Evening star., 1920-04-04
TAX FREE BONDS TEND TO
KILL INVESTMENT MARKET
Otto H. Kahn Discusses Taxation From
Various Points of View-Its Effects
on Investments and Trade.

The Necessary Result.
Attention is called to the evils of
these tax-free issues. the natural re-
suits of exorhitant and of unparal-
leled direct taxation on one hand and
the existence of this great volume of
tax-free. securities on the other.
| "Possessors of large incomes have
| gone on a strike as far as investing
in taxable securities is concerned.
thus greatly diminishing the guam
! tity of funds available for private en-
| terprise. They still buy securities.
but they demand higher interest rates
! to recoup portion at least of the
impairment of their income.
! THAT enhances the cost of capital
and makes for the higher cost of all
articles.
I "In consequence of this attitude of
! self-defense on the part of private
capital. the American investment
! market. to a great extent. has ceased
] to function for the time being. Stag
! nation has characterized it for many
months"
Book Values Not Actual.
| There is no question but Mr.. Kahn
has here stated potent fact. 1t is
generally recognized in financial cir
/ cles that a recognition of the serious
! depression in bonds and bringing
. of book values of life insurance. banks
! and savings institutions into har-
mony with actual values would be
| serious proposition and destroy
millions of apparent values.
| This fact has been. in measure,
| recognized by the controller of the
currency in permitting bankers to
maintain a book value on bond in
| vestments not in keepig with actual
| selling prices.
! Furthermore. the situation in the
! bond market is a hindrance to rail-
| road development.
NJ IA nj
a return to normal conditions of
! trade. prices. etc. until our invest
.nent market will come within meas
l rable distance. at least of normal
T! conditions.
Our newborn aspiration to be the
great financial mart of the world
has been strangled in it's cradle. be-
cause a broad. active and receptive
investment market is an indispensa-
BILE perquisite for the establishment
of potent financial center.
ut Is true, England has a heavy
income tax. but such tax-exempt
bonds are free from the normal tax
only and not from surtaXes. nor IS
the British income tax as all-em-
bracing as ours. For instance. profits
! his regular trade are not subject to
! income tax at all in England.
! IF we wish the world to continue
! to buy from us on a large scale. II we
wish to do what duty and self-in-
terest demand in aiding Europe to
normalize itself. and unless we are
prepared to forego those opportuni-
ties of lasting value to the country.
which the present situation offers
We must be willing to advance con-
and Germany have always done in
| Dre-war times. and as England Is do
ing now to the extent of her ability.
Load Is Too Heavy.
Banks and exporters cannot carry
the load-the whole load-of financing
such advances. We may not look to
the government to intervene. Pri-
vate investment capital cannot be in
duced to come forth under the cir
cumstances set forth. The deadlock
is round to exist until our policy and
methods of taxation have been re-
vised
Mr.. Kahn expresses the opinion that
those who believe the ratification Of
the peace treaty will cure interna-
tional exchanges by setting in mo-
tion free flow of. American credits
to European nations are "'harboring
delusion," adding that "the only
large reservoir which can still pc
tapped is the mass of private invest
ment capital"
In a general way it is stated:
That excessive taxation hampers
accumulation of surplus needed for
the expansion OI in6
ness. If business men cannot accu-
muiate adequate working capital the
result will be reaction in trade and
restriction of production or demands
for credit in such volume as to bring
about a dangerous strain. Increased
production is one of the crying needs
of the hour. But increased production
means increased capital. 1t means
that the business man must have at
the end of the year an adequate sur
plus in order to perfect his plant to
enlarge operations"
How 1t Works.
Direct attention is not called in Mr..
| which product is taxed many times as
contributing to the high cost of liv-
ing. The manufacturer buys his raw
material. paying the producers tax:
places another tax on the finished
product that he hands along to the
wholesaler. who in turn passes an
other to the retailer. who adds them
on to his retail price, making for the
extreme high prices current in the
markets of America today-so that
one article often carries taxes OIL
I times repeated.
| Attention is called. however, to the
! fact that the lawmakers have not
used the instrument of taxation to
encourage thrift. In the case of the
well-to-do the very hugeness Of tax
dtlOn MAKES lOT iICTCdSCu
! in SO far as possible, for their rev.
enues have been greatly cut of.
1t is also a fact that heavy taxation
encourages needless expenses in the
conduct of the government.
Tax lodging, through failure to take
profits. through paying out large sur
pluses in bonuses and added salaries.
is patent to the tax officials. who,
after practically deciding to make
examples of some "far-from- a dollar
a-year" men, have, probably from po-
! litical reasons. passed on to quiescence
in these matters.
The Inheritance Tax.
In concluding his pamphlet Mr..
| Kahn argues for a continuation of a
progressive inheritance tax, but he is
| opposed to the "easy assumption in
, certain quarters that inheritance tax
alton on large fortunes ought TO be
made so heavy as to abolish the be
! queathing of wealth to descendants
! and to start everybody on the race
! of life more or less on the basis OF
, financial equality.
Such action would result in the not
uncommon habit of disposing of es-
| tateS or reducing them greatly DUR
/ ing the life of the owner.
1t is "a commentary on the idea that
/ the rich are becoming richer and the
poor poorer to cite the statement
vouched for by the Bankers Trust
| Company of New York, TO the eEect
that the individual income of the ha-
tion for the fiscal year ended June
! 80. 1919. totaled $53.000.0OO.000 OIL
! which $4,000, 100000 was credited to
/ families receiving incomes OF $o,ooo
and less.
| 1t is believed that Congress as it
exists today recognizes the need Tor
revision of taxation laws. but 1t Is
not believed that any action will be
| taken during the present session.. nor