7
-.7
-.8
-.6
2. Unconsolidated Corporations:
1933 _.
14.1
14.0
14.2
14.1
14.2
14.0
14.2
14.1
14.6
14.4
13.8
13.8
13.9
13.9
14.0
1934 - __.
14.0
Increase or decrease
-.1
-.1
-.2
-.1
-.2
1
PART II. MANUFACTURING INDUSTRIES
1
>
1
4.1
5.1
1
2
1
1
1.0
1.7
2.0
2.8
1
2.2
4.3
1
1
£
2.5
5.4
2.3
4.0
n
g-3,
O
'3
A. Taxable net imcome as percent of
corporate receipts:
1. Consolidated corporations:
(a) All returns:
1933.
1934
1.9
2.6
13.2
13.5
3.7
1.9
3.9
2.2
2.9
7.0
3.2
4.3
Increase or de-
crease -
.7
.3
1.0
5.0
6.0
1.0
-1.8
6.4
4.5
-1.7
.7
.8
2.1
6.0
7.0
2.9
1.7
4.1
1.1
(6) Net returns:
1933
1934
2.3
2.9
.6
5.5
4.7
1
14.9
15.6
6.2
3.5
-2.7
2.9
3.5
.6
6.2
6.6
.4
3.7
8.3
3.8
9.9
4.2
9.3
5.1
6.4
6.3
Increase or de-
crease
.7
-1.9
4.5
2.9
1.0
4.6
6.1
-.1
2. Unconsolidated corporations:
(a) All returns:
1933
1934
12.1
8.7
7.2
9.5
5.0
3.7
4.9
3.6
2.4
2.4
5.6
6.9
5.0
6.5
9.3
9.6
5.7
7.0
3.9
5.2
Increase or de-
crease
-.8
-3.4
2.3
-1.6
-1.3
-1.3
1.3
1
1.5| .2
1.3
1.3
(6) Net returns:
1933..-.
1934
8.1
6.1
15.2
11.0
8.0
9.8
6 4
4.7
6.6
5.3
6.9
5.7
5.4
5.2
7.7
8.6
•9
8.8
9.3
13.7
11.6
10.2
10.4
7.9
7.7
Increase or de-
crease
-2.0
-4.2
1.8
-1.7
,-1.3
-1.2
-..
.5
4.3
6.2
-2.1
.2
-.2
3. All corporations:
(a) All returns:
1933
3.6
3.5
12.4
9.8
6.9
9.0
4.4
2.7
4.8
3.4
1.9
2.1
2.3
2.5
1 4.5
6.1
4. 3 4. 8
5.5 7.0
1.2| 2.2
2.7 8.1
10.7, 10.0
1 8.o' 1.9
3.5
1934
4.6
Increase or de-
crease
-.1
-2.6
2.1
-1.7
-1.4
.2
•2
1.6
1.9
1.1
(6) Net returns:
1933
1934
Increase or de-
crease.
4.8
4.2
1
!-.6
15.1
12.1
-3.0
7.8
9.5
1.7
6.4
; 4.7
-1.7
6.5
5.0
'-1.5
4.4
4.0
-.4
5.6
5.6
7.4
8.2
.8
7.3
j 9.0
!
I 1.7
7.1
6.8
-.3
CONCENTRATION OF ECONOMIC POWER
163
Table 11. —Comparison of corporations filing consolidated and unconsolidated
returns in 1933 and 1934 by industrij — Continued
PART II. MANUFACTURING INDUSTRIES-
-Continued
1
1
>
PQ
1
1
®
.a
1
'6
¥
o
s.
Ah
1
d
i
1
B. Federal taxes as percent of taxable
net income (net returns only) :
1. Consolidated corporations:
1933
1934
14.5
14.1
14.5
14.7
14.5
13.8
14.4
14.0
14.8
14.0
14.4
14.2
14.6
13.8
14.6
14.0
14.5
13.9
14.5
13.8
14.5
13.8
14.5
13.8
Increase or decrease
-'
.2
-.7
-.4
-.8
-.2
14.4
14.0
-.4
-.7
-.6
-.6
-.7
-.7
-.7
2. Unconsolidated corporations:
1933
1934
14.1
14.0
-.1
14.4
14.2
13.8
13.8
14.1
14.0
14.1
13.9
14.3
14.0
-.3
14.1
14.0
13.9
13.9
14.0
14.0
14.0
13.9
14.0
14.0
Increase or decrease
-
-.1
-.2
-.1
-.1
—-
Note. — All corporations filing consolidated returns in 1933 are included as consolidated corporations.
In 1934 the great majority of corporations filed returns on unconsolidated basis, the only exceptions being
railroads and corporations whose fiscal years exempted them from the provisions of the 1934 Revenue Act.
Source: Computed from Statistics of income.
Table 12. — Industrial trends in the operation of the Federal taxes on corporate
income, 1926-36 {net returns only)
PART I. TAXES AS PERCENT OF COMPILED NET PROFITS
Manufacturing
Food.
Beverages
Tobacco
Textiles
Leather
Rubber
Forest products
Paper...
Printing
Chemicals
Stone, clay, and glass.
Metals
Mining
Trade
Service.
Construction
Public utilities
Finance
1926
11.8
8.5
8.5
8.1
12.0
12.4
6.6
12.0
12.1
11.4
10.5
12.6
12.5
11.0
11.5
ILl
10.9
10.6
8.3
1927 1928
11.7
12.1
12.1
12.3
11.6
12.1
11.2
n.7
12.0
11.1
9.8
12.6
12.4
11.1
11.3
10.8
10.2
10.2
8.3
10.3
10.8
10.2
11.3
10.7
11.1
9.5
10.1
10.5
10.0
8.7
11.1
11.0
9.5
9.2
9.0
9.4
9.0
7.7
1929
9.3
9.8
9.5
10.4
9.9
10.3
8.8
9.3
8.9
9.7
7.7
10.1
9.8
9.1
8.9
8.1
8.6
7.6
7.0
1930 1931
9.7
10.5
10.5
11.3
9.9
10.9
7.6
9.3
10.5
8.8
7.9
10.7
10.4
9.4
9.1
8.5
8.6
7.7
6.1
9.7
10.5
10.1
11.3
8.9
10.9
8.7
8.4
10.3
10.4
7.9
10.2
10.0
8.7
9.3
8.0
8.6
8.0
6.2
1932
1933
1934
1935
1936 1
n.2
12.7
12.4
12.0
15.2
11.4
13.1
12.6
14.2
14.6
12.8
14.1
13.8
14.2
16.5
12.9
11.6
12.4
11.7
14.4
10.9
13.4
13.2
13.5
16.4
13.4
13.7
13.4
13.8
17.3
9.8
13.8
13.7
12.6
16.2
11.1
13.7
13.2
12.8
15.3
12.4
13.6
13.3
13.1
15.9
11.7
12.5
12.6
12.7
14.7
9.3
11.2
11.0
9.6
12.1
12.0
13.0
12.6
12.6
15.0
11.7
12.8
12.4
12.1
15.5
10.3
13.0
12.4
11.7
12.8
12.0
13.3
13.1
13.0
15.3
12.6
13.4
13.2
13.2
14.9
10.7
12.7
13.1
14.1
15.7
10.7
11.1
11.2
11.3
12.5
7.5
8.0
6.0
5.9
6.0
1937
15.7
14.2
17.8
14.7
16.1
15.1
13.4
15.4
16.7
14.8
13.9
15.7
17.3
14.1
15.8
15.1
17.1
13.1
6.0
» Excludes returns not subject to the 1936 revenue act because of fiscal year.
Definition: Taxes include the normal corporate income tax for the entire period, the excess-profits tax for
1933 and subsequent years, and the surtax on undistributed profits for 1936. Compiled net profits Includes
the excess of compiled receipts over compiled deductions.
Source: Computed from Statistics of Income for respective years.
164
CONOENTRATION OF ECONOMIC POWER
Table 12. — Industrial trends in the operation of the Federal taxes on corporate
income. 1926-36 (net returns only) — Continued
PART 11. TAXES AS PERCENT OF COMPILED NET PROFITS LESS
INTERCORPORATE DIVIDENDS CREDIT i
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936 2
1937
Manufacturing -
Food
12.8
12.9
12.6
12.8
11.3
11.3
10.3
10.4
11.2
11.4
11.0
11.1
12.6
12.3
13.7
13.8
14.2
13.1
13.6
13.9
14.0
14.0
13.9
13.5
13.6
13.6
13.6
13.8
13.6
13.8
14.0
14.0
10.8
13.6
13.8
14.0
13.3
13.5
13.7
13.9
13.6
13.8
13.5
13.7
13.5
13.5
13.6
13.6
13.6
13.9
14.0
11.0
14.1
14.1
14.5
13.6
14.0
14.1
14.7
14.0
13.8
13.7
13.8
14.0
14.4
13.6
14.7
13.7
14.0
14.2
11.8
16.8
15.8
17.6
15.4
17.2
17.6
17.1
16.2
16.7
16.3
16.3
16.2
17.1
15.2
16.7
15.4
16.0
16.0
11.4
17.2
15.8
18.4
11.9
9.1
11.0
9.7
9.0
10.9
10.9
11.3
10.8
11.0
9.8
9.2
11.4
9.8
9.3
7.7
13.5
11.2
12.7
10.2
12.1
12.9
12.7
12.8
12.3
12.4
11.4
11.2
13.6
12.8
13.5
9.7
15.6
Textiles-—
Leather .-
Rubber
Forest products
Paper
Printing
12.3
12.6
12.8
12.5
12.8
12.5
12.9
12.9
12.9
11.8
11.6
13.1
11.9
11.8
10.0
11.8
12.3
12.5
12.3
12.8
12.5
12.9
12.9
12.8
12.3
11.5
13.1
11.8
11.7
11.4
10.9
11.4
11.4
10.5
11.5
11.0
11.5
11.3
11.3
10.8
9.9
11.5
9.5
9.9
9.5
10.1
10.5
10.7
9.8
10.5
10.2
10.4
10.3
10.2
10.1
9.1
10.5
9.2
9.4
8.9
10.2
11.2
10.6
9.8
11.3
10.9
11.4
11.1
11.3
10.7
9.9
11.5
9.8
10.1
8.4
16.5
15.7
16.8
16.2
17.1
16.4
16.4
Stone, clay, and glass.
Metals
Mining
16.3
18.1
16.3
17.9
Public utilities . . .
15.6
Trade
Service
Finance.
16.7
16.2
11.8
1 In 1936-37 the intercorporate dividend credit was 85 percent of dividends received from domestic corpo-
rations subject to tax.
2 Excludes returns not subject to the 1936 Revenue Act because of fiscal year.
PART III. TAXES AS PERCENT OF TAXABLE NET INCOME (BEFORE DEDUCTION
OF PRIOR YEARS' LOSSES) i
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936 2
1937
Manufacturing
13.0
12.9
13.0
12.7
11.5
11.0
10.7
10.4
10.4
10.5
11.5
11.5
11.2
11.3
11.3
10.6
13.2
12.6
13.4
14.2
14.2
14.4
14.0
14.0
14.2
14.4
14.3
14.6
17.2
16.2
18.3
17.9
Food-
16.2
Beverages -
12.9
19.1
Tobacco
13.4
13.1
11.3
11.0
12.0
12.0
13.8
13.8
14.8
13.8
15.5
15.8
Textiles-
12.7
12.1
11.4
10.2
10.5
9.4
12.3
14.1
14.0
14.4
17.5
17.6
Leather
12.7
12.3
11.9
10.6
11.3
11.1
12.9
14.2
13.9
14.2
18.3
16.1
Rubber
13.0
12.6
12.1
10.8
10.9
9.8
10.8
14.4
14.1
14.8
17.8
17.3
Forest products
12.7
12.4
10.4
9.9
10.0
9.2
12.6
14.4
14.0
14.3
16.9
16.9
Paper -
13.0
13.0
11.9
10.5
11.5
11.3
13.5
14.2
14.0
14.0
17.5
18.8
Printing
12.7
12.7
10.9
10.3
11.2
11.1
13.3
14.0
13.9
14.1
17.0
17.3
Chemicals
13.2
13.1
11.6
10.8
11.8
11.7
13.5
14.2
13.9
14.0
17.3
16.6
Stone, clay, and glass -
13.1
13.1
11.8
10.6
11.3
11.1
13.3
14.1
13.8
14.3
16.6
17.0
Metals
13.2
13.2
11.7
10.3
11.6
11.4
13.4
14.3
13.9
14.7
17.1
19.0
Mining
12.6
12.1
12.6
11.9
11. 1
10.1
10.3
9.3
11.1
9.9
10.1
9.9
11.9
13.1
14.2
14.3
14.0
14.1
14.1
14.2
15.7
16.6
17.2
Trade
17.4
Service
11.9
11.7
10.0
9.4
10.1
9.4
13.0
14.3
14.1
14.3
16.5
16.9
Construction
11.8
13.3
12.0
11.7
13.3
11.9
10.1
11.7
10.8
9.3
10.6
10.1
10.1
11.7
10.3
9.5
11.7
9.7
11.9
13.9
12.7
14.6
14.1
14.0
14.4
13.8
13.9
15.2
13.9
14.2
17.3
15.7
17.3
19.0
Public utilities
15.8
Finance
18.2
1 Taxable net income includes compiled net profits less tax-exempt income.
* Excludes returns not subject to the 1930 revenue act because of fiscal year.
Source: Computed from Statistics of Income for respective years.
CONCENTRATION OF ECONOMIC POWER
165
Table 12.^ — Industrial trends in the operation of the Federal taxes on corporate
income, 1926-86 Cnet returns only) — Continued
PART IV. TAXES AS PERCENT OF TAXABLE NET INCOME (AFTER DEDUCTION
OF PRIOR YEARS' LOSSES) i
1926
1927
1928
1929
1930
1931
1932
Manufacturing
13.3
13.2
13.2
13.3
13.0
13.2
13.1
13.3
13.4
12.9
13.3
12.9
13.3
13.2
13.3
13.2
12.3
12.3
12.4
13.3
12.4
11.8
11.8
11.7
11.4
11.8
12.0
12.1
11.5
12.0
11.2
12.0
11.9
12.1
11.7
10.5
10.6
10.7
11.9
11.2
10.9
10.7
10.7
11.0
10.6
10.8
n.o
10.5
10.9
10.5
11.0
10.8
10.9
10.8
9.7
10.0
9.9
10.9
10.4
11.7
11.7
11.5
12.0
10.9
n.5
11.6
10.6
11.7
n.3
11.9
13.6
11.8
11.6
10.2
10.6
10.8
11.9
10.7
11.7
11.7
11.3
12.0
10.9
11.6
11.8
10.3
1L6
11.4
11.9
1L5
11.8
11.1
10.4
10.0
10.6
11.8
10.3
13 8
Food
13 8
Beverages
13 7
Tobacco
13.5
13.1
13.2
13.3
13.1
13.3
12.9
13.4
13.2
13.4
13.3
12.4
12.4
12.5
13.4
12.3
13 8
Textiles
13.2
13 3
Leather
Rubber
13 7
Forest products
13 7
Paper
13 9
Printing. . .
13.8
Chemicals . . ..
14 0
Stone, clay, and glass
13 7
Metals. - -- - --- -
13.9
Mining
13 8
Trade
13.8
14.6
Construction
13 7
Public utilities . -.. .
14.0
Finance - . .
13.7
1 No deduction for prior years' losses was permitted in 193-3-37.
Source: Computed from Statistics of Income for respective years.
Federal corporate income-tax payments as percent of profits of
corporations of varying size, 1931-37
Table 13
NORMAL TAX AS PERCENT OF COMPILED NET PROFITS i
Size classes (000 omitted)
1931
1932
1933
1934
1935
1936
1937
Under $50
2.8
5.2
7.4
9.0
9.4
9.7
9.9
9.2
}8..
