Court Opinion

ID: 9418839
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:41:03.256338+00
Date Added: 2024-06-11T17:14:52.907164
License: Public Domain

Mr. Justice Cardozo,
dissenting.
The prevailing opinion commits the court to a holding that a tax upon gross sales, if laid upon a graduated basis, is always and inevitably a denial of the equal protection of the laws, no matter how slight the gradient or moderate the tax.
In the view of the majority, the relation between the taxpayer’s capacity to pay and the volume of his business is at most accidental and occasional. In the view of the legislature of Kentucky and of its highest court (Moore v. State Board of Charities and Corrections, 239 Ky. 729; 40 S. W. (2d) 349), the relation, far from being accidental or occasional, has a normal or average validity, attested by experience and by the judgment of trained observers. The one view discovers in the attempted classification an act of arbitrary preference among groups essentially the same. The other perceives in the division a sincere and rational endeavor to adapt the burdens of taxation to the teachings of economics and the demands of social justice.
*567A theory readily intelligible, whether it be sound or unsound, underlies the adoption of the graduated levels. Economically, the theory is that there is a minimum of size for business units below which efficiency is less on the average than expansion would tend to make it; that there are intermediate levels within which efficiency is subject on the average to progressive development; and that there is an ultimate level beyond which efficiency, even if promoted, goes forward more slowly and at a diminishing ratio. Socially, the theory is that just as in taxes upon income or upon transfers at death, so also in imposts upon business, the little man, by reason of inferior capacity to pay, should bear a lighter load of taxes, relatively as well as absolutely, than is borne by the big one. For the purposes of retail business, the first or less efficient class is identified by the Kentucky statute with merchants whose gross sales are $400,000 or less; the six intermediate classes begin at that point and end with a million dollars; the final class is made up of those whose sales are over a million. For the first class the effective rate is 1/20 of 1 per cent; for the last it gradually approaches, though it can never quite reach 1 per cent, this by reason of the fact that the taxpayer in the higher brackets gets the benefit of the application of the lower rates to those parts of the gross sales that fall within the lower levels.
For many years Kentucky taxed her retail merchants upon the basis of property or capital employed within the state. Tolman, The Gross Sales Tax in Kentucky, 10 Tax Mag. 89,112. The tax thus apportioned bore heavily upon the small retailer in comparison with the large one. This was so for several reasons developed with full statistics by students of taxation. Tolman, loe. cit., supra, citing Government of Kentucky,. Report of the Efficiency Commission of Kentucky, vol. II, p. 232, and Martin & Patton, Operations of Real Estate Tax in Lexington, Ky., (Bureau of Business Research, University of Kentucky, *568MS.) Perhaps the chief reason is the rapidity of turnover in large scale enterprises, the effect of this mobility being to reduce the value of the property that must be kept on hand at tax day as well as at other times. Tables in the record bear witness in a' striking way to the resulting inequality. Upon the basis of a property tax a merchant with sales of $10,000,000 was found to pay less than one-half as much tax per dollar of sales as did a merchant whose sales were $150,000 or less. Cf. Tolman, loc. cit., supra,; also Statutes of Kentucky, § 4189-2. More concretely, Kroger, one of the petitioners, with gross sales of many millions, paid a tax upon the old basis of only 137/1000 of one per cent in proportion to its sales in comparison with an average of 934/1000 of one per cent paid by the 16,535 merchants whose sales were less than $400,-000 annually. Tolman, loc. cit., supra. Kentucky is not chargeable with oppressive discrimination in superseding such a method of taxation by one more nearly equal in its burdens.
