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No. 112 "The President's 1936 Tax Proposals: The End of the So- Called `Breathing Spell'," April 4, 1936. American Liberty League. 400dpi TIFF G4 page images Digital Library Services, University of Kentucky Libraries Lexington, Kentucky Am_Lib_Leag_112 These pages may freely searched and displayed. Permission must be received for subsequent distribution in print or electronically. No. 112 "The President's 1936 Tax Proposals: The End of the So- Called `Breathing Spell'," April 4, 1936. American Liberty League. American Liberty League. Washington, D.C. 1936. This electronic text file was created by Optical Character Recognition (OCR). No corrections have been made to the OCR-ed text and no editing has been done to the content of the original document. Encoding has been done through an automated process using the recommendations for Level 1 of the TEI in Libraries Guidelines. Digital page images are linked to the text file. JOIN THE AMERICAN LIBERTY LEAGUE â˜… The American Liberty League is organized to defend and uphold the Constitution of the United States and to gather and disseminate information that (1) will teach the necessity of respect for the rights of persons and property as fundamental to every successful form of government and (2) will teach the duty of government to encourage and protect individual and group initiative and enterprise, to foster the right to work, earn, save, and acquire property, and to preserve the ownership and lawful use of property when acquired. The League believes in the doctrine expressed by George Washington in his Farewell Address that while the people may amend the Constitution to meet conditions arising in a changing world, there must "be no change by usurpation; for this * * * is the customary weapon by which free governments are destroyed." Since the League is wholly dependent upon the contributions of its members for financial support it hopes that you will become a contributing member. However, if you cannot contribute it will welcome your support as a non-contributing member. â˜… â˜… THE PRESIDENT'S 1936 TAX PROPOSALS â˜… â˜… â˜… The End of the So-called "Breathing Spell" ENROLLMENT BLANK Date. I desire to be enrolled as a member of the American Liberty League. Signature ................................. Name ................................. Street .................................. Town ................................. County.......................... State. Enclosed find my contribution of $....... to help support the activities of the League. AMERICAN LIBERTY LEAGUE T^ational Headquarters NATIONAL PRESS BUILDING WASHINGTON, D. C. (112) Document No. na April, 1936 The President's 1936 Tax Proposals Wh you have finished with this pamphlet please pass it on to some friend or acquaintance who might be interested, calling his attention to the membership b\an\ on page zo. (The following analysis of the pending tax program is confined to the broad principles outlined in the President's special message submitted to the Congress on March 3, 1938. It does not attempt to deal with the details of the tentative measure being formulated by the House Ways and Means Committee. The American Liberty League is concerned primarily with the theories actuating administration policies and their bearing on constitutional government rather than with the specific items of legislation offered to carry out the program.) Recommendations by the President for a complete change in methods of taxing corporations mark a definite end of the "breathing spell" promised by him to business in September, 1935. Ill-considered and unsound devices designed to accomplish alleged reforms but sure to have harmful effects make the President's program a threat to recovery. The proposed graduated tax on undistributed profits of corporations reflects the administration's attitude toward thrift and careful business management and represents another attempt to substitute a policy of regimentation and control for the natural operation of economic processes. Political considerations are in large part responsible for the character of the plan. Objectionable features of the President's program are: 1. Insofar as the tax on undistributed profits is designed to force "spending" in lieu of "saving" it is part and parcel of theories already discredited in New Deal experiments. 2. The proposed tax is an arbitrary method of compelling corporations to conform to the rigid blueprints of a planned economy under which it would be impossible for boards of directors to follow their best judgment in the determination of policies. 3. Failure to build up adequate surpluses hereafter will make it difficult for corporations to mitigate the hardships of future depressions to such an extent as in recent years. 4. A graduated tax on undistributed profits will check the development of new industries. The automobile industry, which has contributed to a higher level of wages for a host of workers and has so reduced prices as to place motor cars within the reach of all classes, reached its present position by reinvesting the earnings of its early years. 5. The proposed tax will handicap small and struggling corporations more than those already in a strong position. 6. A new form of taxation with unpredictable effects and great administrative difficulties, as illustrated by the necessity of making special j' provision for corporations restricted as to dividend distribution by contracts with bondholders, will add to the uncertainties which tend to retard recovery. 