10.8
11.5
11.8
11.9
12.0
11.1
11.1
10.9
9.7
13.4
13.4
13.2
13.0
12.8
12.5
12.2
11.5
10.6
13.5
13.5
13.3
13.1
12.7
12.2
11.8
11.3
8.9
13.5
13.5
13.2
12.9
12.6
11.9
11.4
10.9
8.1
10.0
10.4
10.7
11.5
12.0
12.0
11.7
11.2
f 9.9
18.9
9.5
$50 to $100 . - -
10.2
$100 to $250
10.8
$250 to $500 -
11.5
$500 to $1,000
11.8
$1,000 to $5,000
12.0
$5,000 to $10,000
11.7
$10,000 to $50,000
11.7
$.50,000 to $100,000
10.8
Over $100,000
9.3
NORMAL TAX AS PERCENT OF COMPILED NET PROFITS 2 LESS TAX CREDIT FOR
INTERCORPORATE DIVIDENDS
Under .$50
2.9
5.3
7.6
9.4
10.0
10.5
10.8
10.6
}l0.5
10.9
11.7
12.2
12.3
12.7
12.1
12.3
12.3
12.0
13.6
13.5
13.5
13.3
13.3
13.2
13.0
12.9
12.7
13.6
13.6
13.5
13.4
13.3
13.1
13.0
12.9
12.1
13.6
13.6
13.5
13.3
13.2
13.0
12.9
12.8
12.1
10.3
10.7
11.5
12.4
13.1
13.7
14.0
14.0
ri3.9
\13.8
9.8
$50 to $100 . _ . -
10.4
$100 to $250
11.4
.$250 to $500
12.3
$500 to $1,000
$1,000 to $5,000
13.0
13.7
$5,000 to $10,000 . .
14.1
$10,000 to $50,000
$50,000 to $100,000 . . . .
14.2
14.5
Over $100,000
14.3
NORMAL TAX AS PERCENT OF NORMAL TAX NET INCOME (I. E., PROFITS LESS
TAX CREDITS FOR INTERCORPORATE DIVIDEND 2 AND GOVERNMENT INTEREST)
Under .$50 . --
2.9
5.3
7.7
9.6
10.3
11.0
11.4
11.3
}n.2
10.9
11.8
12.4
12.6
13.1
12.8
13.1
13.2
13.0
13.7
13.7
13.7
13.7
13.6
13.7
13.7
13.6
13.6
13.7
13.7
13.7
13.7
13.6
13.6
13.5
13.4
12.9
13.7
13.7
13.7
13.7
13.6
13.5
1.3.4
13.3
10.3
10.8
11.6
12.7
13.5
14.4
14.8
14.8
/14.8
9.8
$50 to $100 .._
10.5
$100 to $250
$250 to $500
11.4
12.6
$500 to $1,000 — _--
13.5
$1,000 to.$5,000 - -
14.4
$5,000 to $10,000
14.9
$10,000 to $50,000 .
15.0
$50,000 to $100,000
15.4
Over $100,000 . . _
12-5 115.8
15.5
...
1 Compiled net profits includes the excess of compiled receipts over compiled deductions.
2 In 1936-37 the intercorporate dividend credit was 85 percent of dividends received from domestic cor-
porations subject to tax.
Source: Computed from Statistics of Income.
262698 — 41— No. 9 12
166
CONOENTRATION OF ECONOMIC POWER
Table IS-A.— Federal corporate income-tax payments, 1931-37, by size of cor-
porations and industries
[Net income returns only]
(Computed from the Sourcebook of the Statistical Section of the Bureau of Internal Revenue. Federal in-
come taxes include the normal corporation income tax, the excess-profits tax since 1933, and the surtax on
undistributed profits for 1936-37. Compiled net profits include the excess of compiled receipts over com-
piled deductions before the payment of Federal income taxes. Taxable net income includes compiled net
profits less tax-exempt income. In 1936, 15 percent of dividends received on stock of domestic corporations
were included, whereas previously 100 percent was excluded as tax-exempt income)
Manufacturing
Size classes based on total assets (in thousands)
1931 1932
1935 1936 1937
Federal income taxes as percentages of com-
piled net profits
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000
$1,000 to $5,000.-
$5,000 to $10,000-
$10,000 to $50,000
Over $50,000
Under $50
$50 to $100
$100 to $250
$250 to $500
$500to$l,OdO----
$1,000 to $5,000--
$5,000 to $10,000.
$10,000 to $50,000
Over $50.000
.3.1
10.4
14.2
14.3
14.7
16.0
6.0
11.4
14.3
14.3
14.6
14.5
8.5
12.0
14.1
14.0
14.4
15.3
10.0
12.3
14.0
13.8
14.3
16.1
m.5
12.4
13.8
13.6
14.0
16.7
10.7
12.2
13.4
13.1
13.5
16.7
10.8
12.3
13.3
12.9
12.7
16.3
10.1
11.9
12.6
12.3
12.4
14.7
9.3
10.1
11.6
11.1
9.9
13.1
14.6
15.1
16.0
16.9
17.6
17.9
17.6
16.1
14.2
Federal income taxes as percentages of tax-
able net income
3.1
10.6
14.6
14.5
14.8
16.0
6.1
11.6
14.6
14.4
14.8
14.6
8.7
12.3
14.5
14.3
14.6
15.3
10.4
12.8
14.4
14.2
14.6
16.1
11.0
13.1
14.3
14.1
14.5
16.7
11.4
13.2
14.1
14.0
14.4
16.8
11.6
13.5
14.1
13.9
14.1
16.4
11.7
13.0
14.1
13.8
14.2
14.8
11.9
13.2
14.2
13.8
14.4
13.1
15.2
15.9
16.9
17.8
18.8
19.3
19.3
18.0
16.8
Food
Size classes based on total assets (in thousands)
1931 > 19321 1933 » 1934 1935 1936 1937
Under $50
$50 to .$100 --.
$100 to $250
$250 to $500
$500 to $1,000
$1,000 to .$5,000- - -
$5,000 to $10,000--
$10,000 to $50,000-
Over $50,000
Federal income taxes as percentages of com-
piled net profits
4.6
6.5
9.0
10.3
10.5
11.1
11.4
10.0
10.8
11.9
14.4
14.3
14.5
14.0
12.1
14.1
14.1
14.3
14.1
12.6
14.3
14.1
14.4
14.3
12.4
14.3
13.9
14.2
15.4
12.5
14.0
13.8
14.0
15.9
12.7
13.8
13. 3
13.6
16.6
12.4
13.3
13.0
12.8
15.6
11.7
13.6
13.1
12.4
14.8
10.7
12.9
11.1
9.8
13.2
14.1
14.2
14.5
15.4
15.8
16.8
16.3
14.4
12.4
Federal income taxes as percentages of tax-
able net income
Under $50
$50 to $100 .-
$100 to $250
$250 to $500
$500 to $1, 000--. -
$1,000 to $5,000-.
$5,000 to $10,000.
$10,000 to .$50,000
Over $50,000
4.7
6.6
9.2
10.8
11.0
11.7
11.9
11.3
11.7
12.0
14.6
14.5
14.6
14.0
12.3
14.4
14.5
14.6
14.2
12.8
14.6
14.4
14.6
14.2
12.8
14. 5
14.3
14.7
15.4
13.1
14.3
14.2
14.5
16.0
13.5
14.2
14.1
14.6
16.7
13.3
14.0
14.0
14.1
15.7
13.4
14.2
13.9
14.0
14.9
11.9
14.2
14.0
14.0
13.3
14.7
14.9
15.2
16.2
16.8
18.1
17.9
15.9
15.7
» Beverages are included as part of food.
CONCENTRATION OF ECONOMIC POWER
167
Table 13-A.— Federal corporate income-tax payments, 1931-37, by size of cor-
porations and industries — Continued
Beverages '
Size classes based on total assets (in thousands)
1933
1934
1935
1936
1937
Federal income taxes as percent-
ages of compiled net profits
Under $50
14.5
14.4
14.6
14.7
14.3
14.3
13.2
13.7
14.4
14.5
14.6
14.2
13.6
14.0
1.3.2
13.6
14.9
14.9
14.4
14.7
13.9
14.2
14.0
13.9
13.8
14.5
15.6
16.8
17.1
19.5
19.4
17.6
10.5
13.5
14.9
16.7
16.4
17.6
18.9
22.4
19.0
$50 to $100
$100 to $250 .
$250 to $500
$500 to $1.000
$1,000 to S5,000 .
$5,000 to $10,000
$10,000 to $50,000 .. .
Over $50.000
Federal income ta.xes as percent-
ages of taxable net income
Under $50
14.6
14.5
14.7
14.8
14.6
14.5
14.1
14.2
14.6
14.6
14.7
14.3
14.0
14.2
14. 1
13.9
15.0
15.0
14.7
K.7
14.2
14.7
14.4
14.6
13.8
14.5
15.6
16.8
17.2
19.5
19.5
17.8
10.5
13 9
$50 to $10(1
15 5
$100 to $250-.
17 4
$250 to $500
17 0
$500 to $1.000.
18 8
$1,000 to $5,000
20 1
$5,000 to $10,000 -
24 3
$10,000 to $50,000 -
21 1
Over $50.000
For 1931 and 1932 beverages were included with foods in Statistics of Income.
Tobacco
Size classes based on total assets (in thousands)
1931 1932 1933 1934 1935
1937
Federal income taxes as percentages of
compiled net profits
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1.000
$1,000 to $5,000..
.$5,000 to $10,000.
$10,000 to $50.C»00
Over i?5('.000
Under $60
$50to$10C'
$100 to .$250
.$250 to $500
$500to$1.0C>0...-
$1,000 to $5.000..
.$5,000 to $U',000.
$10,000 to $50,000
Over $50,000 . .
6.8
10.0
14.5
14.3
15.4
11.7
3.2
11.9
14.8
13.9
14.4
13.0
9.5
13.3
13.6
13.4
14.3
13.3
10.3
12.3
14.0
13.9
13.7
12.2
11.3
12.1
12.8
13.0
14.8
13.4
11.3
12.8
13.0
13.1
13.8
17.0
11.7
13.2
12.8
13.3
12.9
13.3
11.2
13.1
13.2
13.1
13.1
14.6
11.4
12.8
10.9
12.2
11.2
14.2
11.5
12.9
13.0
15.2
16.1
17.6
18.4
16.1
14.4
Federal income taxes as percentages of
taxable net income
6.8
10.0
14.8
15.6
15.4
11.7
3.2
11.1
15.1
13.7
14.4
13.0
10.1
13.6
14.3
13.8
14.6
13.3
10.8
13.2
13.6
14.1
14.2
12.4
11.8
12.2
13.5
15.0
15.8
13.8
11.6
13.7
13.8
1.3.8
14.4
17.0
13.0
13.8
13.9
13.7
13.8
13.3
12.0
14.0
13.9
13.7
13.8
14.7
12.0
13.7
13.8
13.7
13.8
14.2
11.6
15.7
13.8
17.1
16.7
19.1
20.8
17.7
1.5.1
168
CONCENTRATION OF ECONOMIC POWER
Table 13-A. — Federal corporate income-tax payments, 1931-37, by size of cor-
porations and industries — Continued
Textiles (Including Clothing)
Size classes based on total assets (in thousands)
1931
1932 1933
1934
1935 1936
1937
Federal income taxes as percentages of com-
piled net profits
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000
$1,000 to $5,000-.
$5,000 to $10,000.
$10,000 to $50,000
Over $50,000
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000-. - -
$1,000 to $5,000--
$5,000 to $10,000-
$10,000 to $50,000
Over $50,000
1.7
9.5
14.3
14.4
14.6
14.6
5.1
10.8
14.5
14.2
14.6
14.7
7.4
11.6
14.3
14.1
14.4
15.8
9.4
12.4
14.0
13.8
14.3
16.7
9.9
11.9
14.0
13.5
13.9
17.4
10.2
11.1
13.6
13.3
13.6
17.4
6.9
10.4
12.7
12.5
12.9
18.3 1
9.4
10.8
13.0
12.7
13.0
16.0
12.0
0)
12.6
11.1
12.0
14.5
14.8
13.7
15.1
16.7
16.9
17.3
17.2
Federal income taxes as percentages of tax-
able net income
1.7
9.6
14.7
14.5
H.7
14.6
5.1
11.0
14.7
14.4
14.6
14.7
7.5
11.9
14.6
14.2
14.6
15.8
9.6
12.8
14.4
14.3
14.5
16.7
10.1
]2.4
14.4
14.0
14.3
17.4
10.7
12.3
14.2
14.0
14.4
17.4
7.8
12.6
13.8
13.9
14.2
18.3
10.8
12.7
13.8
13.8
14.4
15.5
12.0
11.1
14.1
13.8
13.7
14.9
1
15.1
15.5
15.5
17.2
17.5
18.4
18.5
Leather
Under $50
$50 to $100
$100 to $250
.$2.50 to $.500-
$500 to $1.000
$1,000 to $5,000...
.$5,000 to $10,000. .
$10,000 to $50,000.
Over $50,000
Federal income taxes as percentages of com-
piled net profits
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000 -_. -
$1,000 to $5,000..
$5,000 to $10,000-
$10,000 to $50,000
Over $50.000
3.1
10.4
11.9
14.1
12.0
14.5
14.3
4.8
10.8
15.0
14.4
14.4
13.9
15.2
7.1
11.6
14.1
14.0
14.4
14.6
16.2
9.1
11.9
13.4
13.8
14.2
15.2
14.9
11.8
12.6
14.0
14.3
14.1
17.1
15.7
11.1
10.0
13.7
13.2
13.9
17.7
15.9
10.9
12.8
14.0
10.3
13.2
19.1
15.4
11.7
12.3
13.1
13.2
13. 5
30.7
12.0
13.6
13.7
13.7
13.7
Federal income taxes as percentages
of tax-
able net income
3.1
10.9
15.1
14.4
14.6
14.5
14.3
4.8
10.8
15.1
14.5
14.5
14.0
16.4
7.2
11.7
14.5
14.2
14.6
14.6
16.6
9.3
12.2
14.3
14.1
14.4
15.3
16.0
12. 1
12.8
14.4
11.5
14.7
17.3
16.8
11.5
12.1
14.4
13.9
14.3
17.7
16.8
11.4
13.8
14.2
13.7
13.9
19.2
16.6
12.0
12.5
13.8
13.8
13.7
30.7
12.0
13.6
13.7
13.7
13.7
RusrER
Federal income taxes as percentages of
compiled net profits
Under $50 .......
4.8
5.8
8.4
12.3
11.8
12.4
14.3
11.2
0)
14.9
15.1
14.9
14.6
14.5
13.4
13.2
12.9
14.4
13.9
14.6
14.1
14. 1
13.7
13.0
13.5
12.9
14.2
14.2
14.1
14.5
14.6
14.7
13.3
10.6
15.2
8.4
14.7
12.7
15.5
18.3
18.2
16.7
19.3
17.2
14.7
17.0
$50 to $100
14.2
$100 to $260 "" -
5.7
10.7
8.0
9.6
7.1
14.8
$250 to .$500
17.4
.$500 to $1,000
19.4
$1,000 to $5,000 --
18.2
$5,000 to $10.000 -..-
$10,000 to $.50,000
19.8
16.4
Over $50,000 -- -
8.8
9.8
1 Not computed.
CONCENTRATION OF ECONOMIC POWER
169
Table IS-A.^Federal corporate income-tax payments, 1931-37, hy size of cor-
porations and industries — Continued
Rubber— Continued
Size classes based on total assets (in thousands)
1931
1932
1933
1934
1935
1936
1937
Federal income taxes as percentages of
taxable net income
Under $50
4.8
5.9
6.3
10.9
8.0
10.1
7.1
12.5
12.3
11.9
12.8
14.3
13.1
0)
14.9
15.1
15.2
14.7
14.9
14.2
13.3
14.3
14.5
13.9
14.7
14.3
14.3
13.8
13.8
13.8
13.7
14.6
14.2
14.5
14.5
14.9
14.7
14.5
14.3
15.7
13.7
14.0
12.7
15.5
18.3
18.2
16.9
19.3
17.2
14.7
18.3
14.6
15.3
18.4
20.6
19.3
21.4
18.6
$50 to $100
$100 to $250. -
$250 to $500
$500 to $1,000
$1,000 to $5,000.