The choice of a new method made it necessary for the legislature to strike a balance of advantage. Tolman, op. cit., supra, at p. 90; Haig and Shoup, The Sales Tax in the American States, Columbia University Press (1934), p. 159 et seq. For a time there was a suggestion of a tax on chain stores only, but a lower federal court had held that method to be unlawful (38 F. (2d) 652), and the decision of this court to the contrary (State Board of Tax Commissioners v. Jackson, May, 1931, 283 U. S. 527), had not yet been announced. To be sure there was the possibility of a tax upon gross sales at a flat rate without graduated levels, but- a burden so imposed might be subject to new objections. In the view of serious students of the problem, a flat tax upon gross sales is not always shifted to the consumer. It is often absorbed more or less by the seller, for a time, even if not permanently, to prevent the falling off of sales. *569National Industrial Conference Board, General Sales or Turnover Taxation (1929), pp. 8, 9, et seq.; Buehler, Recent Developments of the General Sales Tax, 36 Journal of Pol. Econ. 83, 92, 93. Such at least is the teaching of a school of economists, though the subject is one as to which the learned are divided.1 At times absorption is accomplished by a reduction of the price even when in form the amount of the tax has been added to the bill. Haig & Shoup, op. cit., supra, pp. 29, 31 et seq.; Buehler, General Sales Taxation (1932), pp. 194, 195. An impressive body of opinion is back of the view that in so far as the tax is not passed to the consumer the flat rate bears more heavily on the small business than on the large one. This tendency is corrected when the tax is imposed on a graduated basis. One of the consequences of such a tax is to make the shifting of the burden easier for those who pay the lower rates than for those who pay the higher ones. For that reason the flat rate is thought to be less efficient than the graded one as an instrument of social justice. The large dealer, it is said, occupies, both absolutely and relatively, a position of economic superiority by reason of the volume of his business. In that view, to make his tax heavier, both absolutely and relatively, is not arbitrary discrimination, but an attempt to proportion the payment to capacity to pay and thus to arrive in the end at a more genuine equality. By the statute in controversy the Commonwealth of Kentucky is aligned with that position. It is not the function of a court to make itself the arbiter between competing economic theories professed by honest men on grounds not wholly frivolous. Otis v. Parker, 187 U. S. 606, 609. Responsibility for economic wisdom has been laid upon the legislature. There is finality in its choice, even though wis*570dom may be lacking, unless choice can be found to be so void of rationality as to be the expression of a whim rather than an exercise of judgment.
The question then is whether there is rationality in the belief that capacity to pay increases, by and large, with an increase of receipts. Certain it is that merchants have faith in such a correspondence and act upon that faith. A witness for the petitioners tells us: “ The policy prevailing throughout the United States, so far as retail merchandising department stores are concerned, is to get as large a volume as possible with a small percentage of profit, allowing the volume to produce the net profit.” If experience did not teach that economic advantage goes along with larger sales, there would be an end to the hot pursuit for wide and wider markets. Official statistics in Kentucky confirm the impulse of her merchants, an impulse shared with merchants everywhere. Tables prepared by a witness on the basis of returns to the State Tax Commission show that persons and corporations whose sales were over $1,000,000 had net earnings between $125,000 and $400,000; those with sales between $600,000 and $800,000 had net earnings of $35,000 to $60,000; those with sales between $200,000 and $450,000 had net earnings of $5,000 to $34,000, with the exception of one concern which was conducted at a loss; and those with smaller sales had net earnings ranging from $10,000 to nothing. This does not mean that an increase of gross sales in one business brought the same increase of net earnings as an increase of gross sales in every other business. It does not mean that larger sales brought net earnings in a mounting ratio, relatively as well as absolutely. It does mean, however, that on the whole, net earnings in a business were higher when sales were large than they were in the same business when sales were comparatively small. In brief there is a relation of correspondence between capacity to pay and the amount of business done. Ex*571ceptions, of course, there are. The law builds upon the probable, and shapes the measure of the tax accordingly.
