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No. 47 "The President's Tax Program: An Analysis of a Transparent Political Gesture," July, 1935. American Liberty League. 400dpi TIFF G4 page images Digital Library Services, University of Kentucky Libraries Lexington, Kentucky Am_Lib_Leag_47 These pages may freely searched and displayed. Permission must be received for subsequent distribution in print or electronically. No. 47 "The President's Tax Program: An Analysis of a Transparent Political Gesture," July, 1935. American Liberty League. American Liberty League. Washington, D.C. 1935. 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. Pamphlets Available â˜… Copies of the following pamphlets and other League literature may be obtained upon application to the League's national headquarters: Why, the American Liberty League? Statement of Principles and Purposes Progress vs. Change Speech by Jouett Shouse American Liberty League Its Platform An Analysis of the President's Budget Message Analysis of the $4380,000,000 Emergency Relief Appropriation Act Economic Security The Bonus Inflation The Thirty Hour Week The Pending Banking Bill The Holding Company Bill "What is the Constitution Between Friends?" Speech by James M. Beck Where Are We Going? Speech by James W. Wadsworth Price Control Yesterday, Today and Tomorrow The Labor Relations Bill Government by Experiment Speech by Dr. Neil Carothers How Inflation Affects the Average Family Speech by Dr. Ray Bert Westerfield The AAA Amendments Political Banking Speech by Dr. Walter E. Spahr The Bituminous Coal Bill Regimenting the Farmers Speech by Dr. G. W. Dyer Extension of the NRA Human Rights and the Constitution Speech by R. E. Desvernine The Farmers' Home Bill The TVA Amendments The New Deal, Its Unsound Theories and Irreconcilable Policies Speech by Ralph M. Shaw Is the Constitution for Sale? Speech by Capt. William H. Stayton How to Meet the Issue Speech by William E. Borah The Supreme Court and the New Deal The Duty of the Church to the Social Order Speech by S. Wells Utley An Open Letter to the President By Dr. Neil Carothers The Revised AAA Amendments The Return to Democracy Speech by Jouett Shouse â˜… AMERICAN LIBERTY LEAGUE NATIONAL PRESS BUILDING WASHINGTON, D. C. â˜… â˜… The President's Tax Program â˜… â˜… â˜… An Analysis of a Transparent Political Gesture "Taxes are paid in the sweat of every man who labors because they are a burden on production and can be paid only by production. If excessive, they are reflected in idle factories, tax-sold farms, and, hence, in hordes of the hungry tramping the streets and seeking jobs in vain. Our workers may never see a tax bill, but they pay in deductions from wages, in increased cost of what they buy, or (as now) in broad cessation of employment. . . . our people and our business cannot carry its excessive burdens of taxation." Franklin D. Roosevelt, Forbes Field, Pittsburgh, October 19, 1932. AMERICAN LIBERTY LEAGUE National Headquarters NATIONAL PRESS BUILDING WASHINGTON, D. C. â˜… â˜… Document No. 47 July, 1935 The President's Tax Program â˜… "Taxes are paid in the sweat of every man who labors because they are a burden on production and can be paid only by production. If excessive, they are reflected in idle factories, tax-sold farms, and, hence, in hordes of the hungry tramping the streets and seeking jobs in vain. Our workers may never see a tax bill, but they pay in deductions from wages, in increased cost of what they buy, or (as now) in broad cessation of employment. . . . our people and our business cannot carry its excessive burdens of taxation." Franklin D. Roosevelt, Forbes Fields, Pittsburgh, October 19, 1932. The American people stand ready to cooperate in an honest effort to place the fiscal affairs of the Government in good order. They will rigidly deny themselves, if necessary, and assume an increased burden of taxation, levied equitably and in conformity with tested principles. As a condition, they demand an end of spendthrift policies and a determination on the part of the administration to abandon emergency projects which are futile as well as costly. The administration proposals for increased taxes on wealth are unsound. They offer no hope of a balanced budget. They give no assurance of a purpose to reduce expenditures. Moreover, the tax plan is directed against fundamentals of the American system of government and would tend to destroy the incentive to individual initiative, infringe upon rights guaranteed by the Constitution, and further shatter confidence of business, already weakened by misguided efforts to attain social reform in the guise of schemes for recovery. The program is objectionable, in that: 1. It was advanced at this time for political rather than economic reasons. 2. It represents a gesture to satisfy radical agitation for a redistribution of wealth. 3. The taxing power is invoked for social ends rather than to raise revenue. 4. It is not a sincere effort to balance the budget, the possible yield of the taxes being inconsequential in comparison with Treasury deficits. 