$5,000 to $10,000
$10,000 to $50,000
Over $50,000
10.4
11.3
Forest Products
Federal income taxes as percentages of
compiled net profits
Under $50..
1.8
5.9
7.7
8.5
10.2
10.7
4.8
1.8
8.6
9.9
11.6
11.6
11.7
12.3
7.1
14.4
13.6
14.0
13.9
13.8
13.2
13.1
13.1
13.7
14.2
14.5
13.9
13.6
13.4
12.9
12.8
13.1
11.4
14.9
14.8
14.4
14.1
14.1
12.5
9.3
10.4
10.7
14.6
14.4
15.5
14.7
15.7
15.5
19.3
10.8
13.1
14 8
$50 to $100
15 0
$100 to $250
15 5
$250 to $500
15 7
$500 to $1,000
16 1
$1,000 to $5,000
15 9
$5,000 to $10,000 ..
17 8
$10,000 to $50,000
Over $50,000
Federal income taxes as percentages of
taxable net income
Under $50
1.8
6.0
7.8
8.9
10.8
11.3
9.1
4.9
8.8
10.1
11.9
12.1
12.9
13.5
13.9
14.8
14.7
14.4
14.4
14.4
14.1
14.8
14.5
14.5
14.5
14.6
14.1
14.1
14.0
13.9
13.8
13.8
13.7
15.0
14.9
14.6
14.5
14.7
14.1
13.7
13.8
13.8
14.6
14.4
15.5
14.8
15.7
15.6
19.4
10. S
13.3
15.9
$50 to $100 ... -
16 0
$100 to $250— -
16.4
$250 to $500
16.9
$500 to $1,000
17.4
$1,000 to $5,000
17.5
$5,000 to $10,000
20.0
$10,000 to $50,000
Over $50,000
Paper
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000...-
.$1,000 to $5,000-.
$5,000 to $10,000-
$10,000 to $50,000
Over $50,000
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000 --.-
$1,000 to $5,000. .
$5,000 to $10,000.
$10,000 to ,$50,000
Over $50,000
Federal income taxes as percentages of
compiled net profits
3.1
12.2
13.7
14.2
14.6
13.9
5.4
11.6
14.2
13.9
14.1
14.3
8.7
12.fi
14.2
14.0
14.4
14.8
10.4
11.9
14.3
13.8
13.9
16.1
10.8
14.3
13.7
13.7
13.7
16.3
11.0
12.5
13.5
13.3
12.9
17.6
11.4
11.8
13.6
13.4
13.1
16.0
9.6
13.2
13.3
13.4
12.8
15.1
9.4
7.3
14.3
8.4
10.0
12.6
14.5
13.6
15.6
17.5
17.4
17.9
16.4
16.3
Federal income taxes as percentages of
taxable net income
3.1
12.2
13.9
u..
14.8
13.9
5, 5
11.7
14.4
14.2
14.2
14.5
10,2
12.7
14.4
14.2
14.6
14.8
10.7
13.0
14.6
14.2
14.2
16.1
11.5
15.0
14.2
14.3
14.1
16.4
in, 8
13.2
14.2
13.9
14.0
17.6
11.8
13.0
14.1
14.0
14.1
16.1
11.7
13.7
13.9
13.9
13.9
15.2
12.4
13.8
14.0
14.6
14.4
12.6
15.3
14.2
16.5
18.7
18.7
19.6
17.7
18.2
' Not computed.
170 CONCENTRATION OF ECONOMIC POWER
Table 13-A. — Federal corporate income-tax payments, 1931-87,
porations and industries — Continued
hy
\ZQ of COT-
Pbinting
Size classes based on total assets (in thousands)
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000 -_.-
$1,000 to $5,000- .
$5,000 to $10,000.
$10,000 to $50,000
Over $50,000
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000--..
$1,000 to $5,000-.
$5,000 to $10,000-
$10,000 to $50,000
Over $50,000
1931
1932 1933 1934 1935 1936 1937
Federal income taxes as percentages of
compiled net profits
2.7
9.9
14.1
14.2
6.2
12.1
13.8
13.9
8.8
12.5
13.6
13.9
10.3
12.7
13.7
13.5
10.8
11.7
12.9
13.1
10.9
12.4
12.7
13.2
110.1
12.5
13.0
12.2
10.7
10.7
11.6
11.5
10.6
9.5
9.2
10.9
14.5
14.3
14.1
13.9
13.4
13.2
12.1
11.5
11.0
14.7
13.5
14.1
14.8
15.4
16.7
15.4
12.3
10.2
14.0
13.5
14.7
15.7
16.0
16.2
15.0
14.8
Federal income taxes as percentages of
taxable net income
2.7
m>
14.2
14.5
14.6
.14.7
6.4
12.6
14.2
14.3
14.5
13.5
9.2
12.9
14.0
14.2
14.5
14.1
10.8
1.3.2
14.2
13.9
14.3
14.9
11.5
13.1
14.0
14.0
14.2
15.5 !
11.5
13.2
14.1
14.0
14.2
16.8 1
12.0
13.8
13.9
1.3.8
13.8
15.4 !
11.9
13.1
14.0
13.8
13.8
12.4 '
12.0
13.9
14.3
13.8
13.8
10.4
14.7
14.2
15.5
16.7
17.3
17.9
17.3
18.5
Chemicals (Including Petroleum)
Under $50-
$50 to $100
$100 to $250
$250 to $.^,00
$500 to $1,000--..
$1,000 to $5,000-.
$5,000 to $10,000-
$10,000 to $50,000
Over $50,000
Under $50
$50 to $100
$100 to $250-
$250 to $500
$500 to $1,000. -. -
$1,000 to $5,000..
$5,000 to $10,000.
$10,000 to $50,000
Over $50,000
Federal income taxes as percentages of
compiled net profits
4.0
6.2
8.9
10.4
10.4
10.9
11.1
10.2
9.7
11.4
12.1
12.1
12.7
12.9
12.4
12.9
12.5
6.2
14.0
14.4
14.1
13.8
13.6
13.3
13.7
11.7
8.7
14.1
14.1
14.1
13.8
13.7
12.8
13.3
11.9
7.8
14.7
14.4
14.2
13.9
13.7
12.5
12.6
11.5
5.8
14.5
14.5
15.7
15.7
16.4
15.8
14.7
13.9
10.4
13.7
15.2
16.1
15.6
16.7
16.4
15.4
15.1
14.4
Federal income taxes as percentages of
taxable net income
4.1
11.4
14.4
14.2
14.9
14.5
6.3
12.4
14.6
14.3
14.6
14.6
9.0
12.5
14.3
14.3
14.4
15.7
10.6
13.0
14.1
14.3
14.3
15.7
11.0
13.4
14.3
14.2
14.3
16.5
11.5
13.4
13.9
14.0
14.2
15.9
11.9
13.7
14.2
13.8
13.8
14.7
12.1
13.9
14.3
13.8
14.0
14.2
10.1
13.4
14.3
14.0
13.8
10.4
14.2
16.1
16.9
16.5
17.3
18.4
17.2
16.9
16.8
Stone, Clay, and
Glass
Federal income taxes as percentages of
compiled net profits
Under $50 ...
1.3
6.0
8.1
9.5
10.4
10.2
10. ■>
10.7
10.2
8.6
11.2
12.1
11.5
11.1
12.6
13.1
11.6
13.9
14.3
14.1
12.5
14.3
13.6
12.9
13.5
12.5
13.8
13.9
14.3
13.9
13.8
13.5
13.2
13.1
11.8
12.5
14.6
14.8
14.1
14.2
13.9
14.4
11.0
12.1
12.1
15.0
14.4
15.4
16.0
16.5
15.9
16.7
13.9
15.0
H.
$50 to $100
14.1
$100 to $250-
15.2
$250 to $500
16.5
$500 to $1,000
17.4
$1,000 to $5,000
17.0
$5,000 to $10,000 .
16.5
$10,000 to $50,000
15.0
Over $50,000
Roughly corrected for arithmetical error in source.
CONCENTRATION OF ECONOMIC POWER 17][
Table 13-A. — Federal corporate income-tax payments, 1931-37, by size of cor-
porations and industries — Continued
Stone, Clay, and Glass— Continued
Size classes based on total assets (in thousands)
Under 50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000..-.
$1,000 to $5,000..
$5,000 to $10,000-
$10,000 to $50,000
Over $50,000
1931
1932
1933
1934
1935 1936
1937
Federal income taxes as percentages of
taxable net income
1.3
8.7
14.3
14.2
14.7
15.0
6.1
11.6
14.3
14.5
15.2
14.4
8.3
12.4
14.2
14.3
14.5
15.4
9.9
12.0
14.8
14.3
14.6
16.1
10.9
12.1
14.1
14.0
14.5
16.6
11.3
13.7
13.8
13.8
14.8
16.0
10.9
13.8
14.3
13.9
14.2
16.7
11.8
13.8
14.0
13.8
14.0
14.1
10.9
13.9
14.4
13.7
14.2
15. 1
15.7
14.7
16.0
17.5
18.5
18.2
18.2
16.7
Metals (Including Motor Vehicles)
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000.. --
$1,000 to $5,000.-
$5,000 to $10,000.
$10,000 to $50,000
Over $50,000
Under $50.
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000- -. -
$1,000 to $5,000-.
$5,000 to $10,000.
$10,000 to $50,000
Over $50,000
Federal income taxes as percentages of com-
piled net profits
2.5
8.8
14.6
14.6
14.9
15.1
15.3
5.9
9.9
14.5
14.4
14.9
15.3
15.4
8.2
10.9
14.0
13.9
14.6
16.2
17.3
10.1
13.1
13.9
13.8
14.4
17.3
18.7
10.4
12.5
13.8
13.7
14.5
18.3
18.2
10.4
11.6
13.8
12.8
13.7
17.6
18.6
10.3
11.9
13.2
12.9
12.8
16.9
19.2
11.6
10.9
12.2
11.8
12.5
15.4
17.4
10.2
12.2
12.6
11.8
11.0
14.4
14.5
Federal income taxes as percentages of tax-
able net income
2.5
8.9
14.7
14.7
15.0
15.1
6.0
10.1
14.8
14.5
15.0
15.3
8.3
11.2
14.4
14.4
14.8
16.2
10.5
12.7
14.4
14.2
14.8
17.3 i
11.0
13.1
14.3
14.1
14.4
IS. 4 i
11.6
13.0
14.0
13.9
14.5
17.7 1
11.2
13.5
14.1
14.0
14.2
17.0
11.6
14.1
14.2
13.8
14.4
15.5
11.8
14.0
14.3
13.8
14.9
14.6 1
15.7
16.1
18.6
20.0
19.4
19.9
21.0
18.9
17.8
Mining
Federal income taxes as percentages of
compiled net profits
Under $50
5.7
6.9
8.5
8.1
10.1
8.8
8.4
9.0
9.1
11.1
11.0
12.3
11.8
12.3
10.9
12.2
12.5
.6
14.5
14.7
13.7
14.0
13.6
13.4
10.9
12.5
12.8
14.1
14.2
14.8
13.8
13.5
12.4
12.2
11.2
11.9
14.1
14.1
14.2
13.9
13.4
11.9
10.4
10.8
11.3
12.7
13.6
13.8
13.8
14.0
14.2
14.2
13.1
11.1
13.1
$50to$100
17.7
$100 to $250
14.6
$250to$500
15.0
$500 to $1,000
14.8
$1,000 to $5,000.
15.0
$5,000 to $10,000 .
15.5
$10,000 to $50 000
15.5
$50,000 and over
13.3
Federal income taxes as percentages of
taxable net income
Under $50
5.8
7.1
8.6
9.8
10.3
10.4
10.8
11.6
11.4
n.2
11.2
12.5
12.1
12.6
12.8
13.4
13.9
1.2
14.7
14.8
14.1
14.4
14.1
14.6
13.9
13.9
14.5
14.5
14.4
14.2
14.4
14.4
13.9
14.0
13.8
13.7
14.6
14.4
14.5
14.5
14.5
14.1
13.8
13.9
13.7
12.7 1 13.5
$50to $100
13.6
13.8
13.9
14.1
14.3
14.3
13.3
16.3
$100 to $250
15.5
$250 to $500
15.7
$500 to $1,000
16.2
$1,000 to $5 000
17.1
$5 000 to $10 000 .
18.9
$10,000 to $50,000
18.1
$50,000 and over
11. 1 17. 2
X72 OONOENTRATION OF ECONOMIC POWER
Table 13-A. — Federal corporate income-tax payments, 1931-37, hy size of cor-
porations and industries — Continued
Trade
Size classes based on total assets (in thousands)
1931 1932 1933 1934 1935 1936 1937
Federal income taxes as percentages of-com-
piled net profits
Under $50
$50 to $100
$100 to $250-
$250 to $500.
$500 to $1,000.-..
$1,000 to $5,000..
$5,000 to $10,000.
$10,000 to $50,000
Over $50,000
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000.-..
$1,000 to $5,000..
$5,000 to $10,000.
$10,000 to $50,000
Over $50,000
2.2
10.3
14.5
14.3
.4.6
.4.2
4.8
11.2
14.1
14.1
14.3
14.2
7.4
11.9
14.1
13.9
14.0
14.6
9.3
12.2
13.4
13.6
13.9
15.2
10.1
12.1
13.5
13.5
13.7
16.3
10.3
12.1
13.3
12.9
13.1
16.8
10.8
12.1
13.1
13.2
12.8
16.1
10.4
12.1
12.0
12.6
11.8
15.7
11.1
12.2
13.2
12.2
12.6
14.1
14.3
14.5
15.1
15.9
16.7
17.5
16.2
16.5
14.3
Federal income taxes as percentages of taxable
net income
2.3
10.5
14.7
14.4
14.7
14.2
4.8
11.6
14.4
14.3
14.5
14.2
7.6
12.3
14.3
14.2
14.4
14.6
9.9
12.7
14.2
14.1
14.3
15.3
10.8
12.7
14.2
14.1
14.4
16.3
11.3
13.2
14.2
14.0
14.2
17.0
11.9
13.3
14.2
14.0
14.0
16.2
11.5
13.6
14.0
14.2
13.9
15.8
12.1
13.8
14.3
13.9
13.9
14.2
15.1
15.2
16.0
17.1
18.0
19.1
18.0
18.4
Service
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000
$1,000 to .li^OOO-.
$5,000 to $10,000.
$10,000 to $50,000
Over $50,000
Under $50
$50 to $100
$100 to $250
$250 to $500
$500 to $1,000-...
$1,000 to $5,000..
$5,000 to $10,000.
$10,000 to $50,000
Over $50,000
Federal income taxes as percentages of com-
piled net profits
3.6
11.1
14.8
14.2
14.6
13.9
6.3
11.6
14.2
14.0
14.3
14.4
8.3
12.2
13.5
13.6
13.9
14.4
10.3
12.6
13.5
13.1
13.7
14.7
10.2
12.4
13.4
13.2
12.9
15.6
10.8
12.6
13.1
12.9
13.0
15.5
10.9
12.7
13.8
11.9
12.2
15.5
9.4
10.3
10.7
11.7
10.4
15.5
5.1
11.8
13.1
13.0
11.2
15.4
14.3
14.7
15.0
15.9
15.7
15.9
15.7
13.9
13.6
Federal income taxes as percentages of tax-
able net income
14.9
15.5
16.1
17.4
17.4
18.0
18.9
16.9
15.9
3.6
11.2
15.1
14.4
14.7
13.9
6.4
11.9
14.5
14.3
14.7
14.5
8.7
12.9
14.3
14.1
14.4
14.4
10.7
13.0
14.1
14.0
14.4
14.8
11.0
13.3
14.2
14.1
14.2
15.7
11.7
13.5
14.0
14.0
14.2
15.5
11.8
13.9
14.3
13.3
13.8
15.5
10.4
13.5
13.9
13.8
13.9
15.5
12.0
13.6
14.5
14.6
13.7
15.4
Construction
Federal income taxes as percentages of com-
piled net profits
Under $50 . .