It is no answer to say that as between one business and another, or even as between one person and another engaged in the same business, there will be varying rates of return upon the amount of the investment. This is true also of a tax on net income. Net earnings of $100,000 may represent for one man a return on a capital of $2,000,000 and for another a return on a capital of double that amount, yet the tax will be the same for each. So also it is no answer to say that in the administration of this statute two merchants whose sales are very large are subject to as heavy a tax as many thousands of merchants whose sales are in the lowest brackets. One might as well compare the federal income tax of a banker whose net earnings are in the millions with that of a thousand clerks who by reason of exemptions are to pay no tax whatever. The comparison proves nothing unless it be the obvious fact that taxpayers are few when the count is at the highest level. Once more, it is no answer to say that though capacity to pay is enlarged on the average by an increase of the sales, there are times when sales increase and yet the outcome is a loss. No loss has been suffered by any of the petitioners, unless it be in one instance as the result of inefficiency, and so the findings show. In so far as the statute fails to make allowance for the contingency of loss, it is certainly not arbitrary in its operation as to those realizing a gain, and they will not be heard to complain that it is arbitrary as to others. Hatch v. Reardon, 204 U. S. 152, 160; Keeney v. New York, 222 U. S. 525, 536; Hendrick v. Maryland, 235 U. S. 610, 621; Oliver Iron Co. v. Lord, 262 U. S. 172, 180. But the result will not be changed if their standing be assumed. The law has regard in these matters, not to invariable sequences, but to probabilities and tendencies. “ The problems of government are practical ones and may justify, if they do not require, *572rough accommodations—illogical, it may be, and unscientific.” Metropolis Theatre Co. v. Chicago, 228 U. S. 61, 69. “ The fact that a better taxing system might be conceived does not render the law invalid.” Salomon v. State Tax Comm’n, 278 U. S. 484, 491. At the very least, an increase of gross sales carries with it an increase of opportunity for profit, which supplies a rational basis for division into classes, at all events when coupled with evidence of a high degree of probability that the opportunity will be fruitful.
Many a pertinent analogy reinforces this conclusion. The tax upon a long chain of stores is often at a higher rate than the tax upon a short one (State Board of Tax Commissioners v. Jackson, supra), yet it may happen that in lean years, still more in financial crises, the greater the number of stores, the less the actual gain. Fox v. Standard Oil Co., ante, p. 87. The presence of such a possibility does not make the graduation wrongful. The theatre charging a high price for tickets of admission may be taxed at a higher rate than one whose admission price is low. A showing that the revenue of the high priced theatres is less than that of some of the others will not cause the tax to fail. Metropolis Theatre Co. v. Chicago, supra. McKenna, J., sagely pointed out in that case that the choice between high and low prices had been made by the theatre itself, and made in response to its own conception of advantage. A conception good enough for the taxpayer was thought to be good enough for the government. So here, under the challenged statute. Larger and larger sales are sought for by business and sought for with avidity. They are not the products of whim and fancy. They represent a conception of probabilities and tendencies confirmed by long experience. The conception is no more arbitrary in the brain of a government official than it is in the mind of a company director.
*573The striving to expand being so general, there is no occasion for surprise at the discovery of a relation between profit and expansion when expansion is kept within the bounds of moderation. In tracing that connection it will not do to compare the profits of one line of business with those of a different one viewed in isolation. Many factors enter to make one kind of enterprise more gainful than another. Cf. Tolman, op. cit., supra, at p. 112. Moreover, the rule is undoubted that different occupations may be taxed in different ways. Bell’s Gap R. Co. v. Pennsylvania, 134 U. S. 232, 237; Stebbins v. Riley, 268 U. S. 137, 142; Ohio Oil Co. v. Conway, 281 U. S. 146, 159; Union Bank v. Phelps, 288 U. S. 181. Comparison must be between large and small enterprises in the same line of business, or in many lines of business viewed in combination. This comparison being made, large sales will be found in the main to have the advantage over small ones. There are those who hold that growth may be so large as to make the business clumsy and inefficient, destroying 'unity of management, but enterprises swollen to that extent are not the common run that fix the patterns of a statute. It is significant that graduation stops according to the plan of the Kentucky statute before size becomes inordinate.
