charged with the increased interest in this country among the people and among the business men in the development of the inland waterways, and that you could not have a safer body of men to advise than the army engineers.

I count it one of the great good fortunes of this country that when the country had to build the Panama Canal, after using the great ability of civil engineers, we finally settled down upon the army engineers to carry that project through.

So it is with respect to the waterways. They have recommended to the Chairman of the Waterways Committee in the House a system of improvements that I believe will meet the judgment of this Convention, if it be moderated to the possibilities of what can be accomplished. I think you can secure upon the statute books of this country a declaration in favor of continuing contracts to build the four or five projects which the engineers have recommended in such a way that, even if you do not get the bonds voted at first, if the time arises when the revenues will not permit their use-I mean the current revenues-to continue that work with reasonable rapidity, you can move upon the Government for the issuing of bonds. I would make the fight for bonds

when the conditions strengthen the argument in their favor. It is a strong argument that you will have to meet that, if you are going to issue a large amount of bonds just for the purpose of putting them into the waterways as their necessity may develop, then there is a temptation to extravagance. Perhaps it is my judicial experience, but I always feel as if you ought to shape your policy, in order to win, not according to the enthusiastic suggestions of your imagination, but in order to overcome the obstacles that you are likely to encounter in winning the end which you seek.

And, now, ladies and gentlemen, I am very much obliged to you for giving me such attention. I realize that what I have said comes from the lips of a mere tyro, but it comes from one who has some temporary responsibility in respect to the matter, and from one who is thoroughly in sympathy with the general object which you feel here, to wit, the development of all the waterways of this country by a general policy in such a way as to reduce and control railway rates, and in such a way as to stimulate upon the bosom of the waters the transportation of such merchandise as is peculiarly fitted to that character of carriage.

E

VEN the distinguished editor of The Outlook, in his editorial comment on Mr. Pierson's article on the constitutionality of the so-called Federal Corporation Tax, exhibited the misapprehension, very generally entertained, that the tax was imposed by Congress in the exercise of its power to regulate commerce between the States.

But the tax is imposed alike on cor

'An answer to Mr. Charles W. Pierson's article in The Outlook of November 20, 1909.

porations, and joint stock companies engaged in inter-State business and on corporations and joint stock companies whose business activities are confined wholly to one State. The sponsors of the Act have never claimed, and, it may be confidently asserted, never will claim, that the right of Congress to levy the tax is derived in any respect from the commerce clause of the Constitution.

The power to levy and collect the tax is wholly derived from Article I, Section 8,

paragraph 1, of the Constitution, providing that Congress shall have power "I. To levy and collect taxes, duties, imposts, and excises. . . ."

Some readers may not be aware that, under this grant of power, Congress may tax not only imports, liquors, and tobacco, which are the usual subjects of Federal taxation, but every subject of every nature and description known to the taxing power of the several States, including real and personal property, occupations, businesses, privileges, consumption, licenses, sales, and transactions of every kind and description. Indeed, the taxing power of Congress is not only co-extensive with, but less limited (except as the Constitution limits it) than that exercised by the States under the various limitations of their several State Constitutions.

The sole limitations upon the taxing powers of Congress found in the Constitution are that direct taxes (which include poll taxes, taxes on real estate and personal property, and on the income of real and personal property1) must be apportioned according to the population (Art. I, Sec. 2, paragraph 3, and Sec. 9, paragraph 4); that no duties shall be im posed upon articles exported from any State (ib., par. 5), and that duties, imposts, and excises (which include all forms of taxation not direct) "shall be uniform throughout the United States" (Art. I, Sec. 8, par. 1).

There is implied, from our dual system of State and Federal Governments, one more limitation, namely, that neither Government may tax those agencies or instrumentalities of the other which are essential to its preservation as a government. This implied limitation goes no further, however, than to forbid either Government from imposing a tax directly impeding the exercise by the other, or by the agents or instrumentalities of the other, of its strictly governmental functions, "such as the right to pass laws, to give effect to laws through executive action, to administer justice through the courts, and to employ all agencies for legitimate purposes of State government." 2

As Mr. Pierson has pointed out, Con

1 Pollock vs. Farmers' Loan and Trust Co., 158 U.S., 601.

2 Veazie Bank vs. Fenno, 8 Wall., 533.

The foregoing language was used by Mr. Justice Brewer, after citing the above cases, in his opinion in South Carolina vs. United States' (199 U. S., 437), where the right of Congress to impose a tax on the carrying on of the business of selling liquor, which the State of South Carolina "in the exercise of its sovereign power has taken charge of,"5 was upheld on the ground that the function of selling liquor, though exercised by the State, was not strictly governmental in character.

We now come to Mr. Pierson's attack upon the constitutionality of the so-called Corporation Tax. It will be well to keep its principal provisions before us. They are as follows:

That every corporation, joint stock_company, or association, organized for profit and having a capital stock represented by shares, and every insurance company, shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such corporation, joint stock company or association, or insurance company, equivalent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year.

