The Washington herald., 1920-10-16


pared BY Otto H. KohH for the Wash
iHg'os HerGId.
Article III.
Some of the results OF exorbitant
and unparalleled direct taxation on
the one hand and the existence of a
huge volume of tax-free securities
on the other have been these:
(A) The possessors OF income Of
larger size, generally speaking,
avoid investing in taxable securi-
ties, thus greatly diminishing the
quantity of funds available for pri-
vate enterprise. To the extent that
they still buy such securities, they
demand far higher interest rates
than formerly, in order to recoup
portion at least of the impairment
of their income.
That enhances the cost of capital
and makes for higher prices of all
articles.
Obj In consequence largely of this
attitude of self-defense on the part
Of private capital, the functioning
of the American investment market
has become greatly impaired. For
a stretch of many months it was
characterized by unparalleled stag
nation.
surtaxes Cause Shrinkage.
The shrinkage in the value of ex-
isting corporate bonds, which,
though in part due to causes of a
general character. is to the largest
extent attributable to excessive sur
taxes, amounting to billions of dol
lars
There are a number of good rail-
road and industrial bonds which sell
on basis to yield from IN per cent
to Sh per cent annually. There, are
foreign government bonds of un-
doubted soundness which sell on a
basis to yield per cent and more.
The seriousness of the situation
of our investment market and its
grave portent have not received as
yet the attention which they de-
serve. especially in view Of the vast
financia requirements of the rail-
/ roads, which can be met only
through the investment market The
effect of the disturbance of the free
flow of capital to any serious degree
for any length Of time is all-per-
yading. Every Industrial activity,
including that of farming. is affect
ed by it.
We cannot have a return to nor
NAL conditions OF trade, prices, etc.
until our investment market will
have come within measurable dis
tance. at least, of normal conditions.
And that is impossible as long as
our present surtaxes remain in
force. even If the other elements
which have operated to bring about
the present abnormal situation were
removed.
New Aspirations Menaced.
CC) Our newborn aspiration to
be the great financial mart of the
world is menaced with strangula-
tion in its cradle because a broad.
active and receptive investment
market is an indispensable prereq-
uisite for the establishment of
potent financial center.
II we wish the world to continue
to buy from us on a large scale, If
we wish to do what duty and self
interest demand in aiding Europe
to normaEZe and stabilize itself,
and unless we are prepared to forge
. those opportunities of lasting value
to the country which the present
situation offers, We must be will
ing to advance considerable funds
to our foreign customers. as Eng
land. France and Germany have al
ways done to theirs in pre-war
times. and as, indeed, England Is do
ing now to the extent Of her ability.
The banks and exporters cannot
possibly carry the whole load of
financing such advances. We may
not look to the government to in
tervene. Private investment capt.
tai cannot be induced to come forth
adequately under the circumstances
above explained.
The deadlock is bound to persist
until our policy and methods of tax
alton will have been revised and
modified.
Loan Conditions Criticised.
A very regrettable impression is
created abroad by the fact that at
time when we alone are. capable of
supplying the nations with urgent
ly needed funds the American public
fails to respond adequately, and
when our market does accord loans
to foreign countries very onerous
conditions are exacted. Thus, for
instance, the French losn recently
issued here Is reported to have
the French government in excess of
9 per cent. The fault is unjustly
attributed to an ungenerous desire
TO take greedy advantage of Eu-
ropes necessities, when, as a mat
ter OF fact, the cause-apart from
the natural results of prevailing
conditions-is primarily to be found
in our extreme surtaxes.
Our credit structure must not be
subjected tc further strain. The
only large reservoir which can still
be tapped is the mass OF private in
vestment capital, and the way to
that reservoir is barred. in large
part. by the faults of the income
tax.
a. CD Apart from the scale of taxa
tion, there are various provisions in
our income tax law which handicap
the American business man as
against his European competitor.
A common characteristic of these
provisions is that while nationally
harmful in their effect. they are lit |
tie productive of revenue.
Thus, for instance: A free inflow |
and outflow or foreign funds is es-
.sential to the functioning of fnan- |
cfal and commercial world center. ]
In recognition of this fact England I
not only does mot tax bank deposits |