3 5. Proposed higher taxes on large incomes and inheritances would depress business instead of promoting recovery. 6. Rates suggested on large individual incomes violate sound principles of taxation and would produce little revenue. 7. Graduated taxes on corporation incomes are designed to hit bigness but in reality would penalize many small stockholders. 8. Inheritance taxes superimposed upon present Federal estate and state inheritance taxes would be highly deflationary by depressing values of securities and other property involved in forced liquidation. 9. Demands for high taxes on large incomes and estates are predicated upon erroneous ideas of the present division of wealth. Procedure Public opinion fortunately has forced abandonment of the plan to rush the tax program through the Congress without an opportunity for proper consideration. The Constitution in Section VII, Clause 1 of Article I, makes the following provision for consideration of revenue measures: "All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments, as on other bills." It would have been highly irregular and a clear violation of the intent of the Constitution to add a share-the-wealth tax program as a Senate rider to a simple joint resolution extending the life of miscellaneous excise taxes. The pending legislation embodies an innovation in policy entirely foreign to the joint resolution in question. Furthermore, the effect of such a course, even if the proposals were given adequate consideration by the Senate Finance Committee, would be to permit subsequent concurrence by the House in Senate amendments, either directly or through conference, without action by its Ways and Means Committee. The hearings now arranged by both the House Ways and Means Committee and the Senate Finance Committee should give an opportunity to the Congress for exercise of the legislative powers which the Constitution vests in it exclusively. The Constitution in Section III of Article II provides that the President "shall from time to time give to the Congress information of the state of the Union, and recommend to their con-4 sideration such measures as he shall judge necessary and expedient." The same section further provides that he "shall take care that the laws be faithfully executed." Nowhere does the Constitution give the President law-making powers. Our democratic form of government contemplates full discussion of proposed legislation by spokesmen for groups of citizens before the proper committees of the Congress. The Congress, if it does its full duty, will not accept blindly such suggestions for legislation as may be submitted from the Executive branch. No excuse for speedy action exists. Collection of revenues from higher taxes cannot possibly be made until the next returns are filed by individuals and corporations on March 15, 1936. Unless higher rates were to be imposed retroactively, which would be unfair to business, little revenue could be expected until a year later. Political Motives The sudden decision to propose new taxes contrary to the previously announced policy of the administration was obviously actuated by political rather than economic reasons. This is the first administration to attempt to divide the budget into "general" and "emergency" expenditures. The President in his annual budget message, submitted to the Congress in January, 1935, indicated that it was his policy not to attempt to balance the budget except as to "general" expenditures which are those of the permanent government establishment. He said that he was submitting a budget for the fiscal year 1936 "which balances except for expenditures to give work to the unemployed." Continuing, the President said: "If this budget receives the approval of the Congress, the country will henceforth have the assurance that, with the single exception of this item, every current expenditure of whatever nature will be fully covered by our estimates of current receipts. Such deficit as occurs will be due solely to tills cause, and it may be expected to decline as rapidly as private industry is able to reemploy those who now are without work." Elsewhere in the message the President said: "While I do not consider it advisable at this time to propose any new or additional taxes for the fiscal year 1936, I do recommend that the Congress take steps by suitable legislation to extend the miscellaneous internal revenue taxes which under existing law will expire next June or July, and also to maintain the current rates of these taxes which will be reduced next June. Proposed changes in taxes always are unsettling to business. Prior to the special message of June 19, in which the President dealt with the subject, business was told to expect no fundamental changes in revenue laws during this session of the Congress. Nothing has occurred since January to warrant a change in policy at this time. The deficit for the fiscal year 1935, just closed, was considerably less than had been forecast by the President. The huge new commitments approved during the session were contemplated at the beginning. The House Ways and Means Committee