2.4
6.7
8.0
9.4
9.8
10.4
10.5
7.2
6.9
9.1
10.5
11.8
10.4
10.9
10.5
11.0
14.6
13.9
14.6
14.2
12.5
11.9
9.9
11.9
11.5
14.5
14.1
14.2
13.4
13.2
12.8
11.3
11.7
15.1
15.1
14.9
14.3
13.8
14.3
12.7
12.5
15.0
16.2
15.2
16.4
16.1
15.5
17.0
15.3
15.8
$50 to $100
16.4
$100 to $250
16.3
$250 to $500...
18.7
$500 to $1,000- .
16.9
$1,000 to $5,000
17.3
$5,000 to $10,000--
13.8
$10,000 to $50,000. -
Over $50,000
CONCENTRATION OF ECONOMIC POWER
173
Table 13-A.
■Federal corporate income-tax payments, 1931-37, by size of cor-
porations and industries — Continued
Construction— Continued
Size classes based on total assets (in thousands)
1931
1932
1933
1934
1935
1936
1937
Federal income taxes as percentages of tax-
able net income
Under $50
2.4
5.8
8.2
9.9
10.2
11.4
11.7
10.8
7.0
9.3
11.0
12.5
12.1
13.0
13.7
11.7
14.7
14.4
15.6
15.2
14.3
14.7
13.8
14.0
14.7
14.7
14.6
14.5
14.5
14.3
13.7
13.8
15.2
15.4
14.9
15.1
14.7
16.0
13.8
13.8
15.0
16.3
15.3
16.6
16.4
15.8
17.1
15.7
17.0
17.9
17.7
21.1
19.3
19.5
16.4
$50 to $100-
$100 to $250
$250 to $500-.-
$500 to $1,000
$1,000 to $5,000
$5,000 to $10,000.
$10,000 to $50,000
Over $50,000
Public Utilities
Under $50
$50 to $100-
$100 to $250
$250 to $500
$500 to $1,000....
$1,000 to $5,000..
$5,000 to $10,000.
$10,000 to $50,000
Over $50,000
Under $50
$50to$100_.
$100 to $250.
$250 to $500
$500 to $1, 000. —
$1,000 to $5,000-.
$5,000 to $10,000-
$10,000 to $50,000
Over $50,000
Federal income taxes as percentages of com-
piled net profits
3.4
11.9
14.6
14.5
14.8
,B.r
14.1
6.7
12.6
14.3
14.1
14.6
13.9
15.1
8.3
12.6
14.1
13.6
14.3
14.5
15.6
10.3
12.5
13.4
13.6
13.9
15.4
15.5
11.1
12.3
13.6
13.5
13.9
15.2
16.0
11.9
12.6
13.4
13.4
13.4
15.4
15.8
11.2
12.6
12.8
13.2
13.2
15.1
15.6
10.1
12.3
12.6
13.1
13.2
14.8
15.2
7.4
10.2
10.3
9.9
9.9
11.3
15.2
Federal income taxes as percentages of tax-
able net income
3.4
12.1
14.7
14.6
15.0
13.7
6.9
12.7
14.5
14.3
14.8
13.9
8.5
13.0
14.4
14.0
14.6
14.5
10.6
13.1
13.9
13.7
14.3
15. 5
11.5
13.0
13.8
13.8
14.1
15.2
11.6
13.6
14.0
13.8
14.0
15.4
11.9
13.6
13.9
13.8
13.9
15.1
11.6
13.8
13.9
13.8
13.9
14.9
12.0
14.0
14.1
13.8
13.8
11.4
14.9
16.2
16.5
16.4
16.8
16.7
16.6
15.9
15.6
Finance
Federal income taxes as percentages of com-
piled net profits
Under $50..
2.6
3.7
6.3
6.4
6.5
7.2
7.0
6.4
6.0
11.5
11.9
11.2
10.6
9.2
7.8
6.8
6.4
6.2
12.7
13.4
13.0
11.9
10.7
9.8
7.4
6.6
5.2
13.3
13.3
12.5
11.5
9.6
8.5
7.2
6.9
3.1
13.7
13.7
12.7
10.9
9.4
7.6
7.6
6.7
3.1
11.3
11.1
11.1
10.0
9.2
8.4
7.0
6.3
4.0
11.9
$50 to $100
11.6
$100 to $250
11.0
$250 to $500
9.7
$500 to $1,000
8.4
$1,000 to $5,000
6.9
$5,000 to $10,000
6.3
$10,000 to $50,000
6.1
Over $50,000
5.2
Federal income taxes as percentages of com-
piled net profits
Under $50
2.8
3.9
5.9
7.7
8.7
10.5
11.1
11.7
11.5
12.0
12.5
12.5
12.3
12.2
12.0
12.6
12.6
13.7
14.2
14.1
14.2
14.0
14.2
13.8
13.5
13.9
14.1
14.3
14.1
14.1
14.1
14.0
14.0
13.7
13.8
13.8
14.6
14.8
14.5
14.5
14.4
14.3
14.2
14.2
14.0
11.3
11.3
11.2
10.5
10.0
9.2
7.6
6.8
4.5
14.3
$50 to $100 . -
14.0
$100 to $250
14.5
$250 to $500
15.3
$500 to $1,000
16.3
$1,000 to $5,000 ---
16.9
$5,000 to $10 000
18.1
$10,000 to $50,000 - --
17.6
Over $50,000
21.2
174
CONCENTRATION OF ECONOMIC POWER
Table 14. — Federal corporate income-tax payinents and credits for investment
incoine, hy size classes and industries, 1936-37
1936— Normal tax as percent of—
1937— Normal tax as percent of—
Size classes based on total
assets (in thousands)
Compiled
net profit
Profits less
85 percent
of divi-
dends
Taxable
net in-
come!
Compiled
net profit
Profits less
85 percent
of divi-
dends
Taxable
net in-
come!
MANUFACTURING
Under $50
11.5
10.7
11.6
12.5
13.2
13.6
13.6
13.0
12.4
11.8
11.5
10.8
11.8
12.8
13.5
14.2
14.5
14.6
14.6
15.1
11.6
10.8
11.8
12.8
13.6
14.4
14.7
14,8
14.8
15.3
9.8
10.5
11.4
12.4
13.1
13.7
13.7
13.5
13.4
12.0
9.8
10.6
11.6
12.6
13.4
14.3
14.6
14.7
14.9
15.0
10.0
$50 to $100.
10.8
$100 to $250
11.8
$250 to $500
12.8
$500 to $1,000
13.7
$1,000 to $5,000
$5,000 to $10,000
14.5
14.8
$10,000 to $50,000..
15.0
$50,000 to $100,000
15.0
Over $100,000
15.2
FOOD
Under $50
9.3
10.1
10.9
12.2
12.8
13.5
13.7
13.4
13.2
12.2
9.3
10.2
11.1
12.4
1.3.2
14.1
14.7
14.9
14.7
14.9
9.5
10.4
11.2
12.7
13.4
14.4
14.8
15.0
15.0
15.0
9.2
9.9
11.0
11.9
12.6
13.6
13.7
13.6
13.2
11.3
9.3
10.0
11.1
12.1
13.0
14.1
14.8
14.8
14.8
15.8
9.5
$50 to $100
10.2
$100 to $250
11.2
$250 to $500
12.2
$500 to $1,000
13.2
$1,000 to $5,000
14.4
$5,000 to $10,000.
14.9
$10,000 to $50,000 -.
14.9
$50,000 to $100,000-..,
15.1
Over $100,000
15.9
BEVERAGES
Under $50 . .
11.0
11.7
12.5
13.5
13.7
14.3
13.3
14.6
9.4
11.0
11.8
12.8
13.6
14.0
14.6
14.6
14.8
15.0
11.2
11.9
12.9
13.7
14.1
14.7
14.8
15.0
15.0
11.0
11.7
12.8
13.5
13.6
14.2
14.5
13.7
14.0
11.1
11.8
12.9
13.6
14.0
14.4
14.7
14.6
15.0
11.3
$50 to $100
12.0
$100 to $250 . ...
13.0
$250 to $500
13.7
$500 to $1,000
14.1
$1,000 to !»15.000
14.6
$5,000 to S'.O.OOO
14.9
$10,000 to $50,000
14.9
$50,000 to $100,000
15.0
Over $100,000
TOBACCO
Under $50 . ..
10.4
10.1
11.0
11.1
12.6
14.0
13.2
14.0
13.9
13.9
10.4
10.1
11.2
11.2
12.8
14.2
14.6
14.7
14.5
14.8
10.4
10.2
11.2
11.6
12.8
14.7
14.7
14.9
15.0
15.0
9.8
10.0
11.1
10.9
13.0
13.9
13.2
13.5
14.6
14.1
9.8
10.0
11.3
11.5
13.0
14.1
14.6
14.6
14.8
14.9
9.8
$50 to $100
10.4
$100 to $250 ...
11.5
$250 to $500
12.3
$500 to $1,000
13.1
$1,000 to $5,000
14.6
$5,000 to $10,000
14.7
$10,000 to $50,000
14.9
$50,000 to $100,000
15.0
Over $100,000
15.0
TEXTILES
Under $50...
9.2
9.8
11.1
12.1
12.9
13.6
13.3
14.0
13.5
9.2
9.8
11.2
12.3
13.1
14.1
14.5
14.7
13.8
9.4
10.0
11.3
12.4
13.3
14.3
14.7
14.9
15.0
9.5
9.1
10.9
12.0
12.9
13.4
13.7
14.0
15.0
7.6
9.5
10.1
11.0
12.1
13.1
14.0
14.4
14.6
15.0
12.3
9.6
$50 to $100.
10.3
$100 to $250
11.2
$250 to $500--.
12.3
$500 to $1,000
13.3
$1,000 to $5,000
14.3
$5,000 to $10,000
14.8
$10,000 to $50,000
14.9
$50,000 to $100,000 ..
16.0
Over $100,000
16.0
1 "Taxable net income" consists of compiled net profits less the sum of the following: (a) 85 percent of
dividends received from domestic corporations subject to tax; (6) all interest received on governmental
obligations; and (c) the amount of the excess-profits tax.
CONCENTRATION OF ECONOMIC POWER
175
Table 14. — Federal corporate income-tax paytnents and credits for investment
income, hy size classes and industries, 1936-37 — Continued
1936— Normal tax as percent of-
1937— Normal tax as percent of—
Size classes based on total
assets (in thousands)
Compiled
net profit
Profits less
85 percent
of divi-
dends
Taxable
net in-
come
Compiled
net profit
Profits less
85 percent
of divi-
dends
Taxable
net in-
come
CLOTHING
Under $50
9.1
10.2
11.0
12.0
12.6
13.8
13.9
14.2
9.2
10.3
11.1
12.1
13.3
14.2
14.4
14.3
9.2
10.4
11.2
12.2
13.4
14.3
14.8
14.9
9.0
10.0
11.0
11.5
12.9
13.2
13.0
13.6
9.0
10.1
11.1
11.7
13.0
14.1
14.5
14.1
9.1
10.2
11.2
11.8
13.0
14.2
14.5
14.9
$50 to $100
.$100 to $250
$250 to $500
$500 to $1.000
$1,000 to $5,000
$5,000 to $10,000
$10,000 to $50,000
$50,000 to $100,000
Over $100,000
LEATHER
Under $50
8.9
10.0
10.9
11.6
12.7
13.7
14.4
12.9
9.0
10.0
11.0
11.9
13.2
14.2
14.5
12.9
9.1
10.1
11.1
12.0
13.4
14.4
14.7
12.9
9.0
10.1
11.1
11.6
12.3
13.6
13.7
11.6
14.9
9.1
10.1
11.2
12.2
13.0
14.1
14.4
14.7
15.0
9 2
$50 to $100
10 2
$100 to $250
11 4
$250 to $500
12 4
$500 to $1,000
13 1
$1,000 to $5,000
14 3
$5,000 to $10,000
14 7
$10,000 to $50,000
14.8
$50,000 to $100,000
15 Q
Over $100,000
RUBBER
Under $50
9.6
10.0
11.6
12.7
13.1
13.7
13.9
13.8
15.0
10.9
9.6
10.0
11.8
12.8
13.6
14.1
14.6
14.8
15.0
14.9
9.7
10.1
11.9
13.0
13.7
14.4
14.8
14.8
15.0
14.9
9.7
10.4
11.3
12.7
13.1
14.1
14.0
13.1
15.0
4.1
9.7
10.6
11.5
12.7
13.1
14.3
14.6
14.8
15.0
15.0
10.0
$50 to $100
10.7
$100 to $250
11.5
$250 to $500
12.9
$500 to $1,000
13.1
$1,000 to $5,000
14.5
$5,000 to $10,000
14.7
$10,000 to $50,000
14.8
$50,000 to $100,000
15.0
Over $100,000
15.0
FOREST PRODUCTS
Under $60
9.2
10.0
10.9
11.5
12.5
13.2
13.7
10.5
12.0
11.5
9.3
10.1
11.0
11.9
13.1
14.0
14.4
14.9
14.7
14.8
9.7
10.3
11.3
12.6
14.0
14.2
14.7
14.9
15.0
15.0
9.2
10.0
11.0
11.9
12.5
12.9
13.1
12.2
6.5
13.0
9.3
10.1
11.0
12.1
12.9
13.9
14.4
14.7
13.6
14.9
9.5
$50 to $100
10.4
$100 to $250
11.2
$250 to $500
12.4
$500 to $1,000.
13.2
$1,000 to $5,000
14.1
$5,000 to $10,000..
14.6
$10,000 to $50,000--.
$50,000 to $100,000
14.8
14.9
Over $100,000
15.0
PAPER
Under $50
9.0
10.4
11.4
12.2
13.0
13.5
14.0
13.6
9.4
10.5
11.6
12.6
13.4
14.2
14.5
14.1
9.7
10.9
11.9
13.2
14.0
14.4
14.8
15.0
9.5
9.9
11.2
12.5
12.8
13.5
13.9
13.4
14.3
9.9
9.5
10.0
11.4
12.8
13.2
14.2
14.5
14.7
15.0
14.5
9.7
$50 to $100 - ...
10.0
$100 to $250
11.6
$250 to $500.
12.9
$500 to $1,000
13.4
$1,000 to $5,000
14.4
$5,000 to $10,000 .
14.8
$10,000 to $50,000
14.9
$50,000 to $100,000
15.0
Over $100,000 .
9.8
14.9
i4.9
15.0
176
OONOENTRATION OF ECONOMIC POWER
Table 14. — Federal corporate income-tax 'payments and credits for ijivestment
income, by size classes and industries, 1936-37 — Continued
Size classes based on total
assets (in thousands)
Under $50
$50 to $100
$100 to $250 .-
$250 to $500
$500 to $1,000
$1,000 to $5,000... .
$5,000 to $10,000...
$10,000 to $50,000..
$50,000 to $100,000-
Over $100,000
Under $50. .,
$50 to $100- ,
$100 to $250
$250 to $500 -
$500 to $1,000
$1,000 to $5,000.-..
$5,000 to $10,000--,
$10,000 to $50,000.
$50,000 to $100,000
Over $100,000
Under $50-
$50 to $100 ,
$100 to $250 ,
$250 to $500
$500 to $1,000
$1,000 to $5,000—,
$5,000 to $10,000.-.
$10,000 to $50,000.,
$50,000 to $100,000,
Over $100,000
Under $50.
$50 to $100.
$100 to $250.
$250 to $500
$500 to $1,000--
$1,000 to $5,000
$5,000 to $10,000
$10,000 to $50,000.-..
$50,000 to $100,000...
Over $100,000
Under $50
$50 to $100.
$100 to $250
$250 to $500
$500 to $1.000
$1,000 to $5,000...
$5,000 to $10.000..
$10,000 to $50,000.
