The Big Corporations Rule
Article originally appeared at 84 New Republic 99 (1935). Reprinted by permission of The New Republic.
The Big Corporations Rule
By Robert H. Jackson
In The New Republic of August 28, we published the more important sections of a recent statement by Robert H. Jackson, Special Counsel to the Internal Revenue Bureau, made for the Senate Finance Committee, discussing income and taxation in the United States at the present time. The document published below is Mr. Jackson’s companion statement, also slightly condensed, on the role of the corporation in American life today –THE EDITORS
The President, in his tax message of June 29, 1935, says:
I, therefore, recommend the substitution of a corporation-income tax graduated according to the size of corporation income in place of the present uniform corporation-income tax of 13¾ percent. The rate for smaller corporations might well be reduced to 10¾ percent on net income in the case of the largest corporations, with such classifications of business enterprises as the public interest may suggest…
Upon the basis of our estimate of corporation incomes for the calendar year 1935, 182,000 corporations, or 95 percent of all of those expected to report net incomes for this year, would pay a smaller tax under such a schedule than under the flat rate now in effect.
It is apparent, therefore, that the proposal of the President in addition to producing additional revenue involves a redistribution of the corporation-tax burden by which 95 percent of all corporations obtain some tax relief, and about 5 percent, consisting of the largest corporations, would sustain an additional burden. Such a shifting of the burden would produce desirable results from many standpoints.
A weakness of our income-tax structure revealed by the depression is the violent fluctuation of government revenues resulting therefrom. It is apparent that if we can combine a tax based on ability to pay with increased reliance for revenues upon that class of corporations whose income is most stable, and decrease our reliance for revenues upon those corporations whose income shows the greatest fluctuations.
The Treasury statistics of income for 1932 show that the statutory net deficit of corporations of less than $50,000 of assets constituted 33 percent of their net worth, and that the percentage deficit was progressively smaller for each succeeding group of corporations as shown below:
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The National Industrial Conference Board also made a study of 1931 corporation-income tax returns and arrived at substantially similar conclusions. The National Bureau of Economic Research on April 18, 1934, called attention to the fact that when corporations are grouped according to the value of their assets, no group earned an aggregate net profit in 1931 except the group whose assets exceeded $50,000,000. These concerns (not including subsidiaries) numbered only 632 out of the 381,000 corporations included in the study. But, with their subsidiaries, they owned more than 50 percent of the total assets reported by the 381,000 corporations-$155,000,000,000 out of $296,000,000,000. Further, the Bureau called attention to the fact that there was an impressive relationship between size of corporations and relative smallness of losses, the group of smallest corporations experiencing the greatest percentage deficit. The Bureau’s study of these matters is summarized in the following table, which excludes corporations not reporting balance sheets:
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The Treasury, in the light of information now available, is of the opinion that the graduated income tax proposed by the President, which will base revenue yield more upon larger and less upon smaller corporations, would produce a more reliable, predictable and steady flow of revenue to the government than the present flat rate of tax for all. It also believes that such larger corporations are, by reason of their more stable revenues, better able to anticipate and bear the burdens than smaller corporations, whose income tend to fluctuate more erratically.
CONCENTRATION OF CORPORATE WEALTH
However, even though it is desirable to tax big corporations at a higher rate than little corporations, from a revenue point of view, the proposal would need examination as to its secondary consequences and as to the underlying economic conditions on which the proposal would operate.
Concentration of corporate assets in this country today can be determined with a fair degree of accuracy from Treasury statistics. In 1932, the number submitting balance sheets was 392,021, of which the reported total assets were $280,085,000,000. The degree of concentration of assets revealed is startling. Over 53 percent of the value of all assets owned by corporations in this country was owned by corporations, constituting only 0.2 percent of the number of corporations. At the lower extreme the percentage of assets owned is equally significant. Of all American corporations, 67.6 percent held only 2.9 percent of the aggregate corporate assets. We find that 5 percent of the corporations owned 85 percent of all the wealth owned by corporations in 1932. The 5 percent owning the 85 percent of the corporate wealth and the 5 percent whose taxes would be increased are not necessarily identical, but most of the corporations in one class will also be found in the other. A table shows the distribution of assets among all corporations filing balance sheets with returns in 1932:
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THE BIG GROW BIGGER
We turn now to a study of the degree of concentration of net income reported by corporations for the year 1932. For this purpose, corporations that failed to have net profits are dropped out of the calculations and we have left, as the basis for the study, 73,291 corporations that reported a net profit and filed balance sheets with their returns.
Of all net income enjoyed by corporations during 1932, 50.4 percent went to 201 corporations, which represented only 0.3 percent of the number of corporations having some net income. On the other hand, 45 percent of such corporations are shown to have had less than 2 percent of the total income.
