New-York tribune., 1921-05-15

profits over q period which
should be at least three years in most
industries and not less than ten years
in some industries. The personal eie-
ment should be eliminated to the ex-
tent that the normal return is figured
as percentage Of capital, and yet
there are many trades or industries in
which the personal element is the chief
element, and it pervades all business to
some degree. At bottom | can see no
reason why lawyer or engineer whose
earnings are "supernormal' should be
exempt from the excess profits tax.
While the separate division of business
taxation exists in my mind as one of
the indubitable truths Of fiscal expert
ence and science, the distinction
usually drawn between business" on
the one hand and investment or labor
on the other impresses me as thor
oughly fictitious from the economic
standpoint. The business tax is or
should be a tax on every man in his
productive capacity.
Scope Of the Tas
That brings us to the mysteries in
volved in the relation between the ex-
levied upon personal and investment
earnings. We contine the excess profits
tax to profits, eliminating wages and
salaries on the one hand and interest
on the other. But why?
Consider the investor. He has been
lost sight OF in this connection, largely
because as owner OF common stock he
was taxed through the corporation and
as owner of bonds or preferred stock
he suffered rather than gained by the
war and naes shrinkage in capital values
due to rising interest rates But under
permanent excess profits tax, in times
of peace, he might be the principal
beneficiary OF state activities The
maintenance of the gold standard, reso-
Lutte insistence upon credit restriction
and defation, these and similar public
policies may in the future greatly in
crease the income of investors as such.
The large investor is particularly
worth considering because he can prac-
tically put himself in business" or
take himself out OF business" at will
by incorporating his investments. He
can under the present tax law relieve
himself OF the higher surtaxes on re-
invested or saved income and subject
himself TO the excess profits tax; OF,
being incorporated, he can bring him
self back to the status of mere inves-
tor by dissolving the corporation. This
gives rise to most significant paradox.
Under the income tax, the man who is
wealthy enough to draw. large income
from gilt-edged investments with a
minimum of risk and effort is threat
ened with discriminatory difercntials
against unearned income and is act
ually subjected to progressive rates ex-
ceeding at the maximum 20 per cent.
But under the excess profits tax, be-
hind the screen Of the corporate fiction,
his very excess of wealth and security
from risk made him the object of
solicitude and exemption. This is true
whether he is the sole stockholder or
associated with others. The cireum-
stances which under cne tax invite at
tack, under the other justify ezemp-
tion. Who shall solve this riddle?
.4nstCer to Riddle
Whatever may be the ultimate an
swer to this riddle, feel certain that
the truth lies between the two ex-
tremes. The excess profits tax has
grievously sinned in everlasting profits
derived from the more hazardous and
difficult industrial undertakings Rel
atively at least it has dealt far too
tenderly with assured income derived
from highly capitalized investments,
particularly intangible assets. The in
come tax also has unduly penalized
risk-taking investments and in the face
Of the vast outstanding volume of tax
free securities has partially defeated
its own ends by excessive rates.
And I feel reasonably certain of the
RI afio,, ~, urhint, a% ttju xxya
should turn our steps. The income tax
as tax upon business-on it's rela-
tion to men as savers, workers and en-
terprisers-must be perfected. It's re-
pressive effects upon investment and
enterprise must be corrected. Men
will not save and invest except in tax
free securities if the income so in
vested and the fruits of the invest
r1ent are to be taxed at rates exceed
ing 20 per cent. The income surtaxes
must be reduced at least on that in
come which is saved and reinvested in
Taxable property or business" 1t is
in the treatment of saved and rein
vested income that the present income
tax deals most differently with corpo-
rstions and other taxpayers. In re-
forming the taxation of saved and re-
invested income occasion should be
taken to place the corporation and
other taxpayers on substantially
equal basis.
These reforms would greatly reduce
the repressive effect Of our direct
taxes on business. This was the pri-
mary object of the excess profits tax
as peace measure permanent tax.
But it has failed in achieving that OBJ
lect. 1t Should, therefore, be retired.
The reforms of the income tax re-
ferred to above involve some addition
al tax on corporations to compensate
for the surtaxes imposed upon the
reinvested or 7undistributed profits
of individuals and partnerships.
This additional &sx, as has al
ready been stated, will probably
supply even more revenue than ths
excess profits tax would yield during
the next few years. There is every
reason. therefore, to try out necessary
and inevitable changes in the income
tax, as business tax, before final
verdict is reached concerning the fu-
ture desirability and availability OF
the excess profits tax IL is not at all
impossible that we shall find the an
swer to our riddle in lower diferential
rates upon income which is used. not
for enjoyment and consumption, but
for productive purposes, particularly
In the more hazardous, lines.
Meanwhile, the burden Of proof is
fairly upon the friends Of the excess
profits tax. Until we can satisfac-
sorily define it's try scope and place