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p Together with personal incomes, the net incomes of capitalist enterprises, organised in corporations, are also taxed in accordance with the Payne-Aldrich-Tariff Act (1909). In the 1910s-1920s receipts from the tax on corporate incomes, as a rule, exceeded the sum of federal taxes paid by the population. However, after the Second World War, the considerable expansion of the individual income tax base changed the relationship between these elements of the taxation system: at present the individual income tax accounts for more than two-thirds and the corporation income tax for less than one-third of the total federal income tax revenue.

p The rates of the corporation income tax and its progression are much lower than those of the individual income tax.  [92•1  But even in taxing the net income of corporations the level of nominal rates cannot give an exact picture of the size of the actual taxes paid.

p Thus, prior to 1964, the nominal rate at which the 93 overwhelming part (about nine-tenths) of the entire net profits of corporations was taxed, was 52 per cent and after 1964, 48 per cent.  [93•1  But corporations actually pay a considerably smaller share of their profits. The real size of the tax on profits of American companies in the mid-1960s did not exceed 37 per cent. It was 21 per cent in the oil industry, 24 per cent in some other sectors of the extractive industry and of commercial banks, and so on.  [93•2  According to other calculations the real rate of the corporate income tax did not even amount to 30 per cent in the mid-1950s.  [93•3 

p The total sum of taxes paid by corporations in the postwar period is marked by extreme instability. Any slowing down in economic growth rates or a recession was reflected in a much greater reduction of the share of corporate taxes. The particular sensitivity of this tax to cyclical fluctuations is explained by a number of reasons. First of all corporation incomes are sensitive to changes in the scale of production and sales, the degree of utilisation of productive capacity, and display a much greater degree of fluctuation than personal incomes.

p Besides a change in current incomes, a number of other additional factors influences the decline in tax payments. Cyclical fluctuations are revealed by the share of corporation incomes in the entire economy.  [93•4  Moreover, in the preceding period US industry had a particularly widespread system of bookkeeping which based the valuation of inventories in the balance sheets of enterprises at the price at the time of purchase (known as the Fifo, i.e., first-in, first-out system). Therefore during a depression and the ensuing drop in prices, a corporation employing this bookkeeping system 94 usually showed large additional losses on items of working capital.  [94•1  Lastly, besides these factors, which “automatically” reduced the effective corporation income tax rates, in 1948 and 1954 the Federal Government resorted to a “ discretional reduction" of nominal tax rates.

Thus corporations gained the opportunity to curb the decline in their profits. This chiefly benefited the biggest companies since the bulk of the taxed income—more than 70 per cent—is earned by a small group (0.6 per cent of the total) of corporations, each of which has an annual income of $1,000,000 and more.  [94•2 

Table 111-4 Change in Corporation Profits ^rin Periods of Post-War Depressions (’000 million dollars) 4th quar- 2nd quar- 3rd quar- 2nd quar- 4th quar- ter 1948- ter 1953- ter 1957- ter 1960- ter 1969- 2nd quar- 2nd quar- 1st quarter 4th quarter 4th quar- ter 1949 ter 1954 1958 1960 ter 1970 Drop of profits be- fore the payment of taxes 2.5 2.0 3.0 1.0 2.0 Reduction of the corporate income tax 0.9 1.3 1.6 0.5 1.4 Drop in profits after the payment of taxes 1.6 0.7 1.7 0.5 0.6

p Sources: Survey of, Current Business for the respective years.

p Data in Table III-4 show that private corporations were able to shift to the federal budget, that is, ultimately to other taxpayers during the period of the 1948-1949 depression, 36 per cent of their losses connected with the cyclical reduction in the size of their profits; in 1953-1954, it was 95 65 per cent; in 1957-1958, 49 per cent; in 1960, 50 per cent and in 1969-1970, already 70 per cent. The downward tendency in the movement of private profits is substantially restrained by increased fluctuations in government revenue. Thus, such a reduction in the losses of private capital signifies an increase in the losses on the opposite side—in the government budget. The present structure of federal taxation contributes to a situation wherein a greater strain is placed on governmental finance even during not-so-deep economic recessions or stagnations of business activity.

p A number of Western scientists are trying to find some sort of economic justification for this process of shifting losses, regarding it as one of the “built-in stabilisers" which help to reduce the spontaneous cyclical fluctuations of the capitalist economy. But it is difficult to accept this viewpoint. The point is that in the short-term aspect, the money put back by the big corporations into further economic circulation (capital investments and dividends paid to shareowners) in present-day conditions apparently do not greatly depend on the size of the profit remaining after the deduction of taxes.