7. Graduation of the tax has as its chief objective the penalizing of bigness in line with a perverted philosophy which is blind to the part played by large corporations in providing greater opportunities and a higher standard of living for the American people. 8. The radical change in methods of taxing corporations constitutes a dangerous use of the taxing power to accomplish social ends and to promote a redistribution of wealth and income. 9. The administration program emphasizes ways of extracting more revenue from corporations with a consequent greater burden upon business instead of attainment of a balanced budget through a reduction in expenditures. Background of Program The "breathing spell" assured business by the President in a letter addressed to Roy W. Howard on September 2, 1935, was intended to quiet the fears occasioned by the administration's tax program of last year and its persistent assaults upon business. In his letter to Mr. Howard the President defended the Revenue Act of 1935 as part of a legislative program necessarily involving drastic and far-reaching action. The President added: "This basic program, however, has now reached substantial completion and the breathing spell of which you speak is here very decidedly so." An official interpretation of the President's "breathing spell" promise was given by Secretary of Commerce Daniel C. Roper in an address before the Associated Grocery Manufacturers of America at New York City on November 13, 1935. Secretary Roper after quoting from the President's letter said: 4 "This declaration of the President's is clear-cut and concrete. It means specifically that the basic program of reform has been completed. It means that business no longer needs to feel any uncertainty as to what may come in the future with respect to governmental measures." In his budget message in January, 1936, the President gave no hint of the new tax program submitted two months later. He said: "The state of national recovery is such that receipts from prevailing tax sources on the basis of present rates appear adequate for financing the ordinary operations of the Government in 1937, including service on the public debt; and no new or additional taxes are proposed." It is true that the President's statement was based on rates then in effect and that subsequently the processing taxes under the AAA were invalidated and a further new burden upon revenues was created by the enactment of legislation for the immediate payment of the soldiers' bonus. In the light, however, of his "breathing spell" declaration as construed and reinforced by his Secretary of Commerce, American business had the right to expect that any proposals for new taxes at this time would be in line with the existing system and would not attempt to revolutionize the entire scheme of corporate taxation. High Points of Plan The President in his special message of March 3, 1936, proposed the repeal of the present corporate tax structure, including the corporate income tax, the capital stock tax, the related excess profits tax and the exemption of dividends from the normal tax on individual income. As a substitute he recommended a graduated tax on undistributed profits of corporations. The earnings of corporations distributed to stockholders would be subject to the ordinary normal rates from which they are now exempt, as well as to surtaxes applicable to individual incomes. The rates of tax on undistributed profits originally proposed were estimated to yield $1,614,000,000 annually, a net gain of $620,000,000 over the existing system of taxation. The President also proposed a tax on the "windfall income" received by agricultural processors from non-payment or return of the outlawed AAA processing taxes and an excise tax on the processing of certain agricultural products to be continued only over a period of from two to three years. These two taxes, yielding an aggregate of $517,000,000 over the two- or three-year period, were designed to reimburse the Treasury for costs of carrying out contracts under the invalidated AAA. The new revenue from corporation taxes was intended to cover the $500,000,000 authorized annually as a permanent subsidy to agriculture under the new Soil Conservation and Domestic Allotment Act of 1936 and $120,000,000 annually to amortize over a period of 9 years the extra cost of the soldiers' bonus by reason of immediate payment and the refund of interest on loans. It will be noted that the effect of the plan is to shift the burden of financing the new agricultural subsidy from the consumers of farm products to the corporations of the country. This is a crafty way of reducing to a minimum the adverse political effects of a new tax law in a campaign year. Underlying Theories The motives of the administration in proposing the new form of corporate taxation appear to be chiefly the following: (a) To force the spending of corporate surpluses as advocated by those who believe that a major cause of the depression was too much saving with a consequent overexpansion of the capital equipment of industry and of funds for speculative investment. (b) To hit big corporations by broadening the principle of a graduation of tax introduced in the 1935 act. (c) To promote a redistribution of wealth by levying heavy taxes upon profits of corporations owned principally by men of large resources, whether such profits are retained as surplus or paid out in dividends. (d) To raise additional revenue amounting to not more than one-fifth of average deficits of recent years. The first of the four motives is in line with spending policies which have