Entity Theory as Myth in the U.S. Corporate Excise Tax of 1909
Steven A. Bank
University of California, Los Angeles (UCLA) - School of Law
STUDIES IN THE HISTORY OF TAX LAW, Vol. II, John Tiley, ed., Hart Publishing, 2006
UCLA School of Law, Law-Econ Research Paper No. 06-02
Recently, scholars have examined the 1909 corporate excise tax, the first tax imposed against corporations because of their corporate status, and concluded that it was enacted due to developments in entity theory around the turn-of-the-century. According to this scholarship, corporations grew in power and became real entities under the eyes of the law and the people. The government sought to regulate this accumulated wealth through corporate taxation. Thus, the origins of the modern corporate income tax can be traced to entity theory and the need to regulate corporate power.
This historical explanation does not stand up to close scrutiny. Upon examining the events leading up to and following the adoption of the 1909 tax, as well as the debates over the 1909 act itself, it appears that the role of entity theory and corporate regulation in the rise of the modern corporate income tax has been overstated. The 1909 corporate excise tax, like its predecessors, the sugar and petroleum excise taxes during the Spanish-American War, were an attempt to reach shareholder wealth while complying with the constitutional limitations imposed by the Supreme Court in Pollock. While they were both passed with regulatory undertones, the historical significance of this tax became more limited after the constitution was amended to permit income taxation. When the first post-amendment corporate income tax was enacted in 1913, it was essentially a replica of the pass-through corporate taxation employed during the nineteenth century.
This chapter in a forthcoming book, Studies in the History of Tax Law, Vol. II (John Tiley, ed., Hart Publishing, forthcoming 2006), suggests that rather than appearing in 1909 as a result of developments in entity theory, the modern corporate income tax emerged during World War I and its aftermath because of a variety of factors. These included the wartime need for revenue, the increase in progressive surtax rates applied to individuals, and a shift toward more conservative dividend policies among corporations. Each of these factors combined to produce a different reality for the taxation of corporate income. The pass-through model was no longer considered viable. Thus, the modern corporate income tax system developed not because of a change in the theory of the corporation or because of a desire to regulate it, but because the old system no longer worked.
Number of Pages in PDF File: 31
Keywords: 1909 Corporate Excise Tax, entity theory, corporate regulation, corporate income tax
JEL Classification: H25, K34
Date posted: February 3, 2006