was entirely unaware of any necessity or any intended recommendation for new taxes when it submitted as recently as June 14 a report favoring extension of the expiring excise taxes. Only in recent political developments can be found the basis for the unexpected recommendation for immediate action on a far-reaching tax program. Redistribution of Wealth Presentation of the President's plan was a gesture toward satisfying radical demands for a redistribution of wealth. Political demagogues always have harped on the question of a redistribution of wealth. The present administration has shown sympathy for policies designed to attain such an objective. Submission of recommendations for taxes on wealth in the President's annual message next January or at the beginning of some subsequent session would have occasioned no surprise. The press has reported a widespread belief that the announcement of the President's program in the midst of plans for adjournment of the Congress was intended to destroy the effectiveness of attacks upon the administration from extreme radical quarters. It was believed, the press reports related, that the object was to check the political aspirations of one who has used the floor of the Senate and the radio to spread share-the-wealth theories. In the opinion of the more extreme advocates of a redistribution of wealth, the plan is inadequate. Nevertheless, it contains implications which are immediately disturbing to business. It is a sad commentary on present trends that an administration should stultify itself by countenancing for political advantage policies inherently unsound. Improper Use of Taxing Power The taxing power is to be invoked not primarily to raise funds for the Government but to attain political and socialistic ends. It represents a use of the revenue clause of the Constitution for a purpose both reprehensible and of doubtful validity. The Supreme Court held to be invalid a statute which prohibited child labor through the use of the taxing power. In that case the Court held that it was an attempt to deal with a subject properly under the jurisdiction of the states. Nevertheless, recently the taxing power has furnished the basis of such measures as the Social Security Bill and the Bituminous Coal Regulation Bill. Dangers in the use of taxation for social purposes are pointed out by Roswell Magill, former tax adviser to the present Secretary of the Treasury, in an article in the April issue of Fortune Magazine. Expressing his personal view that the use of a tax for social purposes is not necessarily an evil, he asserted that on the other hand "the formulation of a series of taxes which will meet the revenue needs of the Government, and which are distributed fairly over the population, is an enormously difficult task." Mr. Magill added: "If further adjustments have to be made with the intent of accomplishing desired social ends as well, the difficulty of the task is so increased that there is danger that neither objective will be accomplished. Moreover, there is much more likelihood of evasion if the tax system is being used, not only to raise money, but to penalize some type of behavior currently regarded as antisocial." The Budget The program cannot in any sense be regarded as a sincere attempt to balance the budget. The President in his special message to the Congress on June 19 frankly based his recommendations on a desire "to prevent an unjust concentration of wealth and economic power." The comparatively small sum of $340,000,000, the original estimate of the amount to be raised annually under the taxes suggested to the Senate Finance Committee, would be insignificant in comparison with the several billions of the Treasury's annual deficit. Business generally would welcome a genuine effort to balance the budget. Treasury deficits, 7 offering a constant threat of inflation, are a major factor in the undermining of confidence which business must have if it is to go forward. In an emergency such as has existed the temporary financing of Treasury needs by borrowing has been to some extent unavoidable. The business community was given a basis for confidence when the President in his budget message in January, 1934, held out a promise of a balanced budget in the fiscal year 1936. The failure to make good that pledge in the budget for 1936 submitted last January has been an element contributing to a loss of confidence in recent months. In his special message on June 19 the President held out no hope of a balanced budget. The budget estimates of last January showed a prospective deficit of about $4,500,000,000 for the fiscal year 1936. The deficit of only about $3,500,000,000 during the fiscal year 1935, just closed, in the face of a budget estimate of more than $4,800,000,000, merely means that the deficits in 1936 and 1937 will be greater than previously expected. Public opinion will support an honest effort to put the nation's financial house in order. Deficits can be ended by the elimination of emergency expenditures lacking economic justification and by a sound revision of revenue laws. If