Part 8 (1/2)

To concede a right to tax them would be to concede a power to impede or burden the operation of the laws enacted by Congress to carry into execution a power vested in the National Government by the Const.i.tution.

[Footnote 1: People ex rel. Edison, &c., Co., v. a.s.sessors, 156 N.Y., 417; People ex rel. v. Roberts, 159 N.Y., 70; In Re Sheffield, 64 Fed. Rep., 833; Commonwealth v. Westinghouse, &c., Co., 151 Pa., 265.]

[Footnote 2: 159 N.Y., p. 75.]

Apparently the same rule would be applicable were the granting of patent rights, like the granting of ordinary corporate franchises, a prerogative reserved under our system of government to the states instead of being expressly conferred on the United States. By parity of reasoning, the Federal Government in that case would have no power to tax them.

It is familiar law, reiterated over and over again by the Supreme Court, that Congress cannot tax the means or instrumentalities employed by the states in exercising their powers and functions, any more than a state can tax the instrumentalities similarly employed by the General Government. Thus, it has been held that Congress cannot tax a munic.i.p.al corporation (being a portion of the sovereign power of the state) upon its munic.i.p.al revenues[1]; that Congress cannot impose a tax upon the salary of a judicial officer of a state[2]; that Congress cannot tax a bond given in pursuance of a state law to secure a liquor license.[3]

[Footnote 1: United States vs. Railroad Co., 17 Wall., 322.]

[Footnote 2: Collector v. Day, 11 Wall., 113.]

[Footnote 3: Ambrosini v. United States, 185 U.S., 1.]

In the light of these decisions it is not apparent how Congress can tax the franchises of those state corporations (and they are many and important) which perform some public or quasi-public function. A state, to carry out its purposes of internal improvement, charters an intrastate railway or ferry company with power to charge tolls and exercise the right of eminent domain. Is not the grant of corporate existence and privileges to such a corporation one of the means or instrumentalities employed by the state for carrying out its legitimate functions, and is not a tax by the Federal Government upon the exercise by such a corporation of its corporate powers an interference with such means or instrumentalities?

In any discussion of the right of Congress to tax the agencies of or franchises granted by a state, the distinction must be borne in mind between a tax upon property acquired by means of the franchise from the state and a tax upon the exercise of the franchise itself. The former tax may be perfectly valid where the latter would be unconst.i.tutional. Thus, the Supreme Court has upheld a tax by a state upon the real and personal property (as distinct from the franchises) of a railway company chartered by Congress for private gain, while conceding that the state could not tax the franchises, because to do so would be a direct obstruction to federal powers.[1]

[Footnote 1: Union Pacific Railroad Company vs. p.e.n.i.ston, 18 Wall., 5.]

It remains to notice briefly one or two Supreme Court decisions which are relied upon by the sponsors of the new tax law. Reference has already been made to the decision in the Spreckels case[1] which upheld the validity of the tax imposed by the War Revenue Act of 1898 upon the gross receipts of corporations engaged in the businesses of refining petroleum and refining sugar. The Court held the tax to be an excise tax ”in respect of the carrying on or doing the business of refining sugar,” and such it obviously was. It was not a tax upon the privilege or franchise of doing business in a corporate capacity, like the tax now under debate. On the contrary, the act expressly applied to ”every person, firm, corporation, or company carrying on or doing the business of refining sugar....” The case, therefore, has no bearing on the point we are discussing. Had the act applied only to corporations, a different question would have been involved.

[Footnote 1: Spreckels Sugar Refining Co. vs. McClain. 192 U.S., 397.]

The case of Veazie Bank vs. Fenno,[1] upholding the statute which taxed out of existence the circulation of the state banks, has frequently been cited as an authority sustaining the right of Congress to levy a tax upon a franchise or privilege granted by a state. It is true that in that case the eminent counsel for the bank (Messrs. Reverdy Johnson and Caleb Cus.h.i.+ng) argued unsuccessfully ”that the act imposing the tax impaired a franchise granted by the state, and that Congress had no power to pa.s.s any law which could do that;”[2] and that two justices dissented on that ground. The conclusive answer to this argument, was, however, that the power of the states to grant the particular right or privilege in question was subordinate to powers expressly conferred on Congress by the Const.i.tution; that Congress was given power under the Const.i.tution to provide a currency for the whole country, and the act in question was legislation appropriate to that end. The case does not hold that Congress has any general power to tax franchises or privileges granted by a state.

[Footnote 1: 8 Wall., 533.]

[Footnote 2: See 8 Wall., p. 535.]

The scope of this chapter does not admit of further reference to the decisions. It is strongly urged, however, that none of them, rightly construed, will be found to sustain the right of the General Government to impose a tax upon the exercise of franchises granted by a state in the exercise of its independent sovereignty, and that such a decision would mark a new departure in our jurisprudence.

In the debates in Congress over the bill many good lawyers appear to have a.s.sumed, somewhat too hastily, that the tax in question was an excise tax on business or occupation like that involved in the Spreckels case, and that the only const.i.tutional question, therefore, was one of cla.s.sification under the provision of the Const.i.tution that excises shall be uniform throughout the United States. No less eminent a const.i.tutional lawyer than Senator Bailey of Texas, in a colloquy with the junior Senator from New York, put the matter thus:[1]

Mr. Root: May I ask the Senator from Texas if I am right in inferring from the statement which he has just made that he does not seriously question the const.i.tutional power of the Congress to impose this tax on corporations?

Mr. Bailey: Mr. President, I answer the Senator frankly that I do not.... I think the rule was and is that Congress can levy any tax it pleases except an export tax. Of course a direct tax must be apportioned and an indirect tax must be uniform. But the uniformity rule simply requires that wherever the subject of taxation is found, the tax shall operate equally upon it.

I believe that Congress can tax all red-headed men engaged in a given line of business if it pleases.... I have no doubt if the tax fell upon every red-headed man in Ma.s.sachusetts the same as in Mississippi or Texas and all other states, the law imposing such a tax would be perfectly valid.

[Footnote 1: Congressional Record for July 6, 1909, pp. 4251 to 4252.]

The difficulty with this reasoning is that it overlooks the fact that the privilege of being red-headed is not a franchise granted by a sovereign state. From the viewpoint of const.i.tutional law it may well be that Congress can tax a privilege conferred by the G.o.ds where it would be powerless to tax a franchise granted by the Legislature of New Jersey.

XI

THE CORPORATION TAX DECISION

The immediate consequences of the decision of the United States Supreme Court[1] affirming the const.i.tutionality of the federal corporation tax are so slight that its profound significance is likely to be overlooked. Until it was merged with the general income tax the exaction was not burdensome and proved easy of collection. The thing upon which it fell-the privilege of doing business in a corporate capacity-is an abstraction which makes little appeal to the sympathies or the moral sense. The public, more concerned with present conditions than with the pa.s.sing of a theory, is indifferent.