been tried throughout the present administration and which have not produced the results hoped for. The second and third motives are in keeping with the inclination of the administration to array class against class by inflaming the people of the country against large corporations and great wealth. The new revenue which might be gained is so relatively small that the tax program cannot be regarded as a sincere effort to balance the budget. Spending Theories From an economic standpoint the chief reason for advocacy of a tax on undistributed profits apparently is to promote spending as against saving. The plan is another variant of the spending policy which has been tried in many forms, always without marked success, but at a tremendous cost to the taxpayers. The exponents of the spending theory hold that there was too much saving and investment in capital equipment and in speculative enterprises prior to the depression and that the "underconsumption" which has existed in the face of unused plant capacity of industry could be corrected if a greater part of the national income were diverted into spending channels. The claim advanced in connection with the proposal to force a distribution of corporate surpluses by prohibitive taxes is that the funds thus placed in the hands of stockholders would be spent. A part of the funds would be taken by the Government in taxation and used in its spending program. The remainder, the sponsors of the plan assume, would be expended for all kinds of consumption goods, thereby helping industry more than if the same amount were retained by corporations and invested in excessive plant capacity or used in speculation. The question of relative expenditures for capital and consumption goods is a highly controversial one. Even if it be granted that the diversion of a larger portion of the national income to spending as against saving is desirable, there is little in the record of administration experiments to justify confidence that the forced distribution of corporate surpluses would accomplish the purpose. Other schemes of the administration based on the spending theory are not only now discredited but have produced harmful results. There is every reason to be cautious in accepting a plan involving such a far-reaching use of the taxing power. Economic Planning Taxation is being invoked to enforce economic planning. The blueprints of the administration's planned economy call for the distribution of a greater share of corporate profits to the stockholders. The prohibitive tax is a method of compelling corporations to comply with the program. Through such a system corporate management is brought under arbitrary control by the Government. Under the inflexible application of a prohibitive tax there is no opportunity for separate action to meet the varying needs of different corporations. All classes of corporations, whatever their present condition or future uncertainties, must distribute the bulk of their earnings or be subject to a heavy penalty. In the absence of such a tax the boards of directors now decide what portion of the earnings shall be distributed. The members of these boards are intimately acquainted with the special needs of the corporations. They know whether it is desirable to reinvest earnings in new facilities, whether previous surpluses have been so depleted during the depression as to necessitate the laying aside of extra amounts as a safeguard for the future, whether special amounts should be set aside as reserves against obsolescence or unforeseen events such as the recent disastrous floods, whether funds should be held for payment of interest on money to be borrowed and whether more than a normal amount should be retained in order to establish or maintain credit at the banks. The effect of the tax would be to discourage individual initiative and to regiment industry. Through the taxing power the Federal Government would accomplish regulation which would be impossible under the commerce clause of the Constitution. It would be a step toward the type of control prevailing under European dictatorships. Protection Against Depressions While the distribution of corporate profits might tend to speed up business during a period of prosperity, it could not fail to accentuate hardships at the low points of the business cycle. When future depressions occur and there is no reason to believe that the New Deal has discovered a method of preventing depressions there would be no profits to distribute nor would there be an accumulation of earnings from which to continue to pay normal wages and dividends. The present depression would have been much more severe but for the existence of substantial corporate surpluses. Nothing short of catastrophe could be expected in the event of another major depression without comparable reserves. The amounts poured out by the Government for emergency purposes during the depression have been so large as perhaps to have given an impression that its part in mitigating hardships was greater than that of private industry. Actually, however, private industry during the four years from 1931 to 1934, inclusive, expended from its reserves to meet operating deficits twice as much as the Federal Government borrowed to meet its deficits during the same period. Some idea of the manner in which industry lias drawn from its savings during this depression may be gained from estimates of national income by the Department of Commerce. Its figures show national income produced and national income paid out. Business savings or business losses are the difference between