Evening star., 1923-01-29

The principle of taxing excess
profits of Corporations is one Of the
fundamentals Of the present federal
tax system. Secretary of the Treas
ury Mellon tells Congress that when
a corporation permits its excess
profits to accumulate. undistributed
/ amongst it's stock olders, and then, in
stead of declaring a cash dividend,
1t simply declares a stock dividend
and gives each shareholder of the old
stock additional shares, that dividend
is not taxable, for it does not increase
| the value of the stockholders interest
In the company one dollar He backs
that opinion by a ruling of the
Supreme Court in Eisner VS.. Macomber
| (252 L. S., 1S9). The essence Of
that decision Is that a stock dividend
| is merely bookkeeping that does not
affect the aggregate assets of the
| corporation or it's existing liabilities"
| X X x
| What. then, can be the object of
| increasing the outstanding stock-of
dividing the ownership of the corpo-
ration's assets into more ''sliares?''
Is II not that the percentage of profits
in the future. per share. will not be
| SO high. and that thereby the rate Of
! taxation on those profits will not be
, SO great? The rate is not a fiat rate
for all profits, but increases in
| geometrical progression as the divi-
dends (cash) increase per share.
| Suppose a stockholder holds 100
shares in a corporation, at face value
of $4,000. That corporation may ac-
icumuiate a surplus sufficiently large
to amount TO $50 share, so that the
holdings of that stockhoIder will
be worth $4,000. The corporation
sees a field for extending it's business
with additional capital. and. by vote
iof it's directors, declares a dividend
of stock, and so instead of handing
over the $4,000 proportionate share
| or the surplus, in cash, to that holder
of 100 shares, gives him fifty more
shares. If it gave him $4,000 cash
instead of the fifty shares, he would
be no better off, for the shares in that
profitable business will probably pay
dividends in the future, making them
a good nvestment-they are there
fore equivalent to cash to the in
weston
The advantage to the corporation
of stock dividend is that il compels
all the stockholders TO leave their
investment, to the amount of the
dividend, in the treasury, for the ex-
tension of the business. Yes, it is
merely bookkeeping, for the amount
of the dividend actually belonged tc
the original stock, before the dividend
! was declared. Declaring the dividend
had no effect whatever in increasing
1 the profits"
| However. the discussion of this mat
! ter merely brings TO light that the
! laws clumsy wording makes it miss
/ the essential object. which is to tax
| profits not as expressed in the book =
| keeping juggling of dividends, but
| as actually existing. The fact is that
| dividends never come until long after
| profits arrive. and the essential object
| Of the law is to tax profits, which
! means that at the moment-that they
| are brought into existence they should
become liable to taxation-not merely
| when they are divided up amongst
| their several owners, the sharehold-
| ers.
! X Z *
/ The reason profits are made TO bear
| their burden of taxation is that they
| are obviously able to do so. The dis
tribution of taxation is underta ken
SO as to put the weight where it will
| work the ;leas, hardship The law
| makers had that in mind in trying to
reach corporations excess profits,
but made the blunder of trying to
reach those profits at the moment of
their distribution among the share
holders-fa bookkeeping transaction
| cnlv"-iistead of at the more legiti-
mate period-the moment of their
! coming into existence.
| The public utilities commissioners
| say the. joke is on Congress in re-
gard to tie street car fares in Wash
| ington. They would be delighted to
| reduce the street car fares to cents,
/ if Congress had not stipulated that
| the fares should be such as would
! enable the companies to pay fair
! dividend on their stock. The public
| utilities commissioners would well
leone advice, if any one will tell how
| 10 pay present salaries and dividend
| and yet reduce fares 80 or 35 per cent
! No suggestions for stock dividends
| will be considered. No references to
| the claim that Washington has the
| highest fares of any city in the Union
I