The sun. [volume] (New York [N.Y.]) 1916-1920, 1918-09-03

The disposition of those engaged in
the direction of corporate enterprises
Is unquestionably a cheerful and pa
triotic willingness to bear the burden
or unprecedented taxation.
Their chief solicitude in respect TO
the new revenue act Is that 1t may
be as just and impartial in essentials
and as simple in operation as 1t is
possible for our collective wisdom to
devise.
Experience with the intricacies Of
the act of October 3, 1917, has brought
certain measure OF enlightenment as
to first principles Of taxation. For ex-
ample, we shall not again place a dis
criminatory tax upon earned income
thus exposing ourselves to Churchill's
sarcasm:
NO statesman yet has thought 1t worth his
pains
To tax our labors or excise our brains.
But there are other first principles
which have not yet so forcibly been
called to our attention.
In order to approximate the ideal
or Justice a tax law should not dis
eliminate against or bear with in
creased severity upon any corporate
enterprise merely by reason of the
soundness and conservatism of its pol
icies or the form of it's organization.
II also seems obvious. when so liberal
portion Of corporate incomes must
be perforce appropriated to govern
mental needs, that actual, not hypo-
thetical, income should be the basis
Of the tax.
AS practical applications Of these
principles 1 venture to call your no.
tice to three suggestions.
I. Taxation Of Undistributed Earnings.
The tentative agreement to tax I'M
distributed income at a higher rate
than distributed income brings up one
question which seems worthy of seri-
GUS consideration. Presumably the
purpose, certainly the tendency, of this
feature Of the law is to cause freer
distribution OF earnings by way of
dividends. In this lies an element Of
danger. No prudently managed COM
pany should distribute all its earnings.
The Increased cost Of doing the same
business as represented by increased
inventories and labor costs, not to
mention the expansion of the business
itself. has added and is constantly add
ing hundreds Of thousands to capt.
tai requirements. Such additional re-
quirements can practically be met
only by reservations from income.
Offerings of stock, bonds or notes are
undesirable, in most cases impossible.
at a time when Liberty bonds should
have undisputed right Of way with the
investing public.
To distribute as dividends more
than sound business policy sanctions
Is not only inimical to the future OF
any business but is harmful to the
stockholders themselves because tend
ing to produce unwise speculation and
to undermine the stability Of their
stock. 1t would be better to abandon
altogether the i'll considered attempt
to convert the tax law into a pump
to force the flow of excessive divi-
dends. At least each company should
be permitted to make a reasonable
addition to surplus from income dim
tied. for example. so as not to exceed
c5 per cent. of the net income or 10
per cent. Of the capitaD without be-
ing taxed thereon at a higher rate
than upon income distributed in the
form of dividends.
without some such provision the in
evitable tendency OF placing so large
an additional tax on undistributed in
come will be to put premium on i'm
provident and spendthrift corporate
management and introduce a new ele-
ment OF insecurity into the business
fabric.
II. Taxation OF Parent and Subsidiary
Corporations.
A step in the right direction was
taken in the act of October 3. 1917, by
exempting from excess profits taxa
ton income derived by company
from the stock OF other corporations.
1t is submitted that the same rule
should apply to income taxes as we'll,
and that in all cases where the whole
or virtually the whole te. g., at least
90 per cent? OF the stock of a sub
sidiary company is owned by parent
corporation no income or excess
profits tax should be levied upon the
earnings paid by such subsidiary to
the parent company, whether by way
Of dividends or otherwise but that