In what has been written the effort has been to show that enhancement of the gross sales has a tendency in respect of the average business enterprise to increase capacity to pay by making the gains larger than they would be if sales were small. This, if it has been made out, will serve without more to sustain the separation into classes that is now under attack. Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 293, 296; Knowlton v. Moore, 178 U. S. 41, 54. But statistics are not lacking to give color to a broader claim. The studies of the Harvard Bureau of Business Research show (Bulletins 74, 78, 83 and 85) that despite occasional aberrations gross sales have *574a direct bearing on the ratio of net gain to sales and on the ratio of net gain to net worth.2 In brief there is not only an increment of profit expressed in terms of dollars, but an increment also when the profit is expressed as a percentage. How far the teachings of these tables are to be credited as accurate, it is not for us to say. Williams v. Mayor, 289 U. S. 36, 42; O’Gorman & Young v. Hartford Fire Insurance Co., 282 U. S. 251, 257. They are confirmed by economists of standing who testified for the state. Opposed are other scholars, also men of high repute, who have studied the results of large scale enterprises and small ones, and on the basis of that study advance a different doctrine.' They find that the high percentages of profit are more likely to be earned when capital *575and sales are moderate. Epstein, Industrial Profits in the United States, pp. 45, 46, 131, 132. On the other hand, they are not hostile to the doctrine that on the average the net earnings of a business increase absolutely, though not proportionately, as the sales increase in volume.3 Even as to percentages, the lawmakers of Kentucky were at liberty to reach their own conclusion in the face of these conflicting judgments pronounced by men of learning. If their conclusion is not arbitrary, it is not for us to set them right.
The studies back of these statistics are instructive not merely as to results but also as to causes. Harvard Bureau of Business Research, Bulletin 85, p. 9. Sales on a large scale are accompanied, it seems, by differences of method as well as differences of quantity. Some of the attendant advantages are matters of common knowledge. The big shops having ample capital can get the best locations. This is a form of advertising, productive of good will. The big shops can practise economies impossible for small ones. In particular they can make their purchases in bulk and hence at cheaper prices. The big shops acquire a prestige that makes customers eager to buy of them. Here and there they can even charge a little more than others, at least for high priced goods, or goods not wholly standardized, and the buyer will ignore the difference. If they happen to be department stores, they stimulate a customer to buy at one shop without the bother of going elsewhere. If they happen to be chain stores, they have other methods of attraction. Even management tends to be more efficient unless the business becomes unwieldy by reason of its size. Bulletin 85, supra. The president of the Kroger Company tells us: “ Kroger trains *576its men, having regular training schools and diplomas.” As already pointed out, the scheme of the Kentucky statute puts a stop to graduation before size becomes immoderate. From all this it comes about that many avenues of profit closed to the little dealer are open to his big competitor.
The framers of a system of taxation may properly give heed to convenience of administration, and in the search for that good may content themselves with rough and ready compromises. Elaborate machinery, designed to bring about a perfect equilibrium between benefit and burden, may at times defeat its aim through its own elaboration. A crippling result of the decision just announced will be to restrict the choice of means within bounds unreasonably narrow. Hereafter in the taxation of business a legislature will be confined, it seems, to an income or profit tax if it wishes to establish a graduated system proportioning burden to capacity. But profits themselves are not susceptible of ascertainment with certainty and precision except as the result of inquiries too minute to be practicable. The returns of the taxpayer call for an exercise of judgment as well as for a transcript of the figures on his books. They are subject to possible inaccuracies, almost without number. Salaries of superintendence, figuring as expenses, may have been swollen inordinately; appraisals of plant, of merchandise, of patents, of what not, may be erroneous or even fraudulent. In the words of a student of the problem, “ statements of profits are affected both by accounting methods and by the optimistic or pessimistic light in which the future is viewed at the time when the accounts are made up.” Epstein, op. cit., supra, p. 5. These difficulties and dangers bear witness to the misfortune of forcing methods of taxation within a Procrustean formula. If the state discerns in business operations uniformities and averages that seem to point the way to a system easier to administer than one based upon a report *577of profits, and yet likely in the long run to work out approximate equality, it ought not to be denied the power to frame its laws accordingly.
