Evening star., 1925-10-25
TAX-CUT TALK BIC
FACTOR IN MARKET
Stocks Will Net Larger Re-
turns to Investors if Plans
Are Finally Carried Out.
BY HARDEN COLFAX.

Wall Street is gambling on a heavy
surtaX reduction. Such is the con-
struction placed here on the violent
upsWing in stocks time1 but a few
days In advance of Secre.-ry Melons
various proposals before the ways and
means committee, at present consid-
erinE methods of bringing about
another cut in Federal taxes.
Every officially sponsored move 10
reduce the surtax brings with it an
upturn in stock values merely on the
hope or belief that the proposal Will
be enacted into law. That has been
the history of tax reduction and Wall
street values for the past four years.
ana the present move TO cut taxes Is
simply running true to form. The
moment 1t became generally known
among big traders that the Treasury
would urge a substa ntial surtax cut
II was held very probable that stocks
would respond with a. stiff advance.
Reason for Deduction
The reason for the connection be-
tween surtax reduction and stock
values is perfectly plain to the initi-
ated. 1t can he best illustrated by i
concrete example. Take 4 stock. for
instance, selling today at loo nd pay-
ing per cent dividends. The owner
of sl,000,000 worth of this stock, par
value, will receive In dividends this
year $4,000. On that he will pay
surtaxes under the present Law
aomunting to $3.50. His normal tax
VIII run 20 nearly S3.100, making his
Total tax payment approximately
1850.
Hts investment, taken alone. is
yielding him net revenue amounting
10 s5i,440. or little better than
per cent. On this net return of little
more than per cent the stock is
selling at 100.
What Reduction Means.
Now comes 2 proposal TO reduce the
surtax and at the same time 10 cut
the normal tax a bit, too. If adopted
the 81 600, 900 in stock will WELD. net.
next year, say. s56 900, or better than
o12 per cent. In that event. the earn
ing capacity of the stock would have
increased about one half of per cent.
Ihat does not appear to be q great
amount, but 1t does represent an in
crease III net earning value of nearly
10 per cent over the present earning
capacity Of the stock.
W hat IS the logical result? If the
stock can earn 10 per cent net more
than it is already earning isn't ii
worth more as an investment? Wall
street answers yeS-haS answered YES
within the past 10 days-and marks
up the value. But because there is
an element OF uncertainty that the
treasury proposals will be adopted
without modification, Wall Street
doesn't mark up the stock the fun
~ per cent.
Discounted Only in Part
In other words. there is still a
chance that the proposed reduction will
not be so high, wide and handsome
as desired, so the Street adva noes the
stock less than 10 per cent. say :,
per cent or per cent.
The stock that was selling at 100
before the proposal was made thus
advances in trading value 10 Jos To
lo6 merely on the prospect that il
VIII yield more money net to the in
Vestor next Year than this year.
The prospect IS for q fiuctuatiue
market on the stock exchange until
1t becomes entirely clear that Con
gress will adopt this, that or the other
plan Of tax reduction
tCopyright. 1920