more revenue is to be obtained from income taxes, it should be by a broadening of the base of taxation rather than by higher rates at the top. Taxation and Recovery It is difficult to imagine anything more obstructive to recovery than the imposition or even the serious consideration of oppressive taxes. Business has been handicapped in its struggle to get out of the depression by higher labor and other costs. The problem of the great corporations has been just as acute as that of the small business men. Existing taxation, Federal, state and local, already forms a large item in the overhead costs of any business. Proposals for substantial increases inject an element of doubt into future business operations and exert a hampering influence. The complete change in policy involved in a shift from a flat tax on corporation earnings to a graduated tax introduces a new factor in the operations of all incorporated business, big and little. The higher brackets would mean an extra burden on many industrial companies upon 8 whose prosperity hinges the welfare of a large part of our population. While the taxes on large incomes and inheritances might seem to offer no threat to small business or to persons of moderate means, the indirect effects of an excessive taxation of wealth extend all the way to the humblest citizen. The encouragement given by the President to the movement for a redistribution of wealth opens the door to all sorts of wild ideas. Business is held in a state of fear that the Congress may be induced to go even further than proposed by the President. Furthermore, if the Congress merely adopts a moderate program at this time, it introduces new policies which logically may be developed to a greater degree in a later session. Even in his special message the President hinted at a forthcoming assault upon all kinds of corporate holding companies. Holding companies are common to all important industry. The President's statement that ultimately the power of taxation should be used to eliminate "unnecessary" holding companies in all lines of business constitutes an unfair attack upon legitimate business. The unwarranted effort by the administration to abolish all public utility holding companies has had an adverse effect upon securities of the utility industry. The threat against other types of holding companies is a similar deterrent to progress in industries of many kinds. Individual Income Taxes The proposal to increase income taxes on very large incomes can not have, and does not purport to have, any justification other than as a means of attaining a social objective. The surtaxes ranging from 60 to 80 per cent on incomes in excess of $1,000,000, as proposed in rates submitted to the Senate Finance Committee by the Treasury Department, are designed avowedly to prevent the accumulation of great fortunes. The official estimates show a probable yield of $40,000,000 annually from the proposed surtaxes on incomes above $1,000,000. On the basis of incomes during the past few years it is difficult to imagine how even this amount could be raised. Already the portion of incomes above $1,000,000 is subject to a surtax rate of 59 per cent besides a normal tax of 4 per cent. In the latest returns available, those for 1933 filed in 1934, there were only 46 persons with incomes of $1,000,000 and over. Their aggregate 9 net income was only $81,558,981. In 1932 there were only 20 persons with incomes of $1,000,000 and over, their aggregate net income being only $35,239,556. The proposed higher rates would not have yielded much more than an additional $5,000,000, if that much, in 1933 and even less in 1932. There is little likelihood of a recurrence of the situation existing in the boom year of 1929 when 513 persons with incomes of $1,000,000 or over reported an aggregate net income of $1,212,-098,784. In the years between 1923 and 1926, inclusive, the aggregate net income of those with incomes of $1,000,000 and over ranged from a little more than $140,000,000 to less than $500,000,000. Viewed from the standpoint of sound taxation the present surtax rates in the higher brackets are excessive. The rates were increased in the 1934 Revenue Act beyond the point of maximum productivity. The surtax applicable on income above $1,000,000 was made 59 per cent instead of 55 per cent as in the 1932 act. The Revenue Acts of 1926 and 1928 had maintained a maximum surtax rate of 20 per cent on income above $100,000. The years in which low surtaxes on large incomes prevailed were a period of prosperity and contributed generous returns to the Treasury. The yield from income taxes in those years averaged considerably more than double the approximately $1,000,000,000 recently obtained through much higher rates. Experience indicates that the best way to obtain more revenue is to encourage business through the maintenance of reasonable rates of taxation. Excessive rates on very large incomes encourage investments of capital in tax-exempt securities. This means a withdrawal of funds from productive enterprise. Under excessive rates income will not be reinvested