Mr. Pierson says, in substance, that he concedes that the foregoing tax is an excise tax; that an excise tax on the exercise of "the privilege of doing business" would be a valid Federal excise tax; but that this tax is not imposed on the exercise of "the privilege of doing business," but rather on the exercise of " the privilege of doing business in the corporate form;" that this latter privilege is a franchise derived wholly from the State which granted the corpora

United States vs. Railroad, 17 Wall., 322.

2 Collector vs. Day, 11 Wall., 113. Ambrosini vs. United States, 187 U. S., 1. 4199 U. S. at p. 461.

199 U. S. at p. 447.

Conceding, merely for argument, that the tax is imposed on the exercise of "the privilege of doing business in a corporate form," the present writer claims that Congress has power to tax the exercise of such a privilege.

Obviously, the exercise of a privilege to do business in a corporate form is not the exercise of a "strictly governmental function. It is not the exercise of a governmental function at all. It is the exercise of a private privilege conferred by the State on private persons to facilitate the conduct of private business. Therefore it does not fall within the implied limitation upon the taxing power of Congress. It matters not that, to the extent of the Federal tax, the value of the privilege conferred by the State is indirectly diminished, or that, by making the tax on the exercise of the privilege sufficiently large, its exercise could be practically prevented. To that extent the States consented that the exercise of private privileges conferred by them might be burdened when they conferred on Congress plenary powers of taxation.

If the indirect (though practical) curtailment of the powers of a State which might result from Federal taxation constituted a Constitutional barrier against the exercise by Congress of the taxing power, it could be argued with far greater force that Congress could not tax the subjects selected by a State for taxation. No one will maintain such a proposition. Yet by taxing all of the subjects of State taxation to the limits of their capacity to respond, Congress could wholly withdraw from the State its sources of revenue, for, "in the case of a tax upon the same subject by both Governments, the claim of the United States must be preferred."

1

The reader need not be aghast at the destructive power here disclosed. There is a practical limitation upon abuses of that power; but it is not to be found in any supposed Constitutional barrier of State sovereignty. It resides in the fact.

118 Wall. at p. 29.

ment. It is composed of the representatives of the several States, and there is little danger that they will use the power of taxation in a way to destroy the State governments of the people who choose them.

The writer has been unable to find any decision denying to Congress the power to impose excise taxes on the exercise of private privileges or franchises conferred by the States.

He has found a number of decisions recognizing the right of Congress to tax the exercise of such privileges.

In Knowlton vs. Moore1 it was claimed that an excise tax imposed by Congress upon the enjoyment of the privilege of taking property by inheritance invaded the Constitutional barrier of the sovereignty of the State which conferred the privilege.

The Court, after quoting with approval one of its previous opinions, holding that "the right to take property by devise or descent is a creature of the law and not a natural right, . . ." conceded that a tax imposed by Congress on the enjoyment of that right "certainly. certainly . . . diminishes to the extent of the tax the value of the right to inherit or receive," but unanimously rejected the contention that this would invade the Constitutional barrier of the sovereignty of the State which conferred the privilege. The Court held that the tax was a burden cast upon the recipi ent of the privilege or right, and not upon the power of the State to grant, withhold, or regulate the privilege or right.

While the force of the decision in the case of Veazie Bank vs. Fenno,2 upholding the statute which taxed out of existence the circulation of the State banks, is weakened, in connection with the present discussion, by the fact that the second reason given by the Court for sustaining the validity of the tax was that the power to impose the tax was derived from the power of Congress to provide a uniform currency, the first ground given was that Congress had authority, under the taxing power, to impose a tax on the exercise of a privilege derived from a State. It was strenuously argued that Congress could not impose the tax without invading the

178 U. S., 41, at p. 44. 28 Wall., 533.

Constitutional barrier of State sovereignty. Two judges dissented on that ground. But the other five rejected the contention, and, while they held that the tax was upon the exercise of franchise rights derived from the State, as distinguished from a tax upon the franchise itself, regarded as property (just as was held in Knowlton vs. Moore, supra), expressed the following views :

It may be admitted that the reserved rights of the States, such as the right to pass laws, to give effect to laws through executive action, to administer justice through the courts, and to employ all agencies for legiti

mate purposes of State government, are not proper subjects of the taxing power of Congress. But it cannot be admitted that franchises granted by a State are necessarily exempt from taxation, for franchises are property, often very valuable and productive property, and when not conferred for the purpose of giving effect to some reserved power of a State, seem to be as properly objects of taxation as any other property. [p. 547.]

It is not necessary, in order to sustain the validity of the so-called Corporation Tax, to sustain the proposition quoted above; for that tax is not levied directly on the corporation's privileges, as such, regarded as property, but only (if we admit Mr. Pierson's contention) on the exercise of the privileges in connection with the doing of business. But the writer believes that a tax levied by Congress directly on corporate franchises regarded as property would not invade the Constitutional barrier of State sovereignty so long as the franchise taxed was not one granting the right to discharge functions strictly governmental in character.