p The investment policy of corporations during periods of an economic depression thus depends, above all, on the scale of the over-accumulation of fixed capital and the prospects existing in the major commodity markets. It is a rare situation when, in conditions of a substantial underutilisation of its productive capacity, a large corporation attempting to sharply expand its investments, cannot carry out this programme solely as a result of the removal of part of the current profit in the form of income taxes.  [95•1  As for that part of the profit going to dividend payments, the amount of taxes on corporate incomes according to data of special statistical studies, exerts a very small influence on these payments.  [95•2 

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p Thus, fluctuations in the amount of taxes paid by corporations, can hardly restrain cyclical fluctuations of production to any considerable degree. Professor Joseph Pechman, Director of Economic Studies at The Brookings Institution and Executive Director of Detailed Studies of Government Finances, had every right to state that “the corporation income tax is not regarded as one of the significant built-in stabilizers, despite the fact that it contributes heavily to the large swings in federal surpluses and deficits during business cycles".  [96•1 

p In post-war years the opinion has been repeatedly voiced in Congress and in the American press that the tax rates on corporation incomes are so high that they reach a “level of confiscation”, and therefore this situation exerts an extremely unfavourable impact on the processes of economic growth.  [96•2  “We have in this country people anxious to work and capital seeking investment opportunities. We have a need for many things.... But we have erected a high wall between these resources and these needs, in the form of high rates of profits taxation,” it is claimed in one of the publications of the US Committee for Economic Development.  [96•3 

p Discussion of this question has become particularly lively 97 since the beginning of the 1960s. The incoming Democratic Administration began to pay more attention to problems of economic growth and after an initial leap-like increase in governmental appropriations, emphasis was shifted from the Keynesian compensatory finances to the concepts of economic growth through manoeuvring with tax rates influenced by neo-classical concepts. Moreover, a change in the tax rates was regarded as one of the most operational tools for counter-cyclical regulation. Speaking in Congress, R. Nathan, Chairman of the Commission on Money and Credit, stated: “More and more economists have tended to come around to the view that for short-term stabilization purposes, the revenue side is a more important and more potent stabilization force than the expenditure side."  [97•1 

p An analysis of the measures taken in the sphere of taxation (revision of the rates of depreciation allowances and the consequent reduction of the rate of corporate taxes, the law on the 7 per cent investment credit for corporations, etc.) reveals that the profit tax plays a key role in this programme. Since the rate of profit is a basic factor in the decision-making of a businessman, particularly on the question of expansion or reduction of production, government regulation of business activity is first of all directed toward stimulating a growth in the profits remaining at the disposal of corporations. The government recognised that the shortest road to achieving this lay in reducing the effective tax rate on the profits received by private corporations.

p Needless to say, the spokesmen of Big Business were very vocal, and continue to be so, in defending this policy. Thus, Robert Tyson, Chairman of the Finance Committee of the United States Steel Corporation, stated: “I believe that the present-day taxation of corporate income is inequitable and adverse to investment and to economic growth.... Taxes, by their very nature, are disincentives, and the greater the tax the greater the disincentive."  [97•2  William Hogan of Fordham 98 University asserts that “high taxes are making it hard for us to maintain the profitability—the survivability and growability—of our business firms".  [98•1 

p Recent tax reforms, including those enacted in 1964, bear obvious traces of Big Business influence. Thus, at the beginning of the 1960s, the National Association of Manufacturers demanded that the corporate tax rate be reduced from 52 to 47 per cent,  [98•2  while the bill in Congress provided for a reduction of these rates from 52 to 48 per cent.

p Actually all efforts to connect movement of investments with changes in the corporate tax rate fail to disclose the existence of a simple and stable dependence between these magnitudes. Throughout the post-war period the investment process developed more intensively than prior to the Second World War, although in the war years and in the subsequent period, tax rates on net profit of corporations were essentially raised. Surveys specially made in the United States (as well as in a number of other capitalist countries) did not reveal that existing tax rates exercised a distinctly pronounced unfavourable influence on the initiative of businessmen or corporate businessmen.  [98•3 

p Nor has there been any sign indicating that the financial position of corporations was being undermined. The share of borrowed funds in the operations of non-finance corporations throughout our century has remained more or less stable. Moreover, the share of long-term loans in their total debt has been reduced.  [98•4  This is apparently linked with an increase in the role of their own funds in financing the biggest capital investment programmes. Notwithstanding the higher tax rates, accumulation within the sector of non- 99 finance corporations developed at a faster rate than the increase in the GNP. As a result the share of accumulation of private corporations in the GNP rose from 7.3 per cent in 1929 to 8.7 per cent at the end of the 1960s.  [99•1 

p Together with huge investments and substantial reserves formed on the basis of undistributed profits, private corporations used a considerable part of their income, remaining after the deduction of taxes, to pay dividends to shareholders. It is remarkable that the share of dividends in profits after the deduction of taxes was particularly large in rapidly developing US industries: at the beginning of the 1960s about 70 per cent of the profit after deduction of taxes was distributed in the form of dividends in the electrical equipment industry, 64 per cent in the chemical industry, 55 per cent in the automobile industry, while in the steel industry it was 47 per cent and in other industries 37 per cent.  [99•2 

