The claim that the decision in Eisner v. Macomber will allow corporations to escape taxation on their profits may be dismissed as demagogic. The result in no wise affects the taxation of the corporations — it only affects the extent of the double taxation which comes from first taxing the corporation on its earnings, and then taxing the stockholders also because of those earnings.

Even when reckoned in terms of double taxation, and without any change in the law, the ultimate loss, if any, to the government ought to be small. The Revenue Law of 1918, and the regulations thereunder, contemplate that a stockholder who receives stock as a dividend and pays a tax thereon and thereafter sells the stock so received shall not be subject to a tax except to the extent that the proceeds of sale exceed the par value of the stock received. But the regulations also require that a stockholder who receives stock as a dividend and pays no tax thereon and thereafter sells the stock so received shall be subject to a tax on the entire proceeds, and this is confirmed by Mr. Justice Pitney's statement in Eisner v. Macomber. This decision simply throws all stock received as a dividend into the latter class. The tax will accrue, not when the stock is received, but when it is sold. The inhibition on stock dividends being now removed, they will probably frequently be made, and sales of stock received will follow.

But suppose the stock is not sold. If the stock is given away, or passes upon the stockholder's death to his legatees or next of kin, no tax is, under the present law and regulations, assessed upon the capital increment which has occurred prior to such a transfer. And, if the transferee later sells, he will have a taxable gain or a deductible loss according as the proceeds of sale are greater or less than the value of the stock when he received it. This is true of both shares of stock and all other kinds of capital. Thus, there is a great gap in the taxing structure designed to encircle capital increment.

If our taxation laws are to be changed, Congress will seek for taxes which cannot readily be passed on to the consuming public. The country is awakening to the economic fact that heavy taxes on corporate earnings are readily passed on to the consumer-an excess profits" tax suggests the lancing of swollen wealth, but it does nothing of the kind and is, instead, probably the greatest single factor in the present high cost of living. A tax on capital

increment is a desirable form of tax, as it cannot readily be passed on. Therefore the gap in the taxing structure designed to encircle capital increment ought to be closed.

If a taxpayer acquires capital, and later that capital passes from his ownership, at this point there may well be a pause, a rest, a taking account of the capital increase which has occurred during his ownership of the capital. It should make no difference whether the transfer is for a consideration or without a consideration. The administration of such a law would be simple, and, if the reasoning in this article is sound, it is within the constitutional power of Congress to say that the capital increase shall be taxed as income whenever the capital that has increased passes into the ownership of another.

If such a change in the law were made, the ultimate loss, if any, to the government arising from the decision in Eisner v. Macomber would be offset by a substantial gain, for it is to be noted that this change would be applicable to increases of all kinds of capital, and not merely shares of stock.

HARVARD LAW SCHOOL,

CAMBRIDGE, MASSACHUSETTS.

Edward H. Warren.

RAILWAY VALUATION AND THE COURTS

THE

I

HE railways of the country have now secured a statutory rule of rate-making, which requires the Interstate Commerce Commission to fix such rates as will bring five and a half per cent (or at its discretion six per cent) upon the "fair value" of the aggregate railway property within a given district. Upon this clause the hopes of the financial community are centered. It is to bring stability and certainty of return, to restore railway credit, to place rigid restraints upon a supposedly hostile regulating body. It is to substitute an inflexible rule for an uncertain administrative discretion.

Whether or not these hopes are well founded obviously depends upon whether the clause does contain a rule which may be applied with certainty and precision. Five and a half per cent is definite enough, but what is the "fair value" of the railroads? For the present it is obvious that the Commission can do little more than arbitrarily assign a value to the railway property in each rate district. But for the future "fair value " must be derived from the findings of the Commission in its gigantic task of valuing the railroads of the country under the Valuation Act of 1912. How certain and stable a result does this valuation promise?