In the following cases the Supreme Court upheld the constitutionality of excise taxes imposed by Congress on the exercise of State-conferred franchises or privileges. While it is true that the opinions do not discuss any contention that

the taxes invaded the sovereignties of the States which conferred the privileges, that point was necessarily involved, and the decisions would have been the opposite unless that contention had been rejected.

In upholding the constitutionality of the tax on the sales of shares of stock of State corporations,1 the Court clearly recognized the right of Congress to tax the I Thomas vs. U. S., 192 U. S., 363.

exercise of corporate privileges derived wholly from the States; for the Court accepted the contention of the Assistant Attorney-General that "the tax is laid upon the privilege afforded the owner of the stock, under and by virtue of the laws of the State authorizing the formation of the corporation,' to sell or dispose of his property in the form of a certificate of stock."

An excise tax upon the business of corporations engaged in railway, turnpike, canal, and other transportation businesses 2 engaged in the same kinds of businesses was upheld, although individuals and firms

were not taxed.

Mr. Pierson himself concedes that the

exercise by a corporation of its "privilege of doing business" may be taxed by Congress. Having conceded this much, it

seems to me that he has conceded everything; for the "privilege of doing business is, in the case of a corporation, not a natural right, but is a privilege or franchise wholly derived from the State in the exercise of its sovereignty.

What becomes, therefore, of his contention that the exercise of "the privilege of doing business in the corporate form" cannot be taxed by Congress because it is a privilege wholly derived from the State? It is no more derived from the State and

subject to its regulation than the corporation's bare "privilege of doing business."

Mr. Pierson cites the following cases to show that the exercise of privileges conferred by the Federal Government cannot be taxed by the States. He argues,

by analogy, that Congress cannot tax privileges of the same kind conferred by the States.

In California vs. Central Pacific Railroad Congress denied the right of a State

Italics are the writer's.

2 Railroad vs. Collector, 100 U. S., 595. 3 License Tax Cases, 5 Wall., 462.

4 Pacific Ins. Co. vs. Soule, 7 Wall., 433. Spreckels Sugar Refining Co. vs. McClain, 192 U.S. 397. 127 U. S., 1.

to levy a tax on the franchises granted to an inter-State railway chartered by Congress. The franchises, while they in part conferred the right on the Company to conduct a private railway business, in part delegated to the railway the governmental function of carrying on commerce between the States and of carrying mails, troops, and Government stores. The tax was therefore, in part at least, laid upon an instrumentality of Government, and curtailed its exercise of governmental functions. Hence it fell within the exceptions which we have referred to. It may be noted in passing that the tax was levied directly upon the franchise as property, not merely on the doing of the Company's railway business in the corporate form.

Had the tax been upon the roadbed, rolling stock, or other private property of the Company, the State would have had power to levy it.1

6

That patent rights are private privileges, and hence taxable by the States, in spite of the fact that the Federal Government confers them, was argued in the first case cited by Mr. Pierson on this subject. But the Court rejected the contention, calling attention to the fact that Chief Justice Marshall, in McCullough vs. Maryland,' classified patent rights with the mails, the mint, and judicial process as means of government. Without expressing its own views on the correctness of the classification, the Court seemed to feel bound by Justice Marshall's dictum, and by the decisions based thereon, to treat patent rights as governmental instrumentalities.

As

such they would fall within the implied limitation referred to.

But even if patent rights were private rights conferred by Congress, a distinction might be drawn between the right of the States to tax these privileges and the right of Congress to tax State-conferred private privileges, as follows: The surrender by the States to Congress of the power to grant patent rights and copyrights was complete and without reservation, and therefore the States surrendered so much of their taxing power as empowered them to burden the enjoyment of patent rights and copyrights by taxing their exercise. On the other hand, the power retained by the States to grant and regulate the exercise of private privileges was retained subject to the power of taxation which they surrendered to Congress-a power co-extensive with their own taxing power, operating on the same subjects of taxation and limited only by the expressed limitations of the Constitution and the implied limitation that Congress might not curtail the exercise of their functions strictly governmental in character. Therefore, while the States may not tax patent rights and copyrights, even if they be private privileges, Congress may tax rights private in character conferred by the State.

Chief Justice Marshall has suggested another distinction in his famous opinion in McCullough vs. Maryland,' as follows:

It has also been insisted that, as the power of taxation in the General and State Governments is acknowledged to be concurrent, every argument which would sustain the banks chartered by the States will equally right of the General Government to tax sustain the right of the States to tax banks chartered by the General Government. But the two cases are not on the same reason. The people of all the States have created the General Government and have conferred upon it the general power of taxation. The people of all the States, and the States themselves, are represented in Congress, and, by their representatives, exercise this power. When they tax the chartered institutions of the States, they tax their constituents; and these taxes must be uniform. But when a State taxes the operations of the Government of the United States, it acts upon institutions created, not by their own constituents, but by the people over whom they claim no control. It acts upon the measures of a govern

14 Wheaton, 405. See also Henderson vs. Mayor, 92 U. S. at p. 272.