Evening star. [volume] (Washington, D.C.) 1854-1972, 1936-03-04
BLOW TO RECOVERY
SEEN IN TAX PLAN
Reaction in Many Paths
Held Possible on New
Earnings Levy.
BY DAVID LAWRENCE.

gave the impression no radlcal or
revolutionary proposals would subse-
quently come from the White House
to Congress. :
But the latest recommendation by
the President in special message to
Congress is more revolutionary than
anything MIR. Roosevelt has proposed
to Congress In the whole three years
of his administration.
If enacted by Congress, the pro-
posed tax on "undistributed earnings"
will, in view of the many opponents
of the measure, impair the recovery
machine and cause widespread pull
ing in of work already launched, to
say nothing of objections that will
come from labor groups on the ground
the measure may cause throwing
out of employment at the slightest
sign of adverse times in. the future.
Politically, the proposal is fraught
with such danger that this corre-
spondent doubts that the bill will ever
be passed unless it is with a series of
exemptions and amendments as will
hardly attain the revenue claimed for
st by its sponsors.
How 1t May Work.
Briefly, the new tax plan means a
serious dilemma for corporation
which has accumulated surplus and
which may now be feeling secure
enough to undertake little expansion
or remodeling of plant, believing it
can replace out of future earnings
what it now takes out of the past sur
pluses. But faced with threat that
all future earnings will be taxed I'M
less distributed, the corporation may
feel that it is unwise to spend any of
the past surplus and that it is better
to keep all available surplus hitherto
accumulated for the rainy days that
all businesses are apprehensive about.
The records show that had there
been no SURPRISES accumulated by
business corporations America would
have suffered in the last five years
much more acutely and there would
have been many times the unemploy-
ment than actually occurred. Bust
ness and industry are estimated to have
dipped into their SURPRISES to the ex-
tent of about twice the total amount
spent by the Federal Government for
relief.
Now. the proposed law will not
touch past SURPRISES. This means that
corporations which had made plans
for expansion will retain their sur
pulses in the treasury, circum-
stance that will doubtless enhance the
value of their outstanding securities,
but will not tend to encourage the
use of these accumulations of capital
for construction or expansion of bust
ness at time when the Nation had
begun to feel the stimulating effects
OF a recovery movement.
The President estimated that more
than $1,000, 100000 could be raised by
the tax on SURPRISES, which means
he has in mind rate of about %
to 80 per cent on total earnings.
Possible Effect on Bonds.
In answer to the arguments about
future expansion, defenders of the
proposed tax say companies can con-
tinue to borrow in the capital mar
kets. But how safe will investors re-
gard future bond issues if, apart from
sinking fund requirements, the COM
pany itself cannot lay enough aside
to take care of the hazards of bust
ness.
What 1t all amounts to is a. regula-
ton of the management Of American
business by means of tax statute.
The administration makes no effort to
conceal that purpose. President Roose-
welt, in outlining the whole plan to
the press, undertook to show that the
majority stockholders might have the
power. under the present system, to
withhold profits from distribution,
whereas minority might differ and
wish the distribution to be made.
The damaging nature of the pro-
posed plan is that it is to be rigid.
It puts a fixed tax rate on the undis-
tributed surpluSes. Heretofore the
Federal tax laws have contained
provision which taxes SURPRISES "un-
reasonably" accumulated, or those
which can be proved to have been
withheld just to evade taxes. The
burden of proof is on the taxpayer,
who appears before the commissioner
of internal revenue to defend the act
of withholding the surplus from dis
tribution. What it has resulted in,
however, is that not single case has
reached the Supreme Court of the
United States to determine whether
even such a statute is constitutional |
Safety Margin Vague.
There has been no clear-cut issue
as between the wisdom of the internal
revenue commissioner and the tax
payer corporation as to what consti-
tutes a safe surplus and an unrea-
sonable one. Can the Federal Gov
ernment's judgment be substituted for
that Of the owners of corporation
as to what it ought to do with its
earnings? There is no doubt of the
power OF the Congress to levy taxes
that are oppressive, but it is a doubt
full question whether Congress by the
word "undistributed" can, in effect,
control the use of income in such a
way as to endanger the property of
the taxpayer.
Just where the businesses of the
country are going to get the extra
tax money, in the face of new drains
such as is involved in the pay roll
tax and other burdens, is not ex-
planned by anybody in the admins
tration. They certainly will not be
able to afford to pay the undistributed
surplus tax, but will prefer to disburse
their earnings.
Tax Held Untimely.
The President has listened to some
Of the brain trust" group who have
been getting up new tax reforms"
Mr.. Roosevelt is convinced it is a
sound tax plan. 1t would be, perhaps,
when business had accumulated,
through years Of prosperity, some
substantial surpluses and when Dor
rowing in the capital markets was not
hampered by all sorts of Government
restrictions. But coming at time