Evening star., 1936-04-07
TAX PLAN SEEN
THREAT TO BUDGET
Unless Dilemma Is Solved
U. S. Faces Temporary
Loss of $500, 900, 900.
BY DAVID LAWRENCE.


hat of presidential year magic when
he proposed the tax on undistributed
earnings of corporations, but it may
turn out to be another kind OF an
animal figuratively known as white
elephant"
For Representative Pettengill of In
diana, Democrat, has discovered that
the way the tax is set up at present
by the House Subcommittee, the
Treasury may lose about $800,000,0 900
it had expected to have for the, fiscal
year 1887, and thus throw the Federal
budget even more out of balance than
anybody had dreamed.
The dilemma is simple to explain
but difficult to solve 1t happens this
way: The present corporation tax,
which is a fiat tax on earnings, would
normally be paid on March is, 1887,
by those corporations which made their
returns on the calendar year beginning
January /, 1896, and ending Decem-
ber 81. 1886 The Treasury experts
estimate that this would be about
$500 100000. But-and here's the rub
as a part of the Presidents plan the
corporation tax was to be repealed. so
no corporations would be paying in
any more on this fiat tax next March.
Thus S800,000,000 was to be wiped
out.
Delayed Until 1888.
The corporations, on the other hand
were expected to be paying a sizeable
tax for the privilege of retaining some
of their Surpluses and the individual
stockholders were supposed to pay a
higher individual income tax, because
of the receipt of dividends.
All this would conform to the Pres
ident's hopes, except for one thing
namely that the individual income tax
returns will not be made out until
exactly 12 months after March IS,
1887, or in March, 1888, and hence the
Treasury wouldn't begin to get in this
money until nearly nine months after
the fiscal year 1937-which ends June
30, 1937-will have closed.
On the one hand, then, about $780,
100000 Of receipts from the corpora
ton tax are lost to the Treasury esti-
mate for the nscal year 1887 and on
the other hand it is difficult to see how
any considerable sum will have been
obtained in its place that can get into
the Treasury sooner than March, 1888.
The reason for this in unavoidable.
In the first place, corporations are to
be given two and one-half months
after next January 1st in which to
figure out how much of their sur
pluses they want to retain and how
much they want to pay out in divi-
dends, This is because no company
can possibly tell where it is at from
an auditing standpoint until after
December 81, 1926. During the sub
sequent two and half months it is
assumed that decision will be made
by boards of directors as to now much
of the 1885 earnings will be withheld
and how much will be paid to stock
holders. During the two and a half
months, however, that payments are
decided upon, the corporation may
choose to pay out its dividends in
lump sum or quarterly, but in either
event the taxpayer does not count it
as income for the year 1886, but in
come for the year in which he receives
it, namely, 1887. The individual re-
turns for 1887 income, of course, are
not payable until March Is, 1888.
Extras" Slated Later.
Now some corporations will be pay
Ing dividends during the year 1886 on
a quarterly basis as rapidly as divi-
dends are. earned, but in view of the
new tax law and the fact that the
proposed statute will give every COM
pany two and half months after the
calendar year in which to make its
final payments. the chances are that
the dividend payments will be ar
ranged on a regular and extra"
basis, but most of the extras" will
come in 1897.
So far as the Treasury is concerned,
1t will not benefit by any increase
beyond these regular dividends of
1886 except the usual increase due to
improved business conditions. But the
whole purpose of the undistributed
earnings tax was to force extra divi-
dends into circulation. 1t is this
which has been given as the primary
reason for the application of New
Deal tax theory. Actually, however
no such distribution can help the
Treasury out if the tax on the major
part is not going to be collected until
nine months after the fiscal year in
which it is needed.
Should no way be found to bring in
this revenue in the fiscal year 1887,
the budget for that year-the fourth
IN the Roosevelt regime-will prob
ably be more out Of balance than the
three preceding years, in which case
MIR. Roosevelt will wind up with a tax
law that deprives him of the hope he
expressed in his message to Congress,
namely, that the fourth year of his
administration would show decrease
over preceding years.
Handicaps to Solutions.
The seriousness of this gap in COL
lections is fully realized now by mem
bers OF Congress since Representative
Pettenglll brought 1t to their atten-
ton. Nobody, however, has come for
ward with a solution. It might be
thought that one way would be to
continue the corporation tax for an
other year and allow corporations in
March, 1887, credit on the next
years taxes, but the trouble with that
is that some companies will want to
pay out all their surpluses and thus
avoid any tax and under the Presi-
dents plan they are permitted to es-
cape the corporation tax if they pay
all their earnings out in dividends.
Also the corporation tax if paid in
advance to the Government would
complicate company's bookkeeping,
since a corporation that wanted to
figure out its real net income could
not pay the Federal Government
money that really belonged to the
stockholders under the new law.
The undistributed earnings tax Is
running into SO many snags that the
Senate is likely to keep the present
l4rNVT H. -.