Some Constitutional Aspects of the Excess Profits Tax

New York BarNeither the income tax of 1913, nor that of 1916, contained any provisions with reference to "invested capital."Under these acts, the tax upon corporations, like that upon individuals, was determined by the amount of the net income without regard to its relation to capital.Under the Excess Profits Tax Act of 1917,1 conceived in part at least like the corporation, excise tax of 19o9, as a tax upon doing business, the partial exemption from the extra tax burden and the graduation of its amount are based upon the invested capital of the enterprise.By the Act of 1918,2 the "war excess profits tax" was made to apply to corporations only, and as to them there was continued the use of invested capital as a factor in determining the tax.So far as revenue yield was concerned, a sufficiently high flat tax upon business or corporate incomes would have been as effective as the new tax, and would have been easier to compute and to administer.A high flat tax would, however, have borne with undue hardship on the enterprise having an income which was but a low return upon the investment.And it would not have reached the limit of what was conceived to be the tax-paying ability of the enterprise enjoying, perhaps through war conditions, a very high return upon its investment.The excess profits tax was, therefore, framed so as to exempt a moderate return upon capital, and, to increase according to the richness of the return upon the capital.The amount of net income is, of course, the true increase in assets from earnings or profits during a certain period of time.The richness of an income produced by the aid of capital is measured by the relation of the income to the capital.Capital is no fixed and certain thing: especially in the case of corporations, several different bases of reckoning might have been chosen.One basis is the stock, or stock, bonds and dther securities issued; another is the value of the property currently employed in the business.A third artificial basis sometimes suggested is an estimated normal ratio of investment to gross income in a particular industry.The basis actually selected for 'Act of October 3, 1917 (referred to as the Revenue Act of 1917) tit.II, 4o Stat.L. 302.