Thomas Sewall Adams

“ Under the income tax the entire income or profit of an individual is subject to normal tax and surtaxes (the latter rising to 65%) , whether the income is spent or reinvested; but the corporation does not pay income surtaxes and its stockholders pay surtaxes only on the profits which are distributed. After 1917, therefore, the excess-profits tax became a compensatory or balancing tax upon the income of corporations similar to the 5% corporation profits tax adopted in 1919 for the same purpose in the United Kingdom. ”

“ Owing to the urgent need of producing munitions in enormous and ever-growing quantities, it became necessary in the early part of 1915 that the Government should control the operations of these concerns and lay down conditions as to the employment of labour therein, conditions which were regarded as prejudicial to labour interests, and it was ultimately arranged that, while on the one hand labour would accept the proposed conditions, the owners of such concerns would for their part agree to hand over to the Government any amount by which their profits exceeded a certain standard. ”

“ In the United States, where the normal exemption was computed as a percentage of invested capital, corporations which had been liberally capitalized gained an unfair advantage over those which had been conservatively financed. The American tax unquestionably bore more heavily upon hazardous industries than upon those with more stable earnings. Thus for 1918, among corporations liable for excess-profits tax, the average ratio of the tax to net income was 30%. ”

“ Computation of Profits.—Profits both in the accounting periods and in the pre-war years were computed by reference to the actual profits arising in those periods, and it was a general principle of the tax that a similar basis of computation should be adopted throughout. Subject to certain exceptions, the general basis of computation of profits was the same as that adopted for purposes of income tax. Income derived from investments (save in the exceptional case of investment concerns) was excluded from the computation of profits ”

“ On one basis the tax may be described as essentially a tax upon war profits, inasmuch as it was levied upon profits arising during or after the war in excess of a standard representing the profits or average profits of a period prior to the war. On the other basis, the tax took the form of a tax on profits in excess of a prescribed return on capital, and the standard was generally calculated by reference to a percentage upon the capital employed in earning the profits. ”

“ Munitions Levy.—The munitions levy—the official title of which was the munitions exchequer payments—was imposed by the Munitions of War Acts, 1915 and 1916, and the rules made thereunder. It applied only to businesses (mainly concerned in the manufacture of munitions and war material) which were subject to Government control under the Munitions of War Acts, and the period of liability commenced in each case from the date when the business was made a controlled establishment under those Acts. ”

“ The percentage rates, some of which were varied from time to time during the lifetime of the duty, differentiated between companies on the one hand and private businesses on the other, a lower rate being prescribed in the case of companies on the ground that in their case a deduction from profits was normally allowed in respect of remuneration paid to the directors and managers, whereas no deduction was allowed for remuneration paid to the proprietor of, or partner in, a private business. ”

“ Taxpayers Subject.—The American law of 1917 applied to all trades and businesses including professions and occupations, but in case the trade or business had no invested capital or not more than a nominal capital, the tax was virtually an additional income tax equal to 8% of the income in excess of $3,000 for corporations and $6,000 for other taxpayers. ”

“ From the assessments made by the commissioners of Inland Revenue the trader had a statutory right of appeal to either the general commissioners of Income Tax (local bodies appointed for the purposes of the income tax) or to the special commissioners of Income Tax. From the decisions of those commissioners, an appeal lay to the courts on a point of law at the instance of either the trader or the assessing authority (the commissioners of Inland Revenue) . ”

“ This limitation was due to dissatisfaction with the attempt to tax professional men under the Act of 1917, and a recognition that the income-tax proper bears more lightly upon corporations than upon other taxpayers. ”

“ Different businesses consequently commenced to be liable to the levy at different dates according to their respective dates of control; the earliest date at which any business was controlled being July 2 1915. ”