Eor answer to all this the thrust will not avail that “ it is difficult to be just and easy to be arbitrary.” The derogatory epithet assumes the point to be decided. There is nothing arbitrary in rescuing a vast body of taxpayers from,the labor and expense of preparing elaborate reports, at best approximately accurate. There is nothing arbitrary in rescuing a government from the labor and expense of setting up the huge and unwieldly machinery of an income tax department with a swarm of investigators and accountants and legal and financial experts. To frame a system of taxation in avoidance of evils such as these is no act of sheer oppression, no abandonment of reason, no exercise of the general will in a perverse or vengeful spirit. Ear from being these or any of them, it is a pursuit of legitimate ends by methods honestly conceived and rationally chosen. More will not be asked by those who have learned from experience and history that government is at best a makeshift, that the attainment of one good may involve the sacrifice of others, and that compromise will be inevitable until the coming of Utopia.
The argument is made that the principle of graduation, once it has gained a lodgment, may be extended indefinitely, with the result that in some other statute the rate for the upper levels, instead of being confined as it is here to something less than one per cent, may be ten per cent or twenty, thus wiping out profits when business is done on a large scale. A sufficient answer may well be that no such act is now before us; but if this answer be inadequate, another is at hand. The more effective answer is that under the law of Kentucky the danger is illusory. There is no need to consider in respect of an excise upon sales whether the doctrine of Magnano Co. v. Hamilton, 292 U. S. 40, and Fox v. Standard Oil Co., supra, could be *578invoked successfully to uphold a destructive measure of taxation if the standard of validity were to be looked for in the Fourteenth Amendment and not in any other law. The significance of whatever distinctions there may be will be weighed when the event arises. For the present it is enough to say that, under the constitution of Kentucky as interpreted by repeated decisions of her highest court, no tax law in the nature of an excise will be upheld if its effect is so drastic as to extinguish profits altogether. Fiscal Court of Owen County v. Cox Co., 132 Ky. 738; 117 S. W. 296; Louisville v. Pooley, 136 Ky. 286; 124 S. W. 315; Sperry & Hutchinson v. Owensboro, 151 Ky. 389; 151 S. W. 932. Because of those decisions we refused only recently to sustain a statute of Kentucky imposing a prohibitory tax upon the sale of oleomargarine (Glenn v. Field Packing Co., 290 U. S. 177, affirming 5 F. Supp. 4), though in Magnano Co. v. Hamilton, supra, a like tax, adopted by the state of Washington, was held to be consistent with the constitution of the nation. The relevant provisions of the Kentucky constitution and of the explanatory judgments of her courts are written by implication into the Kentucky tax act as if put there in so many words. The act is to be interpreted as if it said: “ The tax hereby imposed is not to be collected if the result will be to wipe out the profits of a business conducted with ordinary efficiency, or to reduce the profits to a level unreasonably low.” Such an extinguishment of profits is not the outcome of the tax when the act is applied to the business of these petitioners, and so the court below has found.4 Such can never be the outcome either under this *579act or any other as long as the constitution of Kentucky continues what it is today.