If we eliminate financial institutions, railroads and public utilities and other classes of business, and consider only manufacturing enterprises, we find a similar degree of concentration. Of the total wealth owned by corporations engaged in manufacturing, 64.4 percent was concentrated in the hands of 0.8 percent of the number of corporations classified in that field. Manufacturing corporations with assets of ten millions and over constituted only 1.2 percent of the total number of manufacturing corporations reporting net income, but this small group accounted for 63.3 percent of the aggregate compiled net profits of all manufacturing enterprises.
We find no evidence that a limit to the continued increase in corporate size has yet been reached, or that any real obstacle, economic or legal, to the continued concentration of corporate wealth has yet been created. By comparison between the figures for 1932 and those for 1926, we find that there was an increase in the concentration of corporate income. In 1926, 1.7 percent of the total number of corporations reporting net income accounted for 69.8 percent of the total of all corporations reporting net income. In 1932 it took only 1.1 percent of the total number of corporations reporting net income to account for 72.6 percent of the aggregate net income reported that year. The two years are not fully comparable and the figures therefore may reflect an increasing degree of concentration or they may simply be another evidence of the greater fluctuation in income on the part of the smaller-income group of corporations.
No condition is so favorable to corporate growth as profits. Profits both provide and attract capital. We may take the distribution of profits as a fair indication of prospects for growth. On that basis concentration and more rapid growth of the big companies in comparison with other companies would appear to be a probable continuing process of our economic life.
There is substantial evidence that the depression, because of the greater stability of the larger units, has hastened the concentration of the wealth owned by corporations-at least in some industries, and especially in finance. For example, on December 31, 1929, one of the largest industrial cities in the United States had 72 banks, 8 of which were controlled by the dominant banking interests of that community, and 64 of which were controlled by other interests. By December 31, 1933, the 8 banks owned by the dominant group had all survived, whereas the 64 competitors had been reduced, through closings and mergers, to 33-and of those, 20 corresponded or cleared through the dominant banks. During that period the percentage of capital and surplus reported by the dominant group of banks had increased 31 percent, while the percent reported by their competitors within the city had decreased 38 percent. Deposits of the dominant banks increased 63 percent, and those of competing banks decreased 45 percent.
In the trade area outside of the same city, on December 31, 1929, 19 banks in 17 towns dominated by the same banking interests had 30 banks as competitors. By December 31, 1933, the dominant banks were all in business and the number of competing banks had decreased to 13. The proportion of bank capital and deposits under the dominant group had increased accordingly.
The social implications of these facts will be read differently according to the temperament, viewpoint and perhaps the interests of different observers. While it is probably debatable whether size has not often exceeded the requirements of efficient operation, and whether in fact it has not sometimes been accomplished at the expense of efficiency, there can be little doubt that the greater stability, on the whole, of large corporations is attributable to their many advantages over their smaller competitors; and these advantages are reasons why size provides a useful measure of ability to contribute to the cost of government. Some of the more obvious advantages are listed below:
1. As buyer of commodities and services, the large volume of their purchases gives the larger corporations a bargaining power that often results in price concessions that smaller concerns do not share.
2. Through widely distributed branch plants and warehouses, they are able to effect important savings in transportation costs, and to sell in a nationwide market.
3. Their large resources enable them to buy up important patents, often to pool these patents with those obtained by other large enterprises; and to carry on research programs, the fruits of which, while of public as well as private benefit, accentuate their competitive advantage over their smaller rivals.
4. In many cases large concerns have become of such dominating size that they are able to control the market and protect their profit margins.
5. Large corporations possess distinct advantages over their smaller competitors in the facility and cost of financing, for they are able to tap the large reservoirs of capital that are made available through the organized financial markets.
EFFECT OF A GRADUATED TAX
The effect upon common-share earnings of the graduated tax is not subject to any fixed rule but would depend upon the capital structure of the particular corporation. All earnings available for preferred as well as for common stock are subject to tax, and the tax would usually be paid by the common stock alone, since the preferred stocks are normally entitled to a fixed return and the cost to common stockholders would therefore be greater in cases where preferred stock is outstanding. Also, in years of low earnings, the amount of the tax per share would be lower, and when no taxable earnings were reported no tax at all would be paid, of course.
We have taken, to illustrate the effect of this tax, the relatively high income year of 1930 and the common-stock earnings of five outstanding corporations in that year:
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Treasury statistics show sources of income, such as dividends, and show the importance, relative to total income, of the various sources. The largest total amount of dividends reported as being received by any income class, according to the preliminary report for 1933, is that received by those under $5,000 of net income, but the relative importance of dividends to total income is least in this class, and the relative importance of dividend income is upon an ascending scale as we climb the income brackets. Thus to those with incomes of less than $5,000, dividends on the average contribute but 5.07 percent of their total, while 50 percent of the total net incomes over $1,000,000, is derived from dividends. The following table shows the relative importance of dividends and wages and salaries in various income groups (amounts are given in thousands of dollars):
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