For better or for worse, we must now take it to be settled that under our American system of jurisprudence the problem is a constitutional one, and the Supreme Court the final arbiter. The Interstate Commerce Commission will before long complete its task of inventorying and appraising every item of railroad property in the United States. Field parties are making engineering surveys of every mile of track, appraisers are examining land values, accountants and experts are digging into historical records and corporate accounts. So far as a vast expenditure of money and indefatigable zeal can accomplish the task, the facts in the case are being brought to light. As to findings of fact, it may be assumed

1 See "Railroad Valuation by the Interstate Commerce Commission," by H. B. Vanderblue, in 34 QUART. J. of Ec. 22.

that the conclusions of the commission will be deemed well-nigh conclusive, in actual practice if not in legal theory.2 But these underlying facts constitute merely the raw material out of which the final decision must be made. The principles according to which the raw material is to be combined must be passed upon by the Supreme Court, and must square with the Supreme Court's conception of constitutional theory.

The object of this paper is to inquire into the premises upon which the court's function, as final court of review in valuation cases, must rest. I shall not attempt any detailed analysis of cases, nor any voluminous marshaling of economic data. The inquiry will lead, necessarily, into an analysis of the nature of the problem which will confront the court, and an examination of those decisions of the court which will throw light upon its own conception of the premises upon which it must act. The inquiry into the nature of the relation between the public utility and the community will lead to certain conclusions which seem to me to have a practical bearing upon some of the problems now agitating the legislature and the courts.

When railroad regulation first became a subject of political and legal controversy, the constitutional issue was simple. The railroads claimed that they were entirely exempt from rate regulation. They operated under charters granted by the states, which in so many words gave them the right to fix their own passenger and freight rates, and these charters were contracts, sacred from the touch of state legislatures. Their property was private, they were in private business operating for profit, and any state interference not specifically authorized in their charter violated those general guarantees in the Fourteenth Amendment, the sweeping character of which lawyers and courts were just beginning to appreciate. The claims on the other side were just as clear cut. The lawyers of the anti-railroad forces claimed that any regulation of rates, however drastic, was valid. The charter provisions giving the railroads power to fix rates meant no more than power to fix rates in accordance with, or in the absence of, state legislation. And apart from charters, the railroad business was a public business, resembling in many ways the businesses of trucking, ferrying, carriage driving, and the like, which the British Parliament had traditionally regu

2 Cf. Van Dyke v. Geary, 244 U. S. 39 (1916).

lated. Regulation of railroad rates was therefore a proper legislative function and quite beyond the jurisdiction of the courts. No one ever heard of a British court inquiring whether a schedule of rates for wagoners or ferrymen, fixed by Parliament, was reasonable. If a legislature fixed unreasonable rates, the people had their remedy at the polls, not in the courts.

In the granger cases,3 in 1876, a majority of the Supreme Court sustained to its full extent the popular view. It not only upheld the power of the legislature to fix rates, but it declared that the legislature alone was the judge of what was a reasonable rate. "The controlling fact is the power to regulate at all. If that exists, the right to establish the maximum of charge, as one of the means of regulation, is implied." If the rate has been improperly fixed, the legislature, not the courts, must be appealed to for the change. The argument that the charter protected the corporations against rate regulation was met by pointing to the general clause in state constitutions reserving the right in the legislature to alter all corporate charters.

One point in this early controversy it is important to understand. There is much discussion whether rate fixing is in its nature a "judicial" or a "legislative" function. This was a period in the history of American jurisprudence when discussions of this sort were popular. The separation of powers into executive, legislative, and judicial was looked upon as more than a mere differentiation of functions based upon practical considerations; it was thought to be the manifestation of an inherent truth. The pseudo-philosophy of the period regarded certain governmental acts as in their nature judicial, and hence never to be exercised, under the constitution, by either the legislative or the executive branch. The opponents of legislative rate regulation tried to bring rate fixing into this category. At common law, in the absence of legislation, a public utility was bound to charge no more than a reasonable rate, and if a shipper or a passenger complained of an act of extortion, it was for the court to decide whether in fact the rate was unreasonable. In such a case reasonableness was a judicial question. So much the court in the granger cases readily admitted. But it declined to draw the conclusion that a rule of the common

• Munn v. Illinois, 94 U. S. 113 (1876); Chicago, B. & Q. R. Co. v. Iowa, 94 U. S. 155 (1876); Peik v. Chicago, etc. Ry. Co., 94 U. S. 164 (1876); and cases following.