national income produced and paid out. Business savings in 1929 were estimated at $2,402,000,000, being the excess of income produced amounting to $81,034,000,000 over income paid out of $78,632,000,000. In each of the five succeeding years from 1930 to 1934, inclusive, the income paid out was greater than income produced, resulting in a substantial total of business losses. The business losses, which were absorbed for the most part from prior savings, included $5,015,000,000 in 1930, $8,120,000,000 in 1931, $8,817,000,000 in 1932, $3,051,000,000 in 1933 and $1,624,000,000 in 1934, a total for the five years of $26,631,000,000. The Federal Government had deficits only in the last four of these five years, the aggregate of the four being about $11,000,000,000, or about half the deficits of private business during the same four years. Without the surpluses actually drawn upon by private industry the collapse of our economic structure would have been complete. Reports of the Internal Revenue Bureau show that even in 1929, 6.1 per cent of the amount of cash dividends paid by corporations came from those showing no net income. In 1930 the percentage was 16.6; in 1931, 37.1; in 1932, 40.3; and in 1933, the latest year for which information is available, 23.7. Without adequate surpluses these corporations obviously could not have continued to pay dividends. [Development of New Industries Without the privilege of reinvesting their earnings, many of the large corporations and the industries of which they are a part never would have reached their present stage of development. Some of these corporations, notably in the automobile industry, did a pioneer work at a time when the bankers did not have sufficient confidence in future possibilities to finance them. According to an authentic tabulation of invested capital in the automobile industry in 1926 the Ford Motor Company expanded to a capital of $694,000,000 from $40,000 merely by reinvesting its profits, while General Motors reached a capital of $593,000,000 by reinvesting $306,000,000 of profits and Dodge Bros, attained a capital of $115,000,000 by reinvesting $102,-000,000. The tangible invested capital of these three companies together with Studebaker, Packard, Hudson, Nash and Reo amounted in 1926 to $1,657,723,399, of which $1,322,752,071 came from reinvestment of profits. Large industries which thus have developed new fields by foregoing current distributions of profits have been of great importance in American economic progress. They have made possible the absorption of large numbers of workers released by technological improvements in other industries. They have contributed to an important extent in placing what were luxuries of earlier years within the reach of the mass of the population. Through lower prices and better wages they have helped to make possible a higher standard of living. The accomplishments of a period of 20 years in the development of the automobile and related industries while profits were being reinvested are striking. In 1914 the average wholesale price of all cars manufactured, including trucks, was $1,239. In 1933 it was $497, a reduction of 63.9 per cent. A tire for a light car cost in 1914 from $20 to $22 and was guaranteed for from 3,500 to 4,000 miles. Twenty years later the corresponding tire cost only $5.30 and was good for from 20,000 to 25,000 miles. In other words, the motorist who received only 200 miles of travel for an investment of $1 in a tire in 1914 was able to get 3,750 miles of travel for his dollar 20 years later. The average cost of gasoline dropped about 60 per cent because of improved methods of production. While the average automobile had a life of four and a quarter years in 1914, the average after 20 years of development of the industry was about twice as great, with probably 50 per cent more annual mileage. The average cost of owning and operating a motor car, mile for mile, at the end of the 20-year period was only about one-fourth of what it was at the beginning. This amazing record of progress would not have been possible except for costly experimental 10 work and research and mass production facilitated by the reinvestment of profits in the early years of the industry. While the tax on undistributed profits is aimed at large corporations, it would actually have the effect of giving companies which have already accumulated substantial surpluses an advantage over newer organizations which lack adequate capital. Many of the largest corporations are now distributing 60 per cent or more of their profits. In many cases these corporations might pay less tax than at present. The smaller corporations which need to retain a larger proportion of their earnings would find the new plan more burdensome. In its application to industries which are pioneering in a new field and also to the smaller and weaker corporations a tax on undistributed profits would be not only unfair but would retard industrial development. Injustices and Uncertainties Without numerous special exceptions, a tax on undistributed profits would work an injustice on many corporations and would drive a large number into receivership or bankruptcy. In such situations ground would be given for an appeal to the courts for protection under the due process clause of the Constitution. Many corporations have entered into contracts or "indentures" with bondholders and preferred stockholders under which it is stipulated that dividends shall be paid on common stock only after certain amounts have been set aside from earnings for amortization or other purposes. Some