in industry and capital will be withdrawn from it. There is no incentive to those of large wealth to take investment risks. The effect on economic conditions is injurious instead of beneficial. Income taxes have proved an unreliable source of revenue in times of depression. In the years following the World War income taxes accounted for considerably more than half of all ordinary receipts. With the falling off of business activity only one-third of ordinary receipts came from this source in the fiscal year 1933 and a smaller percentage in the fiscal year 1934. Excise and other miscellaneous taxes were imposed in the Revenue Acts of 1932 and 1934 to make up for the shrinkage in revenue from income taxes. If a sincere effort is made to balance the budget, involving elimination of unnecessary expenditures as well as an increase in taxation, additional revenue can be obtained from income taxes. A broadening of the base of taxation will produce a substantial amount of revenue. Those with large incomes will furnish the bulk of it. The readjustment of rates need not be such as to be burdensome to those with small incomes. Citizens would take a greater interest in government if more were tax-conscious. Fewer than 4,000,000 persons have filed income tax returns i each year since 1930 as compared with about 1 7,700,000 in 1923. Out of 3,660,105 returns filed â€¢\ for 1933, only 1,731,116 showed taxable income. I In 1923 about 4,270,000 of the returns were taxable. Political considerations have actuated exemptions for as many as possible at the lower end of the scale. Even a very small tax would cause citizens to feel a responsibility for the maintenance of good government. Corporation Income Taxes The proposed graduated tax on corporation incomes, like the higher surtaxes on large individual incomes, is intended as a sop to the radical forces of the country. It is a tax on bigness. The purpose is to discourage the massing of capital in large enterprises by giving corporations with small earnings a relative advantage. It is a direct attempt to penalize or destroy large corporations. It is a device to force a reconstruction of our economic system. It fits into the general program for a redistribution of wealth. The constitutionality of such a tax is doubtful inasmuch as it is proposed to use the taxing power for a purpose other than the raising of | revenue and because its result would be to I confiscate private property without due process 1 of law. The President's own explanation of the proposal makes it clear that the purpose is a social one rather than to assist in balancing the budget. The first estimate was that $100,000,000 additional could be raised annually by the substitution of graduated rates ranging from 10 to ITY2 per cent for the existing flat tax of 13% per cent on corporation earnings. It appeared subsequently that this estimate was much too high. If the purpose were only to get additional revenue, a very slight increase in the flat rate would produce a much larger amount and without a resultant disorganization of corporate structures. The President in his special message conceded that "the community has profited in those cases in which large-scale production has resulted in substantial economies and lower prices." Nevertheless, he offered a program designed to handicap large-scale operations. He would first increase very greatly the tax on earnings of large corporations. Then, he would tax dividends received by corporations to prevent evasion through a reorganization into subsidiaries. Next, he would make the holding company form of organization prohibitive through the power of taxation. His emphasis on the benefits derived by large corporations from the Federal Government and particularly on the interstate character of their business seemed to foreshadow new proposals for regulation, supplementing the extension of the Government's power already accomplished under the Securities Act and the Securities Exchange Act. The entire program looks toward the disintegration of large industrial units and their replacement by smaller enterprises. It points to an effort to break up the great industries which have played so conspicuous a part in the development of the nation. While the aim is to hit wealth, an actual effect would be to affect adversely investments of thousands of small stockholders in large corporations. The ownership of most of the large corporations which would pay the highest rates of tax is widely scattered among citizens of small means. On the other hand many corporations which are primarily family affairs are relatively small although owned by persons of great wealth. The small stockholders of large corporations would suffer a greater reduction in returns in proportion to their investment than would the wealthy owners of stock in small corporations. In this way it would constitute discrimination against the small stockholders. Values of common stocks depend upon earning power of corporations. Taxes on earnings cannot ordinarily be shifted but must be borne by the stockholders. Higher taxes on earnings reduce