$50,000 to $100,000
Over $100,000
1936— Normal tax as percent of—
Compiled
net profit
Profits less
85 percent
of divi-
dends
Taxable
net in-
come
1937— Normal tax as percent of-
Compiled
net profit
Profits less
85 percent
of divi-
dends
Taxable
net in-
come
10.0
10.3
11.1
12.0
12.8
13.3
13.3
10.3
11.3
10.7
11.7
12.6
13.6
13.3
13.0
12.8
12.1
9.7
10.5
12.1
12.8
13.7
13.9
14.2
10.3
10.7
8.0
9.3
10.2
11.6
12.2
13.0
13.5
13.3
12.7
13.4
13.7
9.3
10.5
11.6
12.6
13.4
13.8
13.9
13.4
12.9
12.6
10.1
10.4
11.4
12.7
13.3
14.2
14.4
13.1
14.6
10.3
10.6
12.0
13.8
14.1
14.4
14.8
13.4
15.0
9.5
10.1
11.2
12.1
12.8
13.2
12.9
11.7
11.5
4.3
11.0
11.8
12.8
13.8
14.3
14.6
14.6
15.0
15.0
10.0
11.2
12.0
13.0
14.0
14.6
14.9
15.0
16.0
15.0
9.8
10.6
11.6
12.7
13.4
13.4
13.3
13.1
12.7
10.2
PETROLEUM
9.6
10. 5
12.2
13.1
13.9
15.0
14.9
14.7
15.0
14.8
10.6
12.4
13.1
14.0
15.0
14.9
14.8
15.0
15.0
9.1
11.1
12.6
12.6
13.9
13.1
13.7
13.9
11.3
9.1
STONE, CLAY, AND GLASS
10.
11.
12.
13.
14.
14.
14.
15.0
14.7
9.6
10.6
11.9
12.7
13.5
14.4
14.8
14.9
15.0
15.0
10.2
11.4
12.2
13.2
13.7
13.6
13.5
13.7
13.4
9.4
10.6
11.7
12.8
13.5
13.9
14.6
14.7
14.7
14.8
9.6
10.8
11.9
13.0
13.8
14.1
14.9
15.0
15.0
15.0
10.1
10.6
11.5
12.6
13.3
13.9
13.9
13.7
14.1
13.1
9.6
10.2
11.6
12.4
13.4
14.1
14.3
14.6
14.2
14.9
9.8
10.7
11.8
12.9
13.8
14.4
14.6
14.8
15.0
14.9
9.1
11.1
12.6
13.1
14.0
14.6
14.5
14.9
14.6
15.8
9.2
10.2
11.6
12.4
13.4
14.2
14.5
14.7
14.9
14.8
10.2
10.6
11.6
12.8
13.5
14.3
14.6
14.6
15.0
14.8
10.4
11.6
12.6
13.6
14.4
14.8
14.9
15.0
14.9
10.9
12.0
13.0
14.0
14.6
14.9
15.1
15.0
15.0
9.2
11.5
12.8
13.3
14.1
14.8
14.8
14.9
14.9
15.9
9.5
10.4
11.7
12.7
13.7
14.4
14.7
14.9
15.0
15.0
10.4
10.9
11.9
13.0
13.8
14.6
14.9
14.9
15.1
15.0
CONCEXTRATION OF ECONOMIC POWER
177
Table 14. — Federal corporate incoine-tax -payments and credits for investment
income, by size classes and industries, 1936-37 — Continued
1936— Normal tax as percent of—
1937— Normal tax as percent of—
Size classes based on total
assets (in thousands)
Compiled
net profit
Profits less
85 percent
of divi-
dends
Taxable
net in-
come
Compiled
net profit
Profits less
85 percent
of divi-
dends
Taxable
net in-
come
MOTOR VEHICLES
Under $50
9.2
10. 5
11.7
12.6
13.9
U.4
14.0
14.0
13.6
13.7
9.4
10. G
12.1
12.8
14.1
14.6
14.5
14.9
14.9
14.9
9.7
10.8
12.2
12.9
14.2
14.7
14.9
14.9
15.0
15.0
10.0
11.5
11.8
13.2
13.8
14.2
14.2
14.4
11.9
13.4
10.0
11.5
12.0
13.2
14.0
14.6
14.4
14.8
14.2
14.9
10.2
11.7
12.3
13.4
14.1
14.7
14.9
15.0
15.0
15.0
$50 to $100
$100 to $250 -. -
$250 to $500
$500 to $1,000
$1,000 to $5,000
$5,000 to $10,000
$10,000 to $50,000
$50,000 to $100,000
Over $100,000
MINING
Under $50
10.3
10.5
11.5
12.0
12.2
12.7
12.3
12.4
12.9
7.9
10.3
11.0
12.0
12.8
13.3
14.3
14.4
14.7
14.2
14.8
10.5
11.1
12.1
12.9
13.5
14.6
14.8
15.0
15.2
15.0
10.4
10.8
11.4
12.5
12.5
12.8
12.0
12.8
13.1
9.8
10.4
11.0
11.7
12.9
13.4
14.3
14.3
14.4
14.4
14.8
10 6
$50 to $100
11 2
$100 to $250
11 9
$250to$500.
$500 to $1,000
13.1
13 6
$1,000 to $5,000 -
14 6
$5,000 to $10,000
14 8
$10,000 to $50,000
15 0
$50,000 to $100,000 .
15 0
Over $100,000
15 0
TRADE
Under $50
$50 to $100
9.1
10.0
10.9
11.7
12.5
13.3
13.7
13.5
11.6
14.1
9.2
10.1
11.1
12.0
13.2
14.0
14.6
14.8
14.9
14.7
9.3
10.3
11.2
12.2
13.2
14.2
14.8
15.0
15.0
15.0
9.1
10.0
10.8
11.7
12.5
13.4
13.6
13.5
12.8
12.6
9.2
10.1
11.0
12.1
13.0
14.0
14.5
14.7
15.0
14.9
9.3
10 2
$100 to $250
11. 1
$250 to $500
12 3
$500 to $1,000
13.2
$1,000 to $5,000 .--
14.3
$5,000 to $10,000 .....
14.8
$10,000 to $50,000
.$50,000 to $100,000
14.9
15.1
Over $100,000
15.0
SERVICE
Under .$50
10.1
10.9
11.0
11.6
12.1
12.4
11.6
12.6
12.4
10.2
11.1
11.6
12.6
13.2
14.1
14.5
14.8
15.0
10.3
11.2
11.7
12.7
13.4
14.3
14.6
14.9
15.0
10.2
10.7
11.2
11.6
12.0
12.7
12.3
12.0
12.8
10.2
10.9
11.6
12.4
13.0
14.1
14.8
14.7
15.0
10.4
$50 to $100...
11.1
$100 to $250 . -
11.8
$250to$500
12.6
$500 to $1,000
13.2
$1,000 to $5,000
14.3
$5,000 to $10,000..
16.0
$10,000 to $50,000
14.7
$50,000 to $100,000
15.0
Over $100.000
'
CONSTRUCTION
Under $50
9.3
10.4
10.7
12.1
11.9
13.0
13.7
13.9
9.4
10.6
11.3
12.8
14.0
14.1
14.6
14.0
9.6
10.9
11.6
13.1
14.7
14.6
14.9
14.9
9.4
10.2
11.1
11.9
11.9
13.1
12.4
13.7
12.7
9.6
10.3
11.4
12.5
12.8
14.1
14.3
14.2
14.2
9.8
$50 to $100
10.7
$100 to $250
11.7
$250 to $500
13.0
$500 to $1.000
13.4
$1,000 to $5,000-
14.5
$5,000 to $10,000
14.7
$10,000 to $50,000 -
14.8
$50,000 to $100,000
14.6
Over $100,000 i
178
CONCENTRATION OF ECONOMIC POWER
Table 14. — Federal corporate income-tax payments and credits for investments
income, by size classes and industries, 1936-37 — Continued
Size classes based on total
assets (in thousands)
1936— Normal tax as percent of-
Compiled
net proflt
Profits less
85 percent
of divi-
dends
Taxable
net in-
come
1937— Normal tax as percent of—
Compiled
net profit
Profits less
85 percent
of divi-
dends
Taxable
net in-
come
PUBLIC UTIUTIES
Under $50_
$50 to $100
$100 to $250 -.-.
$250 to $500
$500 to $1.000
$1,000 to $5.000
$5,000 to $10,000
$10,000 to $50,000....
$50,000 to $100,000...
Over $100,000
Under $50
$50 to $100
$100 to $250
$250 to $500.
$500 to $1,000
$1,000 to $5,000 ...
$5,000 to $10.000..
$10,000 to $50,000.
$50,000 to $100,000
Over $100,000
9.4
10.8
11.8
12.2
13.0
13.8
14.1
14.2
14.4
10.2
9.5
10.9
11.9
12.5
13.3
14.4
14.5
14.7
1,5.0
15.0
9.6
11.1
12.1
12.6
13.4
14.5
14.6
14.9
15.0
15.4
9.5
10.7
11.7
12.1
13.1
13.7
14.0
14.3
14.6
10.5
8.5
8.4
8.6
8.0
7.3
6.5
5.4
5.2
4.4
3.0
10.3
10.3
11.0
10.9
10.7
10.9
10.9
10.5
10.6
7.9
10.5 i
10.6 I
11.7 I
12.9 I
14.0 I
15.0
15.0
14.9
14.6
15.0
8.8
8.4
8.7
8.0
7.0
5.7
5.3
5.2
4.7
3.5
9.6
10.9
11.9
12.4
13.3
14.1
14.5
14.7
14.9
14.9
10.5
10.2
11.0
10.9
10.6
10.3
11.0
11.0
12.6
9.7
11.1
12.1
12.6
1.3.4
14.2
14.7
14.9
14.9
15.1
10.8
10.5
11.7
13.1
14.3
15.5
16.7
16.4
18.8
20.7
Source: Computed from the Sourcebook of the Statistical Section of the Bureau of Internal Revenue.
Table 15. — Federal corporate income-tax payments and credits for investment income^
by minor industries, 1937
M.\nufacturing:
Food
Baking and confection-
ery products..-
Canned products
Mill products
Packing-house products
Sugar
Other food products. -.
Beverages
Nonalcoholic
Alcoholic
To bacco
Textiles
Cotton
Woolen and worsted...
Silk and rayon
Carpets
Other textiles
Clothing and apparel. .,
Knit goods
Leather
Shoes
Other leather products.
Normal tax as a per-
centage of—
Profits i
Corpo- less j Taxable
rate credit | net
profits for divi- income
i dends 1
12.1
13.6
13.5
12.8
9.6
12.5
12.5
13.8
13.5
14.0
14.0
13.0
13.5
12.3 I
12.5
14.1 I
13.1 I
12.3 i
12.9 i
13.1 I
13.4 '
12.4 i
14.3
14.4
14.1
14.3
14.1
14.2
13.6
14.0
16.0
16.1
14.9
15.0
14.0
14.2
14 3
14.4
14.0
14.2
14.4
14.6
14.8
14.9
13.7
14.1
13.9
14.2
13.4
13.7
13.9
14.7
14.2
14.5
13.7
14.0
12.7
12.9
1.3. 3
13.5
13.7
13.8
14.0
14.1
12.9
13.1
Surtax on un-
distributed
profits as a per-
centage of—
Corpo-
rate
profits
Taxable
net
income
1.3
1.6
1.7
1.7
1.2
3.5
2.4
4.2
.7
2.5
3.4
4.3
1.6
2.3
L7
2.8
3.2
1.8
1.3
3.0
1.5
1.6
2.0
2.0
1.0
.4
1.4
4.1
2.8
5.0
.8
2.9
4.0
5.0
1.9
2.8
2.0
3.2
3.6
2.0
1.4
3.4
Excess-profits
tax as a per-
centage of—
Corpo-
rate
profits
0.3
.3
.3
.3
.3
.1
.2
.6
.7
.5
.1
.5
1.0
.4
.3
.3
.4
.3
.3
.2
.2
.4
Ta.xable
net
income
0.3
.3
.4
.3
.3
.2
.3
.6
.7
.5
.1
.6
1.0
.5
.4
.3
.4
.4
.4
.3
.2
.5
Total
tax as a
percent-
age of
corpo-
rate
profits
Cash
divi-
dends
paid
out as a
percent-
age of
corpo-
rate
profits
14.2
15.5
15.6
14.8
10.7
13.0
14.0
17.8
16.6
18.7
14.7
16.1
17.9
17.1
14.4
16.7
15.2
15.5
16.4
15.1
14.8
15.9
84.9
78.3
67.5
79.4
106.4
98.3
68.0
55.3
85.7
74.2
64.2
78.2
88.1
91.2
74.4
66.9
66.7
85.9
86.6
76.0
CONCENTRATION OP ECONOMIC POWER
179
Table 15. — Federal corporate income-tax payments and credits for investrneni income
by minor industries, 1937 — Continued
Manufacturing— Con.
Rubber
Tires and tubes
Bone, celluloid, and
ivory products
Other rubber
Forest products
Sawmill and planing-
mill products
Furniture and other
wood products...
Paper
Printing and publishing..
Chemicals
Chemicals proper
Petroleum
Fertilizers
Paints
Other chemicals
Stone, clay, and glass
Metals
Iron and steel
Motor vehicles
Railroad equipment
• Machinery:
Factory
Agricultural.-.
Electrical..
Household
Miscellaneous.
Office equipment
Metal building mate-
rials , supplies
Hardw^are and tools
Precious metals .
Other metal products...
Miscellaneous manufac-
turing
Radios
Airplanes
Instruments, etc
Total manufacturing
Mining -
Metal
Anthracite coal
Bituminous, lignite,
and peat
Oil and gas
Other minerals
N. E. C, lessees and
holders..
Trade.
Wholesale
Retail
Wholesale and retail.
Commission
Other trade
Service.
Normal tax as a per-
centage of —
Corpo-
rate
profits
Domestic
Amusements.
Theaters
Motion-picture pro-
ducers
Motion-picture the-
aters
Other amusements-
Less than 0.05 of 1 percent.
