Corporations That Weren't: The Taxation of Firm Profits in Historical Perspective
32 Pages Posted: 21 Apr 2010 Last revised: 24 May 2010
Date Written: April 21, 2010
This article examines the nation's earliest income tax laws, focusing on the provisions that tax business profits in a way that disregards a firm's state law business form. Broadly speaking, this practice dates back to the Civil War era, when a firm's state law business form made no difference in how its profits were taxed. After the adoption of the Sixteenth Amendment, however, Congress decided to give partial tax relief to undistributed corporate profits, largely on the theory that the firm could and would reinvest those profits in its business. But Congress denied that tax relief to a corporation in certain instances, and it also extended the relief to certain unincorporated firms in a narrow range of situations. This study of those provisions reveals how these measures implicitly reaffirmed the Congressional justification for the partial tax relief on undistributed corporate profits. The study also considers the extent to which each of these measures served the larger interests of equity.
Keywords: corporate taxation, partnership taxation, corporate tax history, income tax, corporations, unincorporated firms
JEL Classification: K10, K34
Suggested Citation: Suggested Citation