of these agreements include a requirement for the maintenance of a specified ratio between current assets and current liabilities. Under a prohibitive tax on undistributed profits a corporation might feel compelled to pay out earnings in dividends in violation of the terms of its contract with holders of bonds or preferred stock. In the event of such a default the individuals holding these securities would have the right to seek a foreclosure in the courts. Probably 50 per cent of the corporations of the country would be confronted with a dilemma involving payment of a prohibitive tax or default. The danger in such a situation has been recognized by the House Ways and Means Subcommittee which in its tentative recommendations attempts to provide a different method of treat-11 ment for corporations which have entered into contracts of this character. Even if these contracts were not disturbed, the holders of bonds and preferred stock would be at a disadvantage as compared with holders of common stock. An increased distribution of earnings would benefit persons owning common stock but the rates of interest and dividends on bonds and preferred stock would remain unchanged. The holders of bonds and preferred stock also would lose the protection afforded by the existence of an undivided surplus. Corporations which are in receivership or other financial difficulties would find it difficult to pay off old obligations without special exemption from the tax on undistributed profits. Corporations borrowing from the Reconstruction Finance Corporation would face a serious problem in the accumulation of a sufficient surplus to repay the loans. The administrative difficulties of the proposed tax would be very great. It would not be feasible in the case of many corporations to distribute earnings within the taxable year. If a higher tax were levied on undistributed earnings, many corporations would not have sufficient cash to pay the tax because of inability to liquidate profits. It is conceivable that the sum total of Federal, state and local taxes might in some instances exceed 100 per cent of corporate income which was not currently distributed. No one can forecast with any degree of certainty the exact effects of the proposed tax on undistributed profits either upon individual corporations or upon economic conditions. The uncertainties would be a factor tending to retard recovery. An Unsound Tax The soundness of a graduated tax on individual incomes is generally recognized. The imposition of progressive rates on incomes of corporations, however, is unsound and unscientific. Economists and financial authorities with scarcely any important exceptions are agreed that this is true. Whereas a graduated tax on individual income is in accord with the principle of ability to pay, a graduated tax on corporation incomes, whether or not distributed, violates it. The reason is that a corporation is an aggregate of individuals who own stock. The tax in reality applies against the stockholders. It is the ability of the investors to pay taxes rather than the size of the corporate investment that is important. The imposition of a high rate upon 12 large aggregate earnings of a corporation does an injustice to the owner of a small amount of stock whose total income may be so little as to be subject only to normal individual taxes. Ownership of many of the largest corporations is widely scattered. It is estimated that at the beginning of the depression the number of stockholders in corporations was 18,000,000 or more. Allowing for holdings of different stocks by the same individual, upwards of 7,000,000 persons were involved. The number of individual members of families benefiting would be much greater. As much as 25 per cent of all dividends paid by corporations goes to persons with incomes below $5,000. Millions of persons of small means are vitally concerned with insurance companies and savings banks which have investments in large corporations. The character of the tax on corporation earnings is such that it cannot readily be passed on to consumers in the prices of products. The tax comes out of the earnings of stockholders and thus out of their individual incomes in the event that earnings are distributed and out of their share of undivided profits otherwise. The burden of a graduated tax upon a stockholder's income from a large corporation is much greater in the case of a person of moderate means than the rate of tax upon his income from other sources. The graduated tax on all corporation earnings, introduced in relatively mild form in the Revenue Act of 1935, and the proposed graduated tax on undistributed profits have no relationship to the percentage of return on invested capital. A large corporation with a very small percentage return on its invested capital might pay a much higher rate than a smaller corporation with a very high percentage of profit. This is contrary to the principle of ability to pay. Hitting at Bigness There can be no doubt that the reason for the imposition of a graduated tax upon corporations is to hit at bigness. The President confessed as much in proposing a graduated tax in his special message to the Congress on June 19, 1935, in advance of the enactment of the revenue act of that year. The President defended his proposal on the ground that advantages conferred upon corporations by government, both Federal and state, increase in value as the size of the corporation increases. He ignored entirely the part that the large corporations have played in the 13 industrial development of the country, their contribution