10.8
8.7
14.1
13.4
12.2
12.4
12.5
13.2
11.9
12.3
11.8
10.0
11.9
12.8
12.6
13.3
13.4
13.2
13.5
13.4
13.2
13.4
13.3
13.1
13.7
14.1
13.1
13. 7
13.5
13.4
13.3
13.8
13.3
13.3
12.9
11.9
11.7
11.5
11.6
11.6
13.1
12.6
12.4
12.3
12.9
11.8
11.2
11.6
11.6
11.2
11.5
10.9
11.6
13.0
Profits
less
credit
for divi
dends
14.3
14.8
14.2
13.9
13.2
13.5
12.8
14.7
13.6
14.4
14.8
15.3
13.5
14.1
14.2
14.2
14.3
14.4
14.8
14.7
13.9
14.6
14.6
13.9
14.1
14.6
14.0
14.0
13.9
14.4
14.2
14.3
15.0
14.1
14.4
14.1
14.5
11.9
13.4
14.0
13.8
13.6
13.4
13.3
13.5
13.1
13.2
13.6
12.8
11.8
13.4
12.8
15.3
1.3.1
13:2
Taxable
net
income
14.5
14.9
14.5
14.1
13.4
13.7
13.1
14.9
13.9
14.6
14.8
15.5
13.7
14.3
14.5
14.5
14.5
14.6
14.9
15.1
14.3
14.8
14.8
14.5
14.4
14.8
14.3
14.4
14.2
14.5
14.4
14.4
15.3
14.3
14.6
14.5
14.7
13.9
13.9
14.4
14.0
14.0
13.5
13.5
13.7
13.4
13.5
13.7
13.0
12.0
13.5
12.9
15.4
13.2
13.4
Surtax on un-
distributed
profits as a per-
centage of—
Corpo-
rate
profits
2.3
1.5
2.0
3.6
2.2
1.2
3.5
2.9
2.6
1.4
1.2
1.3
2.5
2.3
1.4
1.8
3.0
2.6
2.0
2.5
3.0
4.9
1.7
2.2
4.0
3.0
2.6
4.0
3.1
2.2
3.1
3.5
4.3
2.9
2.3
1.2
1.1
1.3
2.3
1.3
1.4
3.0
2.7
2.5
3.1
1.0
3.2
2.3
1.8
2.0
4.0
Taxable
net
income
2.5
1.6
2.3
4.1
2.5
1.3
4.0
3.4
3.0
1.7
.1
1.4
.8
.3
.3
1.9
3.5
2.8
2.2
2.8
.3.2
5.3
1.8
2.3
4.1
3.5
3.1
4.8
3.7
2.6
3.6
4.1
5.0
3.4
2.7
1.5
1.3
1.7
2.7
1.5
1.6
1.1
3.2
3.4
3.2
2.9
3.5
1.1
3.7
2.6
2.1
2.3
4.7
Excess-profits
tax as a per-
centage of—
Corpo- Taxable
rate net
profits income
0.2
(0
1.1
.5
.3
.2
1.2
.2
2.5
2.2
1.4
.5
.1
.9
1.0
.4
.7
.6
.5
1.0
1.2
.1
.4
.6
.5
2.1
.6
.5
1.2
0.3
.1
.5
.5
1.0
1.3
.5
.4
.3
1.2
.4
2.8
2.5
1.6
.6
1.0
1.0
.1
1.1
1.0
1.0
.3
.2
1.9
.5
1.1
1.6
1.2
.7
.7
.4
1.2
1.5
.2
2.3
.7
1.0
.4
1.2
Total
tax as a
percent-
age of
corpo-
rate
profits
Cash
divi-
dends
paid
out as a
percent-
age of
corpo-
rate
profits
13.4
10.2
16.6
17.5
15.4
14.4
16.6
16.7
14.8
13.9
13.2
11.5
15.2
15.4
14.3
15.7
17.3
16.8
15.7
16.6
17.3
19.2
15.3
15.5
19.4
17.6
16.8
19.2
17.7
16.3
17.0
17.7
18.4
16.8
15.7
14.1
14.1
12.8
14.3
13.4
14.9
15.7
15.8
16.2
16.0
15.2
14.9
12.9
15.1
90.2
112.5
68.1
61.6
76.1
62.1
64.9
67.0
75.1
75.1
90.7
74.4
74.3
75.1
71.2
61.9
64.3
66.3
71.9
61.3
44.2
7.3.2
66.1
5.3.6
59.7
63.2
55.0
57.7
69.1
63.0
66.9
48.4
64.3
70.1
86.1
82.5
101.6
76.8
94.1
82.8
88.7
65.8
65.1
65.4
66.1
64.7
83.9
64.8
15.0
14.4
13.4
63.2
65.2
73.9
11.1
54.8
14.2
18.2
71.0
52.2
180
OONOENTRATION OF ECONOMIC POWER
Table 15. — Federal corporate income-tax payments and credits for investment income^
by minor industries, 1937 — Continued
Normal tax as
centage of-
aper-
Surtax on un-
distributed
profits as a per-
centage of—
Excess-profits
tax as a per-
centage of—
Total
tax as a
percent-
age of
corpo-
rate
profits
Cash
divi-
dends
paid
out as a
percent-
age of
corpo-
rate
profits
Corpo-
rate
profits
Profits
less
credit
for divi-
dends
Taxable
net
income
Corpo-
rate
profits
Taxable
net
income
Corpo-
rate
profits
Taxable
net
income
•Service— Continued.
Professional-.
Business
11.6
12.3
12.0
12.1
11.4
12.1
13.7
12.2
12.6
12.2
14.0
13.0
13.4
12.6
11.8
13.7
13.2
8.7
13.8
13.1
14.8
14.1
4.8
4.8
2.8
3.8
11.3
12.1
3.0
7.4
9.6
9.0
4.9
9.2
12.2
13.4
13.1
12.8
11.7
13.0
14.1
14.6
14.3
14.8
14.7
13.9
13.7
13.7
12.3
14.8
14.6
14.7
14.0
13.2
14.8
14.2
10.7
5.3
2.9
4.1
11.3
14.1
16.5
12.4
11.7
12.2
5.3
12.5
12.6
13.6
13.4
13.2
12.2
13.4
14.4
14.7
14.5
15.1
14.9
14.2
14.2
13.8
12.5
14.9
14.7
14.9
14.2
13.3
14.9
14.3
16.5
18.7
54.3
31.7
14.6
14.5
17.6
14.9
12.1
15.2
22.2
15.1
3.4
2.9
2.1
3.4
4.2
3.3
2.1
.7
1.3
1.1
.8
2.3
1.1
1.9
2.2
.4
1.3
.1
2.0
1.0
.7
.8
1.1
.6
4.0
3.3
2.5
4.0
4.9
3.9
2.5
.8
1.6
1.3
1.0
2.7
1.3
2.2
2.5
.5
1.5
.1
2.3
1.1
.8
.9
1.4
2.1
1.6
.8
.6
1.6
2.3
1.5
1.0
.2
.4
.1
.1
1.0
2.4
.3
.9
.3
.2
(') _
'.2
.3
.3
.1
.3
.1
.2
1.7
.9
. 7
1.8
2.4
1.7
1.0
.3
.4
.1
.1
1.1
2.5
.4
1.0
.3
.2
0)
.7
.2
.3
.3
.3
.4
2.0
3.0
16.6
16.0
14.7
17.1
17.9
17.0
16.8
13.1
14.4
13.4
14.9
16.3
16.8
14.8
14.9
14.4
14.7
8.8
16.5
14.3
15.7
15.1
6.0
5.7
2.9
4.0
11.3
14.4
4.3
11.6
12.5
9.0
4.9
9.2
62.7
65.4
Other service ...
69.8
Construction
60.0
Above ground ...
49.6
Underground and on
surface
64.5
Shipbuilding..
Public utilities
Transportation
56.4
88.1
79.4
Steam railroads
Electric railroads. . .
Water transporta-
tion
84.5
81.5
67,4
Air
84.1
Autobus
73.8
Cartage and storage.
Other public utilities:
Electric light and
power -
71.5
94.1
Gas
86.2
Telephone and tele-
graph
Radiobroadcasting..
Water. ..
94.9
65.7
83.4
Pipelines.
78.2
Terminals ..
88.5
Finance
75.2
Banking
54.0
National banks
47.9
State and private
banks
45.9
Joint-stock land
banks .
589.6
Loan companies
Investment trusts,
etc..
2.0
1.3
3.8
2.3
0)
2.3
1.3
4.6
2.6
.4
.1
.3
.6
,4
.3
.6
.8
0)
74.5
89.1
Stock and bond
brokers ..
68.8
Real estate
74.3
Insurance .
33.9
Life
49.1
Other
0)
(0
0)
0)
33.4
Grand total
10.7
13.7
14.6
1.8
2.1
.4
.6
13.0
74.2
1 Less than 0.05 of 1 percent.
Source: Computed from the Source book of the Statistical Section of the Bureau of Internal Revenue.
CONCENTRATION OF ECONOMIC POWER
181
Table 16. — Federal taxes and corproate income paid out as cash dividends or avail-
able for reinvestment or industrial replacement by small, medium-sized, large, and
giant corporations, 1931-37
[In millions of dollars]
PART I
Small Corporations (Assets Under $50,000)
1931
1932
1933
1934
1935
1936
1937
Corporate profits before taxes
378
174
278
433
514
699
641
Federal normal tax.. .. . .
21
20
37
58
2
69
4
73
6
18
66
9
Excess-profits tax .
Undistributed profits tax . . .. ._
18
Total Federal taxes
21
20
39
60
73
97
93
Corporate profits after taxes .
357
191
378
544
154
102
94
148
239
88
127
278
373
212
172
333
441
216
188
413
602
436
223
389
548
Cash dividends paid out
401
226
373
Income available for reinvestment and re-
Medium-Sized Corporations (Assets from $250,000 to $5,000,000)
Corporate profits before taxes
931
537
891
1,367
1,736
2,415
2,286
Federal normal tax
88
61
113
3
171
3
212
10
287
10
58
272
Excess-profits tax .. .
63
Undistributed profits tax
17
Total Federal taxes
88
61
116
174
222
355
352
Corporate profits after taxes
843
635
365
573
476
363
234
347
775
373
328
730
1,193
820
467
840
1, 514
1,024
509
999
2,060
1,537
605
1,128
1,934
Cash dividends paid out
1,500
Depreciation and depletion
642
Income available for reinvestment and re-
placement
1,076
Large Corporations (Assets from $5,000,000 to $50,000,000)
1,028
629
941
1,462
1,859
2,524
2,518
Federal normal tax .. . .
96
69
110
1
167
1
.0.
285
3?
294
44
Undistributed profits tax
10
Total Federal taxes
96
69
111
168
210
325
348
. 932
821
355
466
560
509
260
311
830
606
353
577
1,294
1,156
535
673
1,669
1,463
570
776
2,199
1,814
665
1,050
2,170
Cash dividends paid out
1,796
Depreciation and depletion
Income available for reinvestment and re-
placement .. - . - ... -
708
1,082
Giants (Assets over $50,000,000)
Corporate profits before taxes
2,305
1,358
1,409
2,051
2,606
3,709
4,126
187
132
150
1
183
212
6
338
1
28
400
Excess-profits tax
47
Undistributed profits tax
5
Total Federal taxes
187
132
151
183
218
367
452
Corporate profits after taxes
2,118
2,197
891
802
1,226
1,335
691
572
1,258
1,289
803
772
1,868
1,608
677
937
2,388
1,915
777
1,250
3,342
3,180
1,065
1,227
3.674
Cash dividends paid out
3,397
1,234
Income available for reinvestment and re-
placement
1,511
262698— 41— No. 9-
-13
182
CONCENTRATION OF ECONOMIC POWER
Table 16. — Federal taxes and corporate income paid out as cash dividends or avail-
able for reinvestment or industrial replacement hy small, medium-sized, large, and
giant corporations, 1931-37 — Continued
[In millions of dollars]
PART II
[1932=100]
Corpo-
rate
profits
before
taxes
Corporate profits
after taxes
Cash
divi-
dends
paid
out
Depre-
ciation
and de-
pletion
Income
avail-
able for
Exclud-
ing un-
distrib-
uted
Includ-
ing
profits
tax
reinvest-
ment
and re-
place-
ment
Small corporations:
1931
217
100
160
249
295
402
368
173
100
166
255
323
450
426
163
100
150
232
296
401
400
170
100
104
151
192
273
304
232
100
155
242
286
403
368
177
100
162
251
318
445
410
166
100
148
231
298
399
389
173
100
103
152
195
275
300
187
100
86
208
212
432
393
175
100
103
226
283
423
413
161
100
119
227
287
356
353
165
100
97
120
143
238
254
402
100
135
183
200
237
241
156
100
140
200
218
259
274
137
100
136
206
219
256
272
129
100
116
98
112
154
179
368
1932
loa
1933
188
1934
225
1935
279
1936
391
356
263
1937
252
Medium-sized corporations:
1931 - --- --
16S
1932
100
1933
210
1934
242
1935 . . ...
28S
1936
433
406
325
1937 . .
310
Large corporations:
1931 . . .
150
1932 - ---
100
1933
186
1934 ...
216
1935
250
1936 . .
393
388
338
1937
348
Giants:
1931 - --
14a
1932
100
1933 - --
135
1934
164
1935 _. ... .
219
1936
273
300
215
1937
264
PART III. RATE OF CHANGE IN PROFITS (BEFORE TAXES), 1932-37
[1932=100]
Small
Medium-
sized
Large
Giants
Corporate profits before taxes
Corporate profits after taxes (excluding undistributed-profits
tax)
Corporate profits after taxes (including undistributed -profits
tax)
Depreciation and depletion
Income available for reinvestment and replacement -
100
100
100
100
97
97
68
87
100
9*
Source: Computed from Statistics of Income for respective years.
CONCENTRATION OF ECONOMIC POWER
183
8=1
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1-i 'J* CO O -^ CO
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r-I ^" r-<' 05 to C-i ^' 00
i-<05coc<ifoc6-«*<id'0
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ciodrHi-HiN'-Hidc<ie4
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184
CONOENTRATION OF ECONOMIC POWER
13 :2;
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GQ
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w
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CO CO CO CO 00^ •
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rH Ci r-J e4 i-I i-J r-<
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a c o o-w^ >
1 .-^ -^ ■^ -^ M CD ^
CONCENTRATION OF ECONOMIC POWER
II
es^occi
2o
O lO (35 CO (N CO IM
OS
o "^
II
coiacoji-H^iot^o
.-H .-4 CO .-< CO csi cj 05 es
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t>2-
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r-; ,-; <N r-; C<i ,-; rH Tf C^
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fl a £3 p a g
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t-o
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185
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00 (N CO iM .-H 00 C*
c4 (ri es ^ .-4 ' *
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COOlM
186
OONOENTRATION OF ECONOMIC POWER
a.
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CONCENTRATION OF ECONOMIC POWER
187
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|o 1 ; 1
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20 to 25 percent.—
25 to 30 percent --
30 to 35 percent
35 to 40 percent- -
Over 40 percent
CO
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W
c3
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INDEX
ABOVE GROUND CONSTRUCTION: Page
Charts 62,71,86
Tables 180
AGRICULTURAL COOPERATIVES 22
ACCOUNTING PERIOD, DEFINITION OF 36-38, 74, 87, 117
AFFILIATION, DEFINITION 0F_ 42-45
AGRICULTURAL MACHINERY:
Charts 62,71,86
Tables _____ __ 179
Text 179
ALCOHOLIC BEVERAGES (WHOLESALE):
Charts 98, 110
Tables 106, 200
Also see Beverages.
AIRPLANES:
Charts 62,71,86
Tables 179
AIR TRANSPORTATION:
Charts 62, 71, 86
Tables 180
AMORTIZATION 121
Also see Depreciation.
ASSESSMENT OF PROPERTY 110
AMUSEMENTS:
Charts 62,71,86
Tables 179
ANTHRACITE COAL:
Charts 62,71,86
Tables 179
APPAREL (RETAIL) :
Charts 98, 110
Tables 195
Also see Clothing.
AUTO PARTS:
Retail 106,196
Wholesale 106, 199
AUTO DEALERS 196
AUTOBUS:
Charts 62,71.86
Tables 180
AUTOMOBILES:
Manufacturing 106, 192
See Motor vehicles.
Retail:
Charts 98,110
Tables 196
BAD DEBTS (STATUTORY DEDUCTION 0F)___ 13-15, 29, 33, 150, 152, 155
BAKING AND CONFECTIONERY:
Manufacturing:
Charts_._ 62, 71, 86
Tables 106, 178, 188
Text 98
RetaiL:_::::::::::::::::::::::::::::::: 106,193
Wholesale... 106, 198
203
204 INDEX
BANKING: T-age
Tables 180
Text 59,73,86
See National banks, State banks, joint-stock land banks.
BANKING AFFILIATES, EXEMPTION OF 75
BANKRUPT CORPORATIONS, EXEMPTION OF 23,73
BENEVOLENT INSURANCE ASSOCIATIONS, EXEMPTIONS 0F_ 22
BERLE, A. A 7
BEVERAGES (MANUFACTURING):
Charts 24,
30, 32, 35, 38, 47, 49, 51, 56, 61, 62, 71, 77, 86, 88, 89, 93, 94, 99,
100, 101, 110.
Tables 103, 106, 112,
113, 125, 141, 142, 150, 154-160, 162-165, 167, 174, 178, 186, 188.
Text 31, 38, 46, 49, 59, 78, 89, 98, 101, 102
BITUMINOUS COAL MINING:
Charts 62, 71, 86
Tables 179
BLAKEY, ROY 24, 92
BOECKEL, R. M 123
BONBRIGHT, JAMES 39,40
BONE PRODUCTS:
Charts 62, 71,86
Tables 179
BRANDEIS, JUSTICE 34
BOOKS (RETAIL) 107, 197
BREWERIES 106, 189
BUILDING AND LOAN ASSOCIATIONS, EXEMPTIONS OF 21
BUILDING PRODUCTS AND MATERIALS:
Manufacturing:
Charts 88, 89, 93, 94, 99, 100, 101, 110
Tables,: 104, 112, 113, 141, 142
Text 89, 95, 98
Also see Stone, clay, and glass.
