The Shareholder-Based Origins of the Corporate Income Tax

Abstract

This Article explores the origins of the separate corporate income tax. During the Civil War and Reconstruction, shareholders were taxed on their corporation's undivided profits. While corporations in certain industries were subject to a tax on dividends and undistributed profits, the tax was based on the nature of their business rather than their form of organization. When the income tax returned in 1894, however, corporations were subject to a separate tax. What accounted for this change? The traditional explanation is that changes in the theory of the corporation led Congress to consider it a separate actor for tax purposes. The evidence for this explanation, however, is unconvincing. This Article concludes that the corporate income tax was seen not as a tax on the entity, but rather as a proxy for a shareholder tax on corporate income. It was a natural outgrowth of state and federal efforts to combat tax evasion and reach intangible wealth. In effect, the corporate income tax was thought to be a necessary mechanism for enforcing an individual income tax. This rationale both undercuts the entity theory explanation for double taxation and provides a basis for distinguishing among various proposals to integrate the corporate and shareholder taxes.