The New York herald., 1921-03-30
WEDNESDAY. MARCH so. 1921.
When Capital Is Income.

which will accrue to the Government
through the Supreme Court decision
on the constitutionality of taxing
profits on capital assets as income.
he settlement, even though IL was
favorable TO the Treasury. will relieve
taxpayers Of their doubts as to what
is income and what is capital.
The Supreme Court necessarily had
10 adopt an arbitrary ground in reach
ing its conclusion, since the law pro-
vides for tax on incomes but not on
capital. Strictly speaking. Ill profits
In trading arise simply through an
increase in the value of capital assets.
The only true income merchant, a
trader or banker has in the pur-
chase aud sale of goods or securities
Is the commissions he derives from
such transaction Yer the major part
/ of the earnings of traders of all kinds
are derived from the realization in
cash of the margin between the pur-
chasing price of capital assets dealt
In, whether securities or commodi-
ties, and the enhanced value of those
capital assets represented by the SELL
ing price.
Thus all profits NOT the result of
personal service or Of actual produc-
ton are, in fact. only additions to
capital, and In pure theory a tax on
such profits is not a tax on income.
but tax on capital, and for this the
income tax law does not provide.
However. the Supreme Court has
again shown that it has keen appre-
citation of realities by interpreting
ihe term income to extend also to the
enhanced value of capital assets. If
he decision had gone the other way
it would have been possible for many
individual and corporate taxpayers to
form trading companies holding moth
ing but capital assets. the increase in
the value of which, although col
lected and spent as income, would not
be taxable.
The point is one over which there
has been much warm discussion, with
opponents on each side of the ques-
tion equally sure Of their ground.
One side thought taxation of capital
assets, when realized as profits, could
not be enforced without additional
legislation. The other side was not
concerned with this point, but argued
that unless profits in the shape OF in
creased capital values could be taxed
Ike income tax law might as well be
wiped off the books. Nothing so radi-
cal rs that, they believed, would be
supported by the Supreme Court.
Iu accordance with n concession by
the Government, the court also de-
cided that March 1. 1918, would no
longer be the arbitrary date from
which taxable values must be derived
on transactions beginning before that
date. This removes q bad defect In
the income tax law. In many cases
It actually compelled the payment OF
taxes on losses where the sale price
Of assets was higher than the value
on March 1. 1913. but lower than the
actual purchase price on prior pur-
chase date.
Little by little the Supreme Court
is laying down precedents which
eventually will make the income tax
aw as workable, IL not satisfactory,
as any tax law can be. The ruling
last year exempting stock dividends
from the income tax was the first con-
structive step In this direction. II
deprived the Treasury of about $780,
100000 year in revenues. The pres
ent decision confirms the Treasury in
about the same amount. Accounts are
thus about square SO far as revenue
goes, while the way has been made
easier and smoother for the puzzled
taxpayer who has been hard put "a
decide between his pocketbook and
his patriotism when II came 10 decid
ing when profit was capital and wher
II was income. Now II can be either
or both. but II win be taxable JUS