to a higher standard of living and their importance as employers of labor. The large corporations were able to weather the depression better than those with smaller resources. Their credit is better and the cost of their financing is thus less. As a rule higher wages have been paid by large corporations than by the smaller ones. Seventy per cent of all wage earners in manufacturing industries are employed by large corporations. Without the advantages of large resources many industries could not have been developed to a point to permit such great reductions in prices as have taken place in the case of many manufactured commodities. The large corporations have maintained pension plans, old age and sick benefits and extended other assistance to employees which is seldom possible in small companies. If the large corporations had been broken into small units, they could not possibly have furnished as much extra employment during the depression period as they actually have done. The philosophy of the New Deal appears to call for antagonism to large corporations. Entirely disregarded by those who draw false conclusions from basic facts respecting modern large-scale industry are the greater opportunities now existing for individual advancement than before the days of big business, the greater rewards for brains, energy and thrift and the far greater comforts enjoyed by the masses of the people. Depressions occurred before the days of big corporations. The solution of the problem of business cycles will not be reached by tearing down or penalizing large aggregations of capital. Improper Use of Taxing Power In both the 1935 and the 1936 tax programs the President has sought to use the taxing power to achieve social ends by promoting a redistribution of wealth and income. The amount of revenue involved in the 1936 proposals is somewhat greater than the relatively insignificant amount under the high taxes on wealth recommended by the President in 1935. Nevertheless, just as in 1935, the 1936 program is primarily intended for other purposes than the raising of revenue. One of the major objectives is to make certain that confiscatory rates of the higher surtax brackets will apply to persons of large means who may have substantial investments in cor-14 porations, the earnings of which are not subject to individual income taxes so long as retained as surplus. The schemes designed to accomplish something by indirect means which cannot be done directly under the Constitution present dangers greater than any inequities which may already exist. The corporations already are overburdened by the sum total of their taxation, including state and local taxes, the Federal taxes on income, capital stock, excess profits and sales of specific commodities, and the new taxes on payrolls levied under the Social Security Act. In the fiscal year 1935 more than 80 per cent of all Federal tax revenues were collected in the first instance from business. A survey of financial statements of 18 corporations with gross assets of more than $22,000,000,000 at the close of 1934 shows that taxes absorbed 62 per cent of the amount available for taxes and dividends, only 38 per cent remaining for distribution in dividends among their 2,100,000 stockholders. In the case of these corporations the average taxes, Federal, state and local, were $2.99 per share of stock as against average dividends of $1.76 per share. It is not fair to the corporations, which means to the business and economic life of the country, to add to tax burdens for the primary purpose of pursuing social and economic experimentation. "Toward Insecurity" Professor Raymond Moley, who has figured prominently as an adviser to the administration, has condemned the proposed tax on undistributed profits of corporations in an editorial entitled "Toward Insecurity" in the March 14 issue of Today. In this editorial Professor Moley said in part: "Surpluses are the life insurance policies of business firms. Neither Congress nor any administrative agency can determine fairly how much insurance any one corporation needs. That differs with the nature of its business and with the condition of the corporation itself. Some companies need to lay aside large surpluses in good years to tide them over lean years in a business which is notoriously of the 'feast or famine' type, like the steel industry. Others, conspicuously in the chemical industry, have to be ready for the obsolescence of plant or process that research so often brings upon them with lightning suddenness. New corporations lay up 15 funds for future growth. In short, any law which imposes the same limitations upon corporate thrift for all corporations is bound to work great injustices and to wreck many enterprises. And any attempt to differentiate among them by administrative regulation will lead to hopeless complication." Processing Taxes The processing taxes under the AAA have an unsavory record both by reason of economic effects and unconstitutionality. It is significant that the administration has not proposed their continuance permanently but merely for a temporary period to pay the cost of agricultural benefit programs initiated under the law invalidated by the Supreme Court decision. It is significant also that the subcommittee of the House Ways and Means Committee rejected the President's recommendation. The processing taxes have had many adverse effects. Even when passed on to consumers, or as happened in some instances when passed back to the farmers in the form of lower prices, the taxes have been a heavy burden upon processors through