Retail 196
"BURDEN" OF TAXES 2, 4, 81
BUREAU OF INTERNAL REVENUE 41-45,134-136
BUSINESS CYCLES, SENSITIVITY OF INCOME TAXES T0-_ 9,13,82
BUSINESS LEAGUES, EXEMPTION OF 22
BUSINESS PRIVILEGE TAXES 110-114
BUSINESS SERVICE:
Charts 62,71,86
Tables 179
See Service.
CANNING:
Charts 62,71,86
Tables 188, 178, 106
Text 102
See Food.
CAPITAL LOSS, DEDUCTION OF 13-15,29,33,150,153,157
CAPITAL STRUCTURE, EFFECT OF TAXES ON 73-74,91-195
CARPETS:
Charts 62, 71,86
Tables 178
See Textiles.
CARTAGE AND STORAGE:
Charts 62, 71, 86
Tables 180
See Public utilities.
CASH DIVIDENDS 149, 178-182
CELLULOID PRODUCTS:
Charts 62,71,86
Tables 179
See Leather.
CEMETERY CORPORATIONS, EXEMPTION 0F__. 22
INDEX 205
CHAIN STORES: Page
Charts 88, 89, 93, 94, 99, 100, 101, 110
Tables 104, 107, 112, 113, 141, 142
Text 89
CHARITABLE CORPORATIONS, EXEMPTION OF 22
CHEMICALS:
Charts 24, 30, 32, 35,
38, 47, 49, 51, 56, 62, 71, 77, 86, 88, 89, 93, 94, 98, 99, 100, 101, 110
Tables 104, 1 12,
113, 125, 141, 142, 150, 154-160, 162-165, 170, 176, 179, 191, 205
CHINA TRADE ACT CORPORATIONS 23 73
CIVIC LEAGUES, EXEMPTION OF '22
CLAY PRODUCTS:
Charts 62, 71,86
Tables 179, 106, 191
See Stone, clay, and glass.
CLOTHING:
Manufacturing:
Charts 30, 32, 35, 61, 62, 71, 77, 86
Tables 106, 175, 178, 189, 204
Text 31,59,78
See also Textiles.
Retail 106, 107, 195
COAL AND OTHER FUEL (RETAIL): Tables 197,106
COAL MINING:
Charts 62,71,86
Tables 179, 125
COLM, GERHARD 74
COMMISSION (WHOLESALE):
Charts 62,71,86
Tables 179
CONFECTIONERY PRODUCTS:
Manufacturing:
Charts 62,71,86
Tables 106, 178, 188
Text 98
Wholesale 106, 198
Retail 106, 193
CONSENT DIVIDENDS 74
CONSOLIDATED TAX RETURNS:
Advantages of_ 48-52
Origin of 41-45
Repeal of 44-45, 49-51
Tables 159-163
Also see Holding companies.
CONSTRUCTION (MANUFACTURING):
Charts 24, 30, 32, 35, 38, 47, 49. 51, 56, 60, 71, 77, 62, 86
Tables 125, 150-153, 158-161, 163-165, 172-173, 177, 180, 205
Text 24, 25, 30, 31, 33, 35, 37, 38, 46, 49, 59, 70, 78, 101
CONSTRUCTION SUPPLIES (WHOLESALE):
Charts 98,110
Tables 198
CONSUMPTION TAXES 101-107
Also see General sales, liquor, and tobacco taxes.
CONTRIBUTIONS (STATUTORY DEDUCTION OF) 13
COOPERATIVES, EXEMPTION OF—
Agriculture 22
Banks 21
Ditch 22
Insurance 22
Irrigation 22
Marketing 22
Purchasing 22
Telephone -- 22
CORPORATE SAVINGS, EFFECT OF TAXES ON 73-74,82-86
206 INDEX
CORPORATIONS: Pa^e
N umber of 134
Entity 39-41
COSMETICS (RETAIL) 197
COST OF GOODS SOLD (STATUTORY DEDUCTION OF) 13-16,
28-30, 150, 151, 154
COST OF OPERATIONS (STATUTORY DEDUCTION OF) 13-16,
28-30, 150, 151, 154
COTTON:
Charts 62,71,86
Tables 178
CREAMERIES AND DAIRIES:
Tables 188, 106
Text 98
CREDITOR CAPITAL, EFFECT OF TAXES ON 91-95
Also see Interest paid,
CREDITS UNDER CORPORATE INCOME TAX:
Dividends paid out 75
Dividends received 54-56
Interest received on Government securities 63-64
Minimum amount of net income 23-25
Prior years' loss 36-38
CUSTOMS 5-6
DAIRY AND POULTRY (WHOLESALE) 106,198
DEBT, RETIREMENT OF 74
Also see Undistributed profits tax.
"DEBT RIDDEN" CORPORATIONS 74,95
DEDUCTIONS FROM GROSS INCOME 13-17,28-36,150-159
Also see Contributions or gifts, cost of goods sold, cost of operations,
depletion, depreciation, interest paid, net losses for prior years,
officers, compensation of, rent, repairs, taxes paid.
DEPARTMENT STORES:
Charts 88, 89, 93, 99, 100, 101, 110
Tables 104, 106, 112, 113, 141, 142, 194
Text 189
DEPLETION (STATUTORY DEDUCTION OF) 16,
30-31, 149, 150, 153, 156-157, 181-182
DEPRECIATION (STATUTORY DEDUCTION) 16,
30-31, 149, 150, 152, 156, 181-182
Also see Amortization.
DEPRESSION, EFFECT ON TAXES 13,82,105
DESIDERATA OF A ''GOOD" TAX SYSTEM 116
DISTILLERIES 106, 189
DIVIDEND DISTRIBUTION, TYPES OF 76-77
DIVIDENDS PAID OUT:
Magnitude of 17-19,39-40,76-79,84
Also see Undistributed-profits tax.
DOMESTIC SERVICE:
Charts 62,71,86
Tables 179
Text 97n
DOUBLE TAXATION 53-56
Also see Intercorporate dividends.
DOYLE V. MITCHELL BROS. CO 31n
DRUGS:
DRUGS AND COSMETICS (RETAIL):
Charts 98, 110
Tables 106
DRY GOODS:
Wholesale 106,200
Retail 194
DUN & BRADSTREET TAX BURDEN SURVEY 98,
102-103, 105-107, 110, 136, 143-144
Manufacturing 106, 191
Wholesale 106, 199
Retail 98, 106, 110, 197
EISNER y. MACOMBER 75
INDEX
207
Page
EMPLOYEES' ASSOCIATIONS, EXEMPTION OF 22
EMPLOYMENT, EFFECT OF TAXES ON 97-101
ENTREPRENEURIAL LABOR, EXEMPTION 'OF 98
EQUITY CAPITAL q1_95
EQUITY RATIO, DEFINED ".."."I""'.'.!"""""" 140
Tables 183-185, 187
ESCH, CONGRESSMAN ' 53
EXCESS-PROFITS TAX """' 10-12
27, 67-70, 81-86, 88, 92, 121-125, 12"&-"l29", 149, 178-181
EXEMPTIONS __.._. 21-23
Also see specific industries.
EXPENDITURES, GOVERNMENTAL 4
ELECTRIC LIGHT AND POWER:
Charts 62, 71,86
Tables 125, 180
Text 59,86
ELECTRIC RAILROADS:
Charts 62, 71, 86
Tables 125, 180
ELECTRICAL GOODS (WHOLESALE) 106, 199
ELECTRICAL MACHINERY:
Charts 67,71,86
Tables 106, 179, 192
Text 102
ENGINES 106, 193
EFFECTIVE TAX RATES 10-11,24-25,57
FACTORY MACHINERY:
Charts 62-71,86
Tables- _ _ 179
FAMILY CLOTmNG"(RETAYLy_\\"^^^'^"""'""
FARM IMPLEMENTS (RETAIL) 107,194,196
FARMERS' SUPPLIES (RETAIL):
Charts 98, 110
Tables 106, 193, 194
FEDERAL CAPITAL STOCK TAX 67-70,88,92,126-129,184,186-187
Also see Excess-profits tax.
FEDERAL CORPORATE INCOME TAXES 149,163-200
History of 9-12
FEDERAL EXCISES 101-104, 188-200
FERTILIZERS:
Charts 62,71,86
Tables 179
FETTER, PROFESSOR 41
FILLING STATIONS:
Charts 98,110
Tables 106,197
FINANCE:
Charts 24, 30, 32, 35, 38, 47, 49, 51, 56, 60, 71, 77
Tables 125, 150-153, 158-161, 163-1^65, 173, 177, 180,207
Text 24, 25, 31, 33, 35, 37, 38, 46, 49, 51, 59, 65, 78
FISH:
Wholesale 106, 198
Retail 106,193
FIXED-COST TAXES 2, 109-114
FLINT V. STONE TRACY 9n, 63
FLOOR COVERINGS (RETAIL) 19o
FLORISTS (RETAIL) ^ 106
FLOUR AND FEED MILLING 106,188
See Mill products. ^^ ^^ ^,
FLUCTUATING ENTERPRISE 21,36-38,68-70,74
FOOD:
''™SSr£^ 24,30,32.35 38 47
49, 51, 56, 61, 62, 71, 77, 86, 88, 89, 93, 94, 98, 99, 100, 101, 110
Tables ^^'^'
"ii2,"ii3,'i25."i4i,"i42, 150, 154-160, 162-166, 174, 178, 188. 203
Text ______-_- 38, 46, 49, 51, 59, 78, 98
208 IISDEX
FOOD— Continued.
Wholesale: Page
Charts 98, 110
Tables 198
Retail:
Charts 98, 110
Tables 193
FOREIGN CORPORATIONS 73
FOREST PRODUCTS:
Charts 24,30,32,35,38,47,
49, 51, 56, 61, 62, 71, 77. 86, 88, 89, 93, 94, 98, 99, 100, 101, 110
Tables 103, 106, 125, 150, 154-160, 162-165, 169, 175, 179, 189, 190, 204
Text 24, 30, 31, 38, 46, 49, 59. 70, 78
FOUNDRIES 106, 192
FRANK, JEROME 91
FRATERNAL ORGANIZATIONS, EXEMPTIONS OF 22
FRIDAY, DAVID 124
FRUIT (WHOLESALE) 106, 198
FURNITURE:
Manufacturing:
Charts 62, 71, 86
Tables 106, 179, 190
Retail :
Charts 98, 110
Tables 106, 195
GALVESTON ELECTRIC CO. v. GALVESTON 3
GAS (MINING):
Charts 62, 71, 86
Tables 125, 179
GAS (UTILITIES):
Charts 62,71,86
Tables 125, 180
Text 86
GENERAL MERCHANDISE:
Charts 98, 110
Tables 106, 194
GEORGE, EDWIN B 73n, 77n
GLASS, CARTER 123
GLASS PRODUCTS 196
See Stone, clav, and glass.
GOVERNMENT INTEREST 13-15, 63-65
GOVERNMENT REGULATION OF PRICE: Income taxes under 3
GRADUATION OF RATES 12,25-27
GROCERIES:
Wholesale 106, 198
Retail 106, 193
GROCERIES AND MEATS 106,107
GROSS INCOME 149
GROSS MARGIN, DEFINED 140
HARDWARE:
Manufacturing:
Charts 62,71,86
Tables 106, 179, 192
Wholesale 106, 199
Retail 106, 107, 195, 196
HEATING SUPPLIES (WHOLESALE) 106,199
HEER, CLARENCE 4
HELVERING, COMMISSIONER 72
HIGHWAY TAXES 5-6
HOLDING COMPANY 39-41
Also ?ee Consolidated returns.
HOSIERY 106,189
HOUSE WAYS AND MEANS COMMITTEE 23,45,130
HOUSEHOLD APPLIANCES (RETAIL) 106,195
HOUSEHOLD MACHINERY:
Charts 62,71,86
Tables 179
INDEX 209
Page
HOUSTON, SECRETARY loq
HOWE, F. C 9
HUGHES V. COMMISSIONER 36
HULL, CORDELL 54
ICE MANUFACTURING io6 188
INCIDENCE OF TAXES 2-3' 107
INCOME TAX, SHIFTING OF ' 3
INCOME TAX ACTS OF—
1894 9
1909 9-16, 23, 25, 34, .53, 92
1913 10,23,34,54,92
1916 10,54,92
1917 10, 23, 25, 54-55, 87, 121
1918 10, 23, 25, 31, 37, 42, 55, 87, 92, 121-124
1921 1 0, 23, 34, 37, 42-43
1924 10,25,43
1926 11
1928 11,23,43
1932 10-11,23,25,44,92
1933 11,67
1934 11,44-45,55,92
1935 11-12,25-27
1936 11-12, 26, 27, 35, 55, 70-74, 89
1937 11
1938 11-12, 27, 45n, 67. 74, 89
1939 11-12, 27, 37, 45n
1940 (I) 11
1940 (II) 11-12,55
INDEPENDENT RETAILER 107
INDIVIDUAL INCOME TAX 25,73
INDUSTRIAL CHEMICALS 106, 191
See Chemicals.
INDUSTRIAL UNIT OF TAXATION 39,52
Also see Consolidated returns.
INSTRUMENTS:
Charts 62,71,86
Tables 179
INSURANCE:
Charts 62,71
Tables 180
Text 22,53,59,73,86
See Life insurance.
INTERCORPORATE AFFILIATION 39-45
Also see Consolidated returns.
INTERCORPORATE DIVIDENDS 53-63
Also see Consolidated returns.
INTEREST PAID (STATUTORY DEDUCTION OF) 13-16,
30, 149, 150, 152, 155
Also see Creditor capital.
^'INVESTED CAPITAL" 121-122
Also see Excess profits.
INVESTMENT, EFFECT OF TAXES ON 17-19,81-86
Also see Reinvestment.
invp:stment trusts 59
Dividends received and paid 55
IRON AND STEEL:
Charts 62, 71, 86, 88, 89, 93, 94, 99, 100, 101, 110
Tables _ 104,106,112,113,141,142,179,191
Text 89
IVORY PRODUCTS:
Charts 62,71,86
Tables 179
JACKSON, ROBERT 25, 26, 45n
JEWELRY (RETAIL) 106, 197
JOINT COMMITTEE ON INTERNAL REVENUE TAXATION 43
210 INDEX
JOINT-STOCK LAND BANKS: Page
Charts 62,71
Exemption of 22
Tables 180
Text 73
KITCHINS, SENATOR 55
KNIT GOODS:
Charts 62,71,86
Tables 178
KOSHLAND v. HELVERING 76
LABOR COST RATIO 140
LABOR ORGANIZATIONS, EXEMPTION OF 21
LARGE CORPORATIONS. 26, 30-31, 48-49, 53-54, 68-70, 78, 81-86, 89, 98, 110
LEATHER:
Charts 24, 30, 32, 35, 38, 47,
49, 51, 56, 61, 62, 71, 77, 86, 88, 89, 93, 94, 98, 99, 100, 101, 110
Tables 104,112,
113, 125, 141, 142, 150, 154-160, 162-165, 168, 175, 178, 189, 204
Text 31,38,46,49,59,78
LENROOT, SENATOR 55
LIFE INSURANCE:
Special deduction legislation 34, 35
Charts 62,71,86
Tables 180
LIGNITE (MINING):
Charts 62,71,86
Tables 179
LIQUOR TAXES 102
Also see Alcoholic beverages.
LOAN COMPANIES:
Charts 67,71,86
Tables 180
LOSSES 13,34
Fire, Storm, Shipwreck, Casualty, Theft.
Also see Net loss.
LUMBER:
Manufacturing:
Charts HO
Tables 103, 106, 112, 113, 141, 142, 190
See Forest products.
Wholesale 106, 199
RetaiL 98. 106, 110, 195, 196
MACHINE SHOPS 106, 192
MACHINERY:
Charts 62, 71, 86, 88, 89, 93, 94, 98, 99, 100. 101, 110
Tables 104, 106, 112, 113, 141, 142, 179, 192
Text 89,98
MACHINERY AND EQUIPMENT (WHOLESALE) 106,199
MAGILL, ROSWELL 13
MAIL-ORDER HOUSES 106
MANUFACTURING:
Charts- 24, 30, 32, 35, 38, 47, 49, 51, 56, 60, 71, 77, 88, 93, 94, 99, 100, 101, 110
Tables 104, 106, 112, 113, 125, 132, 133, 141, 142, 150-166, 174, 203
Text 24, 25, 30, 31, 33, 35, 37, 38, 46, 49, 50, 51, 59, 65, 78, 95, 101
McREYNOLDS, JUSTICE... 34
MEANS, GARDINER C 7,40
MEAT PACKING 106, 188
See Packing-house products.