In assessing the thesis that high tax rates on corporate profits are an obstacle to economic growth, one can point to the following. In most West European countries as well as in Japan, the tax rate on company profits is not smaller than in the US. Thus, the real tax rates on undistributed profits of corporations were 67 per cent in the Federal Republic of Germany and 46 per cent in France at the beginning of the 1960s. In the United States (after the tax reform of 1964) they were 43 per cent, while the taxes on the distributed part of the profit were correspondingly 44, 46 and 43 per cent.  [99•3  The maximum tax rate on the net profits of corporations in Japan in the mid-1960s was also higher and the tax on corporations played a greater role in the budgetary revenue system than in the United States. Nevertheless in both Japan and the Federal Republic of Germany industrial production during the period under review developed considerably faster than in the USA.

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p The influence of tax rates is inseparably linked with the problem of incidence of the corporate income taxes. Within the framework of the present work it is impossible to examine in detail all aspects of this problem, which in a theoretical sense is quite complex. Let us confine ourselves to the following points: an increase in the tax on corporation incomes did not lead to any substantial reduction in the rate of profit after tax deductions. Thus, the rate of profit on the capital of corporations in the US manufacturing industry in the period of the cyclical advance of the 1920s (1927- 1929), fluctuated around the level of 8 per cent and in the cyclical advance of the 1950s (1955-1957), around 9 per cent, although the nominal rates of corporate taxation during this period rose 4-5 times.

p Martin Krzyzaniak and Richard Musgrave in a special study dealing with the problem of the shifting of the corporation income tax, arrive at the following conclusion: “An increase in the tax is shifted fully through short-run adjustments to prevent a decline in the net rate of return, and ... these adjustments are maintained subsequently..."  [100•1  Since one of the major forms of shifting the corporation income tax is to raise the price of the goods they sell, this process promotes an increase in prices and a general rise in the cost of living.

p In conditions of monopolistic competition when an important role is played by non-price aspects of the competitive process, the shifting taxes may assume somewhat different forms: the price would remain more or less stable but the quality of the goods is worsened, the volume of after-sale services is reduced, and so on. This process can be distinctly noted when rates on corporate taxes are raised in conditions of a war economy. But a study made by the Consumers Union in the post-war period shows that this process can also take place in conditions of a peacetime economy and the absence of government price control.

p The US federal financial system is distinguished by a comparatively smaller share of indirect taxation.  [100•2  That is 101 why programmes for reducing corporate taxes often contain proposals for compensating the resulting fiscal losses by extending indirect federal taxes.  [101•1 

p The connection between an increase in indirect taxes and the rise in consumer goods prices is evident. At the end of the 1950s, D. Davies published a study demonstrating the influence which taxes on foodstuffs can exert on the living standards of various groups of the population. For families with incomes under $1,000 annually, the actual rate of taxation is 2.14 per cent of their incomes; $1,000 to $2,000, 1.43 per cent; $3,000 to $4,000, 1.33 per cent; $5,000 to $6,000, 1.26 per cent; $7,500 to $10,000, 1.04 per cent and above $10,000, 0.69.  [101•2  Consequently the system of actual rates of indirect taxation is marked by a distinctly pronounced regression: the burden of these taxes borne by the poorest population is 2-3 times heavier than by rich families. Particularly high are the actual rates of indirect taxation on poorer families with a large number of dependents.

At the same time, as pointed out in the subsequent chapter on local finances, the distribution of a number of state and local taxes is also of a regressive nature. The cumulative effect of these factors results in that the highest rates (as compared with their income) are paid by the poorest American families. R. Herriot and H. Miller have calculated the effective rate of taxation which would take into account all types of federal and local taxes. Some of the results of their estimates are given in Table III-5. Thus the actual tax burden more often does not increase but decreases as the economic possibilities of the taxpayers rise. Such a structure of the tax rates merely intensifies the inequality in the 102 Table 111-5 III. TAX REVENUE 01’ FEDERAL BUDGET Burden of Federal and Local Taxes Annual incomes less from from from from from from from from of taxpayers than 2 to 4 to 6 to 8 to 10 to 15 to 25 to 50 and (thousand 2 4 6 8 10 15 25 50 above dollars) Effective tax rate, per cent of income 5.0 34.6 31.0 30.1 29.8 29.8 30.0 32.8 45.0 Source: American Economic Review. Papers and Proceedings, May 1972, p. 320. distribution of incomes and property between various classes and social groups of American society.