a tendency to curtail volume of business and otherwise. The cotton textile industry was handicapped in its struggle to meet foreign competition. The meat packers, millers, tobacco manufacturers and others felt adverse effects. The taxes represented sales levies on food and clothing at very high rates. The consumers bore this extra load on top of such increases in prices as were due to the drought, monetary policy, the AAA and the NBA. The farmers have been injured by reason of consumer resistance due to high prices. The proposal to levy a tax on "windfall income" of processors who refused to pay an unconstitutional tax or whose payments were impounded and returned to them is an example of the unfair attitude of the administration toward business. These processors had the courage to resist a tax which would have been declared unconstitutional long before but for dilatory tactics pursued by the administration. By their foresight these particular processors were able to escape some of the losses suffered by other processors. The "windfall" tax is of doubtful constitutionality. A Balanced Budget If the administration's tax program were a sincere effort to balance the budget, it might 16 merit approval. It cannot, however, be so regarded. The deficit in the fiscal year 1937 seems certain to be considerably more than five times the new revenue obtained under the proposed corporation tax. All that the plan for increased corporate taxation purports to do is to substitute a different form of revenue for the invalidated processing taxes and to amortize the added cost of the soldiers' bonus. The extra burdens placed upon the Treasury by reason of the Supreme Court decision in the AAA case and the enactment of new soldiers' bonus legislation are used as an excuse to inflict upon the corporations of the country a new and untried form of taxation. No attempt whatever is made to reduce the deficit which was in prospect prior to the Supreme Court decision and the enactment of bonus legislation. If a new revenue law is passed, it should follow the lines of the existing system of taxation by broadening the base of income taxes or extending the field of sales taxes. Alternative possibilities submitted by the Treasury to the House Ways and Means Committee included a broadening of the base of income taxation in such a way as to raise nearly $450,000,000 annually, general manufacturers' sales taxes yielding from $190,000,000 to $910,000,000 and numerous miscellaneous excise taxes capable of yielding some hundreds of millions. For political reasons these taxes were not recommended by the administration. In the opinion of many competent authorities the estimates of possible revenue from a tax on undistributed profits are excessive. The probability is that the new revenue would be disappointingly small and in no way sufficient to compensate for the difficulties and uncertainties attendant upon the adoption of a new system of taxation. The pending measure, if enacted, will be the fifth law increasing taxes in as many years. In view of the very great increase in revenues under present laws, emphasis properly should be placed upon attainment of a balanced budget by a reduction of expenditures before any new taxes are imposed, least of all a tax which completely changes present practice. It is folly to continue to pile on taxes to finance the orgy of experimentation and extravagance. Business and the American people should bear their fair share of taxation to support proper functions of the Government. But 17 they have a right, first of all, to demand that useless activities be eliminated, and that such additional taxes as then may be levied to insure a balanced budget shall be in accord with sound practice as revenue measures and not intended either to facilitate a control of business or to achieve alleged social and economic reforms. Even with the taxes proposed under the President's program the Treasury deficit in the fiscal year 1937 will be at least $3,000,000,000 and may even exceed $4,000,000,000. The amount involved in the pending proposals is not so great as to justify action which would constitute a menace to recovery. A Breathing Spell The administration obviously realized in the fall of 1935 that business was deeply disturbed and distrustful because of insistence upon proposals for alleged reform in the guise of measures to promote recovery. It was in recognition of this situation that the President wrote his "breathing spell" letter, which, although greeted with approval, occasioned doubts in the minds of many as to whether it was a mere deceptive gesture or whether it represented a dependable administration policy for the future. Whatever may have been the intentions of the President when he promised a "breathing spell," the presentation of his tax program with its far-reaching implications has been highly disturbing and has served to upset any calculations which business may have made on the basis of expected relief from experimentation. Entirely new methods of taxing corporations will create complications and uncertainties tending to check the upward movement in business which gained substantial impetus following the Supreme Court's adverse decision in the NBA case and which was further encouraged by the Court's invalidation of regulatory devices employed in the AAA. Present improved conditions are not sufficiently well grounded to withstand the shock of the abandonment of methods of taxation of many years' standing in favor of a new and untried formula. A genuine "breathing spell" is the most urgent need of business. 18