Corporate Taxation and the Regulation of Early Twentieth-Century American Business

Abstract

In the early twentieth century, the taxation of modern business corporations became increasingly important to the development of American democracy. During that time, governments at all levels began to view business corporations not only as sources of badly needed public revenue, but also as potentially dangerous wielders of concentrated economic power. To combat the growing dominance of corporations, many fiscal reformers sought to use corporate taxation as a mode of regulatory governance. This paper explores the motives and intentions of fiscal reformers during critical junctures in the development of early twentieth-century U.S. corporate taxation. It seeks to explain how changing historical conditions shaped corporate tax law and policy. More specifically, this paper investigates why activists at certain times turned to taxation as a mode of corporate control, and why at other times they used tax policy to promote corporate growth. By focusing on the pivotal ideas and actions of key political economists, social commentators, and lawmakers, this paper attempts to answer the question: why did reformers see taxation as a viable form of public control over corporate power?

We argue that the corporate tax emerged and developed as a result of competing factions and changing social, political, and economic conditions. During the height of corporate consolidations, some reformers believed taxation could be used to control, or even reverse, the growth of corporate size and power. In the wake of corporate scandals, moreover, the government’s collection and possible publicity of corporate information was seen as one specific way to regulate and discipline large-scale industrial corporations. By contrast, others saw the corporate tax as a means to encourage and foster the kind of behavior that would generate much needed economic activity and growth, especially during periods of financial crisis and economic recovery. Still others, mediating between these two extremes, sought to use the corporate tax in a supervisory capacity, while ensuring that it did not “kill the goose which lays the golden egg.” Thus, the corporate tax that developed throughout the first half of the twentieth century reflected changing visions of corporate regulation – visions that fluctuated among demands for penalty, subsidy, and neutrality.

Keywords: Tax Policy, Corporate Taxation, American Legal History, U.S. fiscal history

JEL Classification: A11, B15, H20, H25, H71, K34, N41