Evening star., 1936-04-02
SURPRISES GUARD
AGAINST COLLAPSE
Proposed Tax Seen Likely
to Be Major Cause if
Depression Returns.
Ry DAVID LAWRENCE.

panicS are inevitable In cycles OF nve
to seven years or more, because they
represent the sum total of human
error in attempting to measure the
future, there are many factors now |
in operation, any one OF which WILL
doubtless be singled out some day as
the conspicuous cause Of the next |
depression.
Just which one will be selected |
for emphasis is, Of course, impossible
to conjecture, but it seems possible |
and, indeed, distinctly probable, that
the undivided surplus tax, If enacted
into law as a basis Of American tax
policy, will be major cause OF the
next economic collapse experienced by
the United States.
Testimony is piling up that tax
on prudence or penalty on fore
sight is bound to bring in its wake
more distress than followed the panic
of 1929 because the severity of the
current depression was immeasurably
reduced by the large reserves which
had been husbanded for the emer-
gency.
$50, zoo, ,000, 900 Dividends.
The latest reliable figures show. for
instance, that in the 13 years between
1921 and 1888 dividends amounted
to $50, ZOO, ,000, 900. as against $4l,-
600 900 900 of net income for that
period. In other words, all the net
income for the four years from 1929
to 1888 was expended to meet dividend
requirements and $9,700, 900, 900 Of in
come from previously accumulated
surpluses was disburSed as well. In
addition, about $4,000 100000 was
disbursed out of surpluses to meet
deficits, and particularly pay rolls.
What would American industry have
been able to do had there been no
such surpluses? What would have
happened to the American financial
structure If the dividends that were
paid had been stopped altogether?
Business men answer, that without
surpluses set aside each year and
without the purchasing power and
investment funds furnished by divi-
dends in depression, many company
would have been wrecked, its employees
forced out of employment and the
capital invested would have been lost.
To force a disbursement Of divi-
dends when sound management would
seem to indicate that just the reverse
policy is essential, means that the
responsibility for determining the
future of American business may rest
suuarely on Government and not on
the managers or stockholders or own
ers or partners as the case may be.
The last panic was blamed on Wall
Street.-The next one may be blamed
on the tax policy Of Government.
Cost of Surplus.
One important business has figured
1t out that to retain surplus will
cost about 40 per cent. 1t can get
capital much more reasonably by bor-
rowing, but this fortunately is be-
cause the company in question already
has a surplus which presumably will
not be taxed. So 1t will be In posi-
ton to borrow new money and will,
of course, distribute its surplus in
dividends rather than pay the pen
atty tax.
But the other type of business which
has no accumulated surplus will bor-
row with difficulty and II it does get
credit it may be among the first to
collapse at the first adverse turn in
business tide. This is because its op-
portunity in good times to build up
surplus to take care Of annual sinking
fund requirements will be impeded
by the new tax policy of the Gov
ernment.
But what will be the plight of COM
panies that have distributed sur
pluses and who find a sudden need
for capital when business turns down.
ward? The opportunity to borrow
funds when all corporations want 1t
may be affected by tight money con-
ditions or by psychological factors
1t is to avoid precisely this kind of
situation that reserves are built up,
so business will have funds to weather
a storm.
Perhaps the most amazing aspect OF
the tax situation is that no bill has
been written as yet by the House
Ways and Means Committee. Hear
ings are being held on an academic
or theoretical basis. The exact word
ing of the law, the supposed amend
ments to protect certain types of
companies in the banking and in
surance field have not been revealed.
The hearings being held are per-
functory and will have to be dupli-
Gated when the exact phraseology Of
the proposed bill is known.
Hearings on Imaginary Bill.
Many things of an unprecedented
and revolutionary character have been
done by the New Deal party, but Moth
ing quite so novel as to hold hearings
on an imaginary bill whose only out
line has been presented in presiden-
tial message and in a vaguely-worded
report of House subcommittee. Un-
doubtedly the Senate Finance Com
mittee will hold hearings, too, but in
the meantime business uncertainty
multiplieS and the financial managers
Of Americas enterprises do not know
how they must adjust themselves to
the new tax changes.
Assuredly the income tax in 1918
was a profound influence upon the
conduct of American business. But
with the size and scale of operations
today the proposed tax on undivided
surpluses is bound to cause an even
greater transformation in methods
and practices, and some day, when the
non-surplus system faces real test
Of economic adversely, the Nation will
be able to examine in retrospect the
far-reaching influence of the devastat-
ing attack now being made on the pol
icy of thrift and foresight in accumu-
lating surplus for a rainy day. The
proposed tax is tantamount to saying,
"The rainy days will never come
again." But, unhappily, they do
come, and years after the persons re-
sponsible for the policies that brought
them on are out of office, and hence
immune from reprisals at the polls.
tCopyright. 1861