The case has thus far been considered almost wholly without reference to the precedents. When these are examined, the conclusion is even clearer. To dwell upon the chain store decisions is needless. Board of Tax Commissioners v. Jackson, supra; Fox v. Standard Oil Co., supra; Liggett Co. v. Lee, 288 U. S. 517. They are too recent to be forgotten. Classification in those cases ran athwart the lines of profit, yet it was none the less sustained. There is no magic, however, in the catchword of a “ chain.” In cases not so recent, other forms of business enterprise have been subjected to graduated taxes on the basis of size alone without reference to profits. Thus, in Clark v. Titusville, 184 U. S. 329, a license tax was laid upon wholesale and retail merchants, the rate for each class varying progressively with the amount of the gross sales. The court upheld the classification as one reasonably related to capacity to pay. In Metropolis Theatre Co. v. Chicago, supra, already summarized in this opinion, a tax upon theatres proportioned to the cost of tickets was upheld against the contention of the taxpayer that the price of tickets was unrelated to the profits of the venture. In Pacific American Fisheries v. Alaska, 269 U. S. 269, a tax had been laid on salmon canneries at graduated levels, the percentage of the tax increasing with the number of cases packed. It was pressed that the tax discriminated against large canneries in favor of small ones. The argument was dismissed with the remark that “ classification of taxes by the amount of the corpus taxed has been sustained in various connections heretofore.” Cf. Maine v. Grand Trunk Ry. Co., 142 U. S. 217, 228; Dow v. Beidelman, 125 U. S. 680, 691; Chicago, Burlington & Quincy R. Co. v. Iowa, 94 U. S. 155, 164; Chesapeake & Ohio Ry. Co. v. Conley, 230 U. S. 513, 522; Spreckels Sugar Refining Co. v. McClain, 192 U. S. 397; Hope Gas Co. v. Hall, 274 U. S. 284; Citi*580zens’ Telephone Co. v. Fuller, 229 U. S. 322; Heisler v. Thomas Colliery Co., 260 U. S. 245; Brown-Forman Co. v. Kentucky, 217 U. S. 563; Postal Telegraph Cable Co. v. Adams, 155 U. S. 688. See also Louisville Gas Co. v. Coleman, 277 U. S. 32, 43, 44, which brings the precedents together. Other cases could be added.
In fine, there may be classification for the purpose of taxation according to the nature of the business. There may be classification according to size and the power and opportunity of which size is an exponent. Such has been the teaching of the lawbooks, at least until today.
I am authorized to state that Mr. Justice Brandéis and Mr. Justice Stone join in this opinion.

 The problem is discussed by Stone, J., with a reference to many treatises on finance, in his dissenting opinion in Indian Motocycle Co. v. United States, 283 U. S. 570, 581.

 Bulletin 74 deals with the operations of department stores for 1927. One set of tables includes stores whose sales are in excess of a million dollars. They are divided into four classes (one million to two million; two million to four million; four million to ten million; ten million and over). Referring to these classes, the report says (p. 10): “ While noticeable differences appeared in net profit for stores grouped according to volume of sales, these differences were even greater in the case of total net gain both as a percentage of net sales and as a percentage of net worth. In each instance these figures varied directly with the volume of sales, and a distinctly more favorable showing was made by the larger firms.” Another set of tables includes stores whose sales were under a million dollars. Among these the most favorable net profit showing was that of the group with volume of sales between one quarter and one half million. Between half a million and a million, the ratio of increase declined. Even there, however, the showing was more favorable than for stores under a quarter of a million, where the average was one of loss. Bulletins 78, 83 and 85 state the operations for later years with results not greatly different. Even in years of loss, the percentage of loss had in the main a tendency to be lower as the volume of the sales increased. “It is quite clear that the larger stores operated on a distinctly more satisfactory basis than the smaller stores, and that success as measured by earnings varies directly with size.” Bulletin 85, p. 8,

The prevailing opinion in effect concedes “that averaging the results of the concerns making the reports it is true ' generally speaking,’ as the court below put it, that profits increase with sales.”

A loss of $9,023 would have been suffered by one of the petitioners if the tax had been paid in 1932, but the finding is that for that year the business was conducted without reasonable skill, and that with a change of the methods of management the loss was turned into a profit. At most the operations of that year might call under the Kentucky decisions for a modification of the judgment. The petitioners seek an injunction that will annul the statute altogether.