the value of the equities of common stockholders. Graduated taxes on earnings of corporations which are not based on the amount of investment are grossly inequitable. If the amount of earnings is the only criterion as proposed in the President's plan, the tax on small earnings from a large investment would be much greater than the tax on large earnings from a small investment. A 5 per cent profit on a large investment would be harder hit than a 1000 per cent 12 profit on a small investment. Taxation of this character is utterly indefensible. The financing of large enterprises would become increasingly difficult under such a plan of taxation. Investors would hesitate to place their money either in a new project or to assist in the refinancing of an old company. Facing investors would be a progressive limitation of profits as the volume of business increased. Investors would be inclined to turn to small enterprises with earnings subject to a low rate of tax. The growth of small speculative businesses would be stimulated. The money of small stockholders would be shifted from large, well-managed corporations to fly-by-night projects promising a higher rate of dividends. A premium would be placed on inefficiency and a discount on the efficiency characteristic of successful, large enterprises. The effect of such a tax would be deflationary and a definite drag upon business recovery. The flat tax on corporation earnings has proved to be the most equitable. While a graduated tax on individual incomes has much to commend it, the same principle can not be applied satisfactorily to earnings of corporations. The experience with the excess profits tax during the war showed that administrative difficulties were very great in attempting to base the tax on the rate of return on invested capital. The excess profits tax now in effect under the 1934 Revenue Act, wherein a tax is assessed on the excess over a specified return on the "adjusted declared value" of a corporation, is less difficult to administer and at least is intended to be equitable. The administration, however, has chosen to ignore all considerations except the volume of earnings in its new graduated tax proposal. It has been generally recognized that the tax on corporation earnings has been kept at an oppressively high level. At the end of the World War corporations were paying a flat tax of 10 per cent plus an excess profits tax. The 1921 act repealed the excess profits tax, increasing the flat rate to 12 y2 per cent. The rate was increased to 13y2 per cent with the repeal of the capital stock tax in 1926 but was reduced to 12 per cent in 1928. The present rate of 13% per cent was established in the Revenue Act of 1932. The present excess profits tax is 5 per cent on excess earnings above 12% per cent of the "adjusted declared value." If the rates proposed before the Senate Finance 13 Committee were adopted, it would mean a reduction in tax for corporations with net income not in excess of $40,000. The suggested rates are 10 per cent on net income not in excess of $2,000, 11 per cent on net income between $2,000 and $5,000, 12 per cent between $5,000 and $15,000, and 13 per cent between $15,000 and $40,000. Taxes on all corporations with earnings above $40,000 would be increased, the proposed rates being 14 per cent between $40,000 and $100,000, 15 per cent between $100,000 and $300,000, 16 per cent between $300,000 and $1,000,000, 17 per cent between $1,000,000 and $20,000,000 and 17V2 per cent above $20,000,000. The highest rate would apply to some of the best known of the large corporations. Some idea of the far-reaching effect of the application of the highest rates is given by figures which show that 23 of the largest corporations have 4,809,000 stockholders. Inheritance Taxes The new inheritance tax system proposed by the President is the only part of the pending program which promises eventually to raise a fairly substantial sum of money. It would not figure in the balancing of the ordinary budget if the President's suggestion is adopted that the revenue from this source be segregated for use in a reduction of the public debt. Also, no revenue could be expected in the immediate future. Liquidation of estates requires time and bequests from large estates would not immediately be passed on to the beneficiaries. Just as with the higher taxes on large individual incomes and the graduated tax on corporation earnings, the inheritance taxes are the answer to a socialistic cry for the redistribution of wealth. The tax on inheritances, superimposed on a heavy Federal estate tax and state inheritance taxes, offers, its sponsors believe, an effective method of breaking up large fortunes with a view to a redistribution of wealth. According to the tentative estimates the rates submitted to the Senate Finance Committee would raise eventually about $200,000,000 annually. The estimate is probably over-optimistic. The rates commence at 4 per cent on net inheritances of $300,000 or more and not in excess of $500,000 and are graduated up to 75 per cent on the amount in excess of $10,000,000. Under