New-York tribune. [volume] (New York [N.Y.]) 1866-1924, 1917-07-26
Wednesday, July 25, 1917

Business men generally concede
the necessity of heavy taxation, and
there is therefore little disposition
to criticise the governments tax pro-
gramme, the Senate's scheme espe-
cially being regarded as very fair,
save in one particular. That Is the
clause under which it is proposed to
levy an impost of 10 per cent on
profits, 20 per cent being exempted
undistributed sixty days after the
close Of the fiscal or calendar year.
The object of this tax presumably
is to compel distribution of profits
in the form Of dividends, so that
revenues from the personal income
tax may be enlarged. There are
forceful objections TO such a tax,
however. Chief of these is that 1t
would tend to induce an unsound
financial practice in that corpora
tons would be tempted to greatly
reduce what has been aptly de-
scribed as their "shock absorbers"
that is, they would be under pres
sure to abandon conservation OF
profits against contingencies which
may have to be met in future full
of uncertainties. One of the main
elements making for strength in the
industrial structure of the country
is to be found in the fact that by
adding to the contents of their cash
tills and increasing their other re-
sources, instead of adopting over
liberal policies in the matter of divi-
dends, many companies have put
themselves in an impregnable fnan-
cial position. Ample vindication of
that course is to be found in a sit
uation which exists right now. The
f,otation of the Liberty Loan and
the certainty of much heavier gov
ernmental demands for funds have
brought about a condition in the
Investment market under which cor
porations frd it possible to obtain
money only in limited quantities
and at very high rates. Were it
not for the fact that numerous COM
panies have so conserved their re-
sources that they can view the sit
uation with equanimity, serious en-
barassment for many of them might
have ensued. Any tax which would
tend to destroy such policy should
be condemned, even if it were not
defective in other ways.
But this particular measure is
unsound in several other respects.
The American Institute of Account
ants points out its defects clearly
in a special report on the subject.
In the first place, it says, in many
cases all profits earned will not be
eadily available for distribution.
because the amount of working cap
ital required in ordinary industry is
expanding, while profits often take
the form largely of inventories and
accounts receivable, which obviously
cannot be paid out. Especially is
this true of the war industries
which while making large profits
are nevertheless frequently short of
cash. Moreover, it is extremely
difficult to determine profits under
existing conditions. On this point
the Institute says:
II must always be remembered
! that statements of profits are at
best estimates. In particular many
companies will be required 70 pay
heavy excess profit taxes, the
amount of which will necessarily be
uncertain until their returns have
been approved by the Internal Reeve
nue. Department 1t would be most
unsound financial policy to dis
tribute large percentage Of the
profits shown by such companies
with such large uncertain liability
outstanding.
Corporations which were fnan-
cially embarrassed prior 10 the pres
ent period Of increased profits are
looking to those profits to restore
completely their solvency and could
not justifiably distribute any large
part thereof in dividends.
Other corporations have made
financial plans calling for the appli-