MEATS (RETAIL) 193
MEATS AND FISH:
Wholesale 106, 198
Retail 106,193
MECHANIZATION 98-101
Also see Pav-roll taxes.
MEN'S AND BOYS' CLOTHING 107,195
See Clothing.
INDEX 211
METAL BUILDING MATERIALS AND SUPPLIES- Page
Charts 62,71,86
Tables _ __ __ ,70
METAL MINING: ^^^
Charts 62,71,86
lables I9f^ 17Q
METALS: i^o, i/y
Charts 24, 30, 32, 35, 38, 47, 49, 51, 56, 62, 71, 77, 86, 98 110
Tables 125, 150, 154-160, 162-165, 171, 176, 179, 191, 192 205
METaIs,- PRECIOUS-: ^'' ''■ ''' ''■ «• ''• ''• ^«
?abreL-:::::::::::::::::::::::-.::::: ''-''-.f,
MILK DEALERS joo
MILL PRODUCTS:
Charts 62,71,86
Tables 170
Text :_:::::::: 98
MILLS, OGDEN o%
MINING:
Charts 24, 30, 32, 35, 38, 47, 49, 51, 56, 60, 71, 77
Tables 125, 150-153, 158-161, 163-165, 171, 177, 206
Text _ 24, 25, 30, 31, 33, 35, 37, 38, 46, 49, 50, 59, 78
MINIMUM NET INCOME, EXEMPTION OF 123-25,150
Also see Small business.
MONOPOLY PROFITS 87-90
Also see Excess-profits tax.
MOTION-PICTURE PRODUCERS:
Charts 62, 71, 86
Tables ___ ___ 179
Text :::: 79
MOTION-PICTURE THEATERS:
Charts 62,71,86
Tables ^ 179
MOTOR-VEHICLE DEALERS ./....'. 106
See Auto parts.
MOTOR VEHICLES:
Charts 30, 32, 35, 62, 71, 77, 86
Tables 106, 177, 179, 192, 206
Text 59, 78, 102
See Metals.
MUTUAL-INVESTMENT COMPANIES:
Dividend credit of 55
MUTUAL SAVINGS BANKS, EXEMPTION OF... 21
NATIONAL BANKS:
Charts . 62, 71, 86
Tables 180
NATIONAL INDUSTRIAL CONFERENCE BOARD 9n, 111-113
NATIONAL INDUSTRIAL RECOVERY ACT 67
NATIONAL LIFE INSURANCE CO. v. UNITED STATES 34
NATIONAL MORTGAGE ASSOCIATIONS, EXEMPTION 0F__ _ 75
NET LOSS FOR PRIOR YEARS (STATUTORY DEDUCTION 0F)_ 36-38
NEWLANDS, SENATOR 53-54
NEWSPAPERS 106, 190
NONALCOHOLIC BEVERAGES:
Charts 62, 71,86
Tables 178, 189
Text 98
See Beverages.
NONFERROUS METALS:
Charts 88, 89, 93, 94, 99, 100, 101, 110
Tables 104, 106, 112, 113, 141, 142, 192
Text 98
NORMAL CORPORATE INCOME TAX: Tables 83, 165, 174, 186-187
^'NORMAL RETURN'' 121
See Excess-profits tax.
212 INDEX
Page;
NURSERIES AND FLORISTS (RETAIL) 197
OCEAN AND COASTAL TRANSPORT 125
OFFICE EQUIPMENT:
Charts 62,71,86
Tables 179
OFFICERS, COMPENSATION OF (STATUTORY DEDUCTION
OF) 13-15,33, 150, 151, 154-155
OIL AND GAS (MINING):
Charts 62, 71,86
Tables 1 79
OLIPHANT, HERMAN 72n, 130-131
PACKING-HOUSE PRODUCTS:
Charts 62,71,86
Tables 106, 178, 188
Text 98
See Meats.
PAINTS:
Manufacturing:
Charts 62,71,86
Tables 106, 179, 191
Wholesale 106, 199
Retail 106, 196
PAPER:
Manufacturing:
Charts 24, 30, 32, 35,
38, 47, 49, 51, 66, 62, 71, 77, 86, 88, 89, 93, 94, 98, 99, 100, 101, 110
Tables 103, 106, 112,
113, 125, 141, 142, 150, 154-160, 162-165, 169, 175, 179, 190, 204
Text 30,31,38,46,49,59,78,95
Wholesale _ . 106, 200
PAYNE, CONGRESSMAN 53
PAY-ROLL TAXES 97-101
Regressive ' 101
Mechanization 98-100
Tables 1 88-202
PEAT (MINING):
Charts 62,71,86
Tables 179
PERIODICALS 190
PETROLEUM:
Manufacturing:
Charts 30,
32, 35, 62, 71, 77, 86. 88, 89, 93, 94, 98, 99, 100, 101, 110
Tables 104, 106, 112, 113, 141, 142, 176, 178, 191, 205
Text 31,59,78, 102
See Chemicals.
Wholesale :
Charts 98, 110
Tables 106, 200
Retail, see Filling stations.
PIPE LINES:
Charts 62, 7 1 , 86
Tables 180
PLANING-MILL PRODUCTS:
Charts 62,71,86
Tables 179
PLUMBING AND HEATING SUPPLIES (WHOLESALE) 106,199
POLLOCK V. FARMERS' LOAN & TRUST CO 9n
POULTRY (WHOLESALE) 106, 198
PRICES 2-3,97, 101-110
PRINTING AND PUBLISHING:
Charts 24,30,32,35,
38, 47, 49, 51, 56, 62, 71, 77, 86, 88, 89, 93, 94, 98, 99, 100, 101, 110
Tables 104, 106,
112, 113, 125, 141, 142, 150, 154-160, 162-165, 170, 176, 190, 205
Text 24, 30, 31, 38, 46, 49, 59, 78, 101
INDEX
213
Pag€
PRIOR YEARS' LOSSES 36-38,158-159
See Fluctuating enterprise, small corporations.
PRODUCE AND FRUIT (WHOLESALE) 106 198
PROFESSIONAL SERVICE:
Charts 62, 71, 86
Tables _ _ 179
PROFIT RATIO, DEFINED ....[. 140
Tables 90, i 83- 187
PROFITS, CORPORATE I49, 181-182
Definition for tax purposes 13-17
Effect of taxes on _ 17-19 81-86
PROGRESSIVE TAX RATES 12 25-27 57
PROPERTY TAXES 109-110,188-200,202
PUBLIC UTILITIES:
Charts 24, 30, 32, 35, 38, 47, 49, 51, 56, 60, 62, 71, 77, 86
Tables 125, 150-153, 158-161, 163-165, 173, 177, 207
Text 24, 25, 30, 31, 33, 35, 37, 38, 46, 49, 50, 59, 78, 101
PUBLISHING. See Printing.
RADIO AND HOUSEHOLD APPLIANCES (RETAIL) 106,195
RADIOS (MANUFACTURING):
Charts 62,71,86
Tables 179
Text 79
RADIOBROADCASTING:
Charts 62,71,86
Tables 180
RAILROAD EQUIPMENT:
Charts 62,71,86
Tables 179
RAILROADS:
Charts 62,71,86
Tables 125, 180
Text 45,53,54,59
RATHENAU, WALTER 7
RAYON PRODUCTS:
Charts 62,71,86
Tables 178
REAL ESTATE:
Charts 62,71,86
Tables 180
RECEIPTS, PUBLIC 4-6
REGRESSION, DEFERRED 69n
REINVESTMENT OF PROFITS 17-18,70-79,81-86,181-182
RENT PAID (STATUTORY DEDUCTION OF) 13-15,33,150,151,155
REPAIRS (STATUTORY DEDUCTION OF) 34
RESTAURANTS:
Charts 98, 110
Tables 107, 197
RETAIL:
Charts 62,71,86,98,110
Tables 179,193
ROOSEVELT, F. D 1,26
ROOT, ELIHU 23
RUBBER:
Charts 24, 30, 32, 35, 38,
47, 49, 51, 56, 61, 62, 71, 77, 86, 88, 89, 93, 94, 99, 100, 101, 110
Tables 104, 112, 113,
125, 141, 142, 150, 154-160, 162-165, 168-169, 175, 179, 204
Text 31, 38, 46, 49, 51, 59, 70, 78, 89
SAWMILL AND PLANING-MILL PRODUCTS:
Charts 62,71,86
Tables 179
SCHMIDT, O. A 68n, 126-127
SECOND-HAND STORES 197
SECURITIES AND EXCHANGE COMMISSION 136-140
SENATE FINANCE COMMITTEE 42
262698— 41— No. 9 15
214 INDEX
SERVICE: Page
Charts 24, 30, 32, 35, 38, 47, 49, 51, 56, 60, 62, 71, 77, 86
Tables 125, 150-153, 158-161, 163-165, 172, 177, 206
Text 24, 30, 31, 33, 35, 38, 46, 49, 51, 59, 78
SHIFTING 2-3
See also Incidence.
SHIPBUILDING:
Charts 62, 71, 86
Tables 180
Text 79, 97n
SHOES:
Manufacturing:
Charts 62, 71, 86
Tables 106, 1 79
Text 86
Retail 106, 195
SILK AND RAYON:
Charts 62, 71, 86
Tables 178
Text 86
SILVERHERZ, JOSEPH D llOn
SIZE OF ENTERPRISE:
Charts. _. 24, 30, 32, 35, 38, 58, 60, 61, 62, 69, 71, 77, 83, 85, 88, 92, 98, 99, 110
Tables 49, 128-129, 132-133,
142, 150-157, 159, 165-178, 181-185, 188-201, 203-207
Text- 21-24, 27, 30-36, 38, 57-61, 65, 68-70, 77-79, 81-86, 89, 92, 98, 109, 110
SMALL BUSINESS 23-27, 33, 36, 38, 68-70, 74. 78, 81-86, 92, 98, 110
Also see Graduation, minimum income, progression.
SPECIFIC CREDITS IN DOLLARS 23-25
Also see Minimum net income.
SPRECKELS SUGAR REFINING CO. v. McCLAIN 9n
STATE CORPORATE FRANCHISE TAXES (OTHER THAN ON
INCOME) 110-114
STATE CORPORATE INCOME TAXES 9n, 12n, 113-114, 188-200
STATE CORPORATION ORGANIZATION AND ENTRANCE
TAXES . _ 110-111
STATE SALES TAXES 105-107,188-200
STATE AND PRIVATE BANKS:
Charts 62, 7 1, 86
Tables 180
STATIONERY"(REfAIL)Vrri'^]]]]]]"]";"]]^ 197
STEAM RAILROADS:
Charts 62, 71, 86
Tables 1 25, 180
STEEL:
Charts 62,71,86,88,89,93,94,99, 100, 101, 110
Tables 104, 106, 112, 113, 141, 142, 179, 191
Text 89
STOCK DIVIDEND, TAXABILITY OF 75-76
STOCK AND BOND BROKERS:
Charts 62, 71, 86
Tables 180
STOCKHOLDERS:
Control of corporation 6-7
STONE, CLAY, AND GLASS:
Charts 24,30,32,35,38,47,49,51,56,62,71,77,86,98, 110
Tables 106, 125, 150, 154-160, 162-165, 170-171, 176, 179, 191, 205
Text 24, 3 1 , 38, 46, 49, 59, 70, 78
See Building products.
STORAGE:
Charts 62,71,86
Tables 180
STRATTON'S INDEPENDENT LTD. v. H A WBERT 31n
SUGAR:
Charts 62, 71, 86
Tables 178
Text _ _ ___ 59,86
INDEX 215
Page
TAFT, WILLIAM 9_10
TAXABLE INCOME, CONCEPT OF 13
TAX COLLECTIONS 4-6 146-147
"TAX CORRECTIVES" _ ' i
TAX RATIOS:
Capital stock tax 184
Corporate taxes 188, 200
Excess profits tax 178-180, 183
Income tax 163-173, 188-200
Normal tax 165, 174-180, 183
Pay roll taxes 188, 200
Property taxes 188, 200
Sales taxes 188, 200
Undistributed profits tax 178-180, 185
TAXES, TYPES OF 2-3
TAXES PAID (STATUTORY DEDUCTION 0F)__. 13-15,31,150.152,156
TAX-EXEMPT SECURITIES:
Distribution of 64
Income received from 63-65
TAXING POWER 115
TAX RATES, STATUTORY 10-12
TAX SOURCES, CHANGING : 5-6,148
TEACHERS' RETIREMENT FUND ASSOCIATIONS, EXEMPTION
OF 22
TELEPHONE AND TELEGRAPH:
Charts 62,71,86
Tables 125, 180
Text 79, 86
TERMINALS:
Charts 62,71,86
Tables 180
TEXTILE WEAVING 106, 189
TEXTILES:
Charts 24, 30, 32, 35,
38, 47, 49, 51, 56, 61, 71, 77, 88, 89, 93, 94, 98, 99, 100, 101, 110
Tables 103, 112, 113,
125, 141, 142, 150, 154-160, 162-165, 168, 174, 178, 189, 203
Text 24, 38, 46, 49, 59, 89, 98
THEATERS:
Charts 62,71,86
Tables 179
THORP, W. L xi, 73n, 77n
TIRES AND TUBES:
Charts 62,71,86
Tables 179
TOBACCO:
Manufacturing :
Charts 24,30,32,35,
38, 47, 49, 51, 56, 61, 71, 77, 88, 89, 93, 94, 98, 99, 100, 101, 110, 203
Tables_..___._-_-_______-_ — 103, 112, 113,
125, 141, 142, 150, 154-160, 162-165, 167, 174, 178, 188, 189
Text 31, 38, 46, 49, 51, 59, 70, 78, 89, 101, 102
Wholesale 66, 71, 86, 198
TOOLS:
Charts 62,71,86
Tables 179
TRADE"
Charts __ 24,30,32,35,
38, 47, 49, 51, 56, 60, 71, 77, 88, 89, 93, 94, 99, 100, 101, 110
Tables 104, 125, 150-153, 158-161, 163-165, 172, 177, 179, 206
Text 24, 25, 30, 31, 33, 35. 38, 46, 49, 51, 78
TRANSPORTATION: ^„ ^^ „^
Charts 62,71,86
Tables 180
See Publications.
215 INDEX
TRANSPORTATION EQUIPMENT: Page
Charts 88, 89, 93, 94, 99, 100, 101, 110
Tables 104, 106, 112, 113, 141, 142
Text 89,95.98, 152
TROXEL, C. E 3n
UNDERGROUND AND SURFACE CONSTRUCTION;
Charts 62, 71,86
Tables 180
UNDISTRIBUTED PROFITS TAX 70-79,149
Equity ratio comparison 95, 185, 187
Industry comparison 79, 178-181
Profit rate comparison 89-90, 185-186
Size comparison 77-78
VARIABLE-COST TAXES 21, 97-107
See also Pay-roil taxes, Federal excises, and State sales taxes.
VARIETY STORES 106, 194
VARNISHES (WHOLESALE) 106, 199
WALLPAPER (RETAIL) 196
WAR: Effect of 4d, 13
WAR PROFITS TAX 121-125.149
WATER (UTILITIES):
Charts 62, 71,86
Tables 180
WATER TRANSPORTATION:
Charts 62, 71, 86
Tables 180
WHISKY TAX 102
WHOLESALE:
Charts 62, 71, 86, 88, 89, 93, 94, 98, 99, 100, 101, 110
Tables 104, 106, 112, 113, 141, 142, 179
WINERIES-- 189
WOMEN'S WEAR (RETAIL) 106,195
WOOLEN AND WORSTED PRODUCTS:
Charts 62, 71, 86
Tables 178
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