the President's program the inheritance taxes would be buttressed by high gift taxes. Already, under the Revenue Act of 1934, the 14 Federal estate tax imposes graduated rates upon undivided estates ranging up to 60 per cent above $10,000,000. Credits are allowed for payments made under state inheritance tax laws up to 80 per cent of the portion of the Federal estate tax represented by the lower rates of the 1926 act. Gift taxes, which are intended to prevent evasion of estate taxes, are imposed up to a maximum of 45 per cent above $10,000,000. The 1934 rates on undivided estates were carried to such a point as to be confiscatory, the 1926 maximum having been 20 per cent. A considerable part of the very large estates already is taken by the Government. What is now proposed is that after the balance then remaining is distributed among the heirs the Government shall impose an inheritance tax up to a maximum of 75 per cent above $10,000,000. Death taxes have existed since ancient times. The United States enacted its first estate tax in 1916, having in earlier years experimented for brief periods in war emergencies with legacy taxes. At the time of the enactment of the Federal law in 1916, 43 states had a death duty of some kind, most of them being on inheritances rather than estates. Now only one state, Nevada, and the District of Columbia are without such a law. Most foreign nations have death taxes. Estate and inheritance taxes have come to be accepted as a legitimate method of obtaining a steady source of revenue for both the Federal and state governments. In order to maintain a steady flow of revenue, the rates should not be excessive. If the taxes are raised to such a point as to accomplish the breaking up of large estates, the revenue to be gained in this field ultimately will shrink to the vanishing point. To tax an estate or an inheritance is to tax capital. The principle involved differs from that in the taxation of income. If the tax is carried to such an extreme as to destroy capital, it means that the possibility of future income is destroyed. If the Government, after forcing the liquidation of a part of an estate to satisfy tax assessments, spends the money for unproductive purposes, it means a destruction of capital. Adverse effects of excessive taxes on estates and inheritances have many ramifications. Income usually is in sufficiently liquid form that it can be drawn upon for taxation without destroying values. The contrary is true of estates which in large part consist of securities, real estate and other property. If it is necessary to obtain cash, a part of the estate must be sold. If a large block of securities is placed on the market, the effect may be to depress the price not only of the particular block but of the entire issue. Similarly, a forced sale of real estate affects adversely the market price of adjacent or similar property. Depressed values carry with them a long chain of deflationary evils affecting industry and employment. Complete accomplishment of the program to redistribute wealth would be impossible. Administration of the law would break down by reason of insuperable difficulties. The great fortunes consist for the most part of property which cannot easily be converted into cash. The Government could make no use of this property and necessarily would attempt to force its liquidation. Even such a highly successful industrial plant as that of the Ford Motor Company could not possibly be sold for cash. The final outcome would be a destruction of values and a failure on the part of the Government to collect the full amount of the taxes due. Tax-Exempt Securities The President's approval of the proposal for a constitutional amendment aimed at tax-exempt securities, advocated by several of his predecessors, is a natural accompaniment of his tax recommendations. The enactment of the tax program would give an impetus to investment in tax-exempt securities greater than any that has existed heretofore. Policies of the present administration involving not only the borrowing of huge amounts by the Federal Government but encouragement to states, counties, municipalities and other local governmental bodies to do likewise, have increased the output of tax-exempt securities enormously. Existence of high income and estate taxes has given the tax-exempt securities a market preference which they did not have when lower rates prevailed. Governmental policies respecting industry have tended to encourage investment in tax-exempt securities. Uncertainties respecting future policies have encouraged the banks to use their funds for investment in tax-exempt government obligations. Unfortunately, from the standpoint of any immediate checking of investment in tax-exempt securities, the proposed constitutional amendment would not affect securities already outstanding. It would merely allow the Federal Government to tax income from securities of the states and subordinate bodies issued hereafter and would give the states the reciprocal privilege of taxing the income from the securities of the Federal Government