THE first federal income tax, introduced in 1913, used the corporate income tax chiefly as a withholding levy. The rate of tax on corporate income was the same as the normal rate on personal income. Dividends were exempted from the normal personal tax. Thus double taxation was avoided. This policy was continued through the First World War, although both the normal personal and the corporate rates were raised to 12 per cent during this period. In the early twenties, the relationship between the two taxes was broken when the corporate rate was raised to 12½ per cent and later to still higher figures, while the normal personal tax was reduced to 8 per cent and subsequently to lower levels. In 1936, when dividends were made subject to the normal tax, the divorce between the two levies became complete. What had once been a withholding levy was thus converted into a full-fledged business tax. Both before and during the Second World War, the trend in federal taxation was to rely heavily on taxation of business as such.
The "theoretical" approach to business taxes is probably less important than an analysis of their incidence and effects. However, the effects of a tax depend considerably upon the reasonableness of its imposition. One of the main objectives of this study is to determine what constitutes a rational tax system and to what extent its attainment is practical. When this objective is contemplated it is apparent that the "theoretical" basis of business taxation is of no small importance.