issued hereafter. The last annual report of the Secretary of the Treasury showed that there were then outstanding more than $31,000,000,000 of Federal, state and local securities entirely exempt from the normal income tax and surtaxes of the Federal Government. There were in addition more than $14,000,000,000 of securities of the Federal Government exempt as to the normal tax but not as to surtaxes. The grand total of securities wholly or partially exempt a year ago was thus more than $45,000,000,000. The total now is closer to $50,000,000,000. With such a tremendous volume available, it would appear to be difficult to prevent avoidance of the new proposed taxes by shutting off the issuance of future tax-exempt securities at such time as the necessary number of states ratify a constitutional amendment to be submitted by the Congress. It is a serious question in the minds of many authorities whether the additional revenue gained by the elimination of tax-exempt securities would be sufficient to offset the higher interest charges necessary on securities issued thereafter. This consideration was understood to have caused the present administration to block action on the tax-exempt security constitutional amendment in the last Congress. The states have been hesitant about permitting the Federal Government to tax income from their securities. It would mean higher costs in floating the obligations of states, counties, municipalities and school districts. If and when the Congress submits such an amendment as is proposed, the American Liberty League insists that it shall be submitted to conventions of the people in the states rather than to the legislatures. This is the method which was employed with reference to the Twenty-first Amendment and is the only way in which the people themselves can have the opportunity for expression. Present Division of Wealth Much misinformation as to the existing distribution of wealth in the United States has been broadcast by sponsors of share-the-wealth plans. A common assertion is that one or two per cent of the population owns 60 per cent of the wealth. There is absolutely nothing to support statements of this character. Such statistical data as are available give an entirely different impression of the actual situation. 17 Income tax returns and other official data are the basis of the following statements: (a) Individuals reporting incomes of $5,000 and over for 1933, the latest returns available, constituted, with their dependents, about 3 per cent of the population. Their aggregate income was only about 10 per cent of the estimated total national income. (b) Even in 1928 and 1929 those with incomes of $5,000 and over reported only about 20 per cent of the entire national income. This was an abnormally high portion, due to large speculative profits of those years. The average for all years since 1916 is about 14 per cent. (c) The decrease in incomes of those receiving $5,000 and over from 1928 to 1933 was 75 per cent, while the decrease in the income classes below $5,000 was only 42 per cent. (d) Income of employee classes has ranged from 75 to 85 per cent of the national income in recent years, while income from capital has amounted to from 15 to 25 per cent. Ownership of wealth is widely diffused. Such fragmentary information as is available makes it appear that more than two-thirds of the national wealth is controlled by the great mass of the people. The aggregate number of stockholders, including duplications, in 151 leading corporations at the beginning of 1934 was about 9,400,000. Insurance policies in effect, including ordinary life, industrial and group policies, number about 115,000,000. The Federal Deposit Insurance Corporation reports that it has insured more than 56,000,000 individual bank accounts. More than 10,500,000 families own urban homes, while about 3,500,000 own farms. About three out of four families have automobiles. More than 60 per cent of them have telephones, two-thirds of them use elecricity and about half of them have radios. Even in the depression the standard of living in the United States has been above that of prosperous times in any other country. Tax Program Unwise It has been shown that the presentation of the administration tax program at this time was due to political considerations, that its objectives are socialistic rather than to raise revenue, that the tax rates suggested are excessive and based upon unsound principles and that enactment of the program would retard rather than aid recovery. Sound government will be promoted by rejection of the legislation. If the 18 Congress and the administration are ready to join in an honest effort to balance the budget through a drastic reduction in expenditures and such increase in taxation of a sound and equitable character as is necessary, the country will applaud. Approval of the pending plan would be unwise and dangerous. It would mark a step toward a change in our form of government and would be unquestionably a surrender to the forces of radicalism preaching unsound doctrines impossible of accomplishment. f I