Evening star., 1938-04-21

Federal taxes eat 'a Lawrence
up exactly that amount So the true
cost OF borrowing is really in excess of
80 per cent, for the borrower has to
pay interest and also as a rule State
income tax of around to per cent.
Even under the proposed Senate tax
bill. which eliminates the undistrib-
uted surplus levy, the fat tax of 1s
per cent must be paid, 50 on every
$4,000 borrowed there must be an ad-
ditional sum earned sufficient to paw
an IL per cent tax before there is a
net income Of $4,000 Using the IS
per cent tax figure, and adding per
cent for interest to the bank and 3
per cent for State income taxes. the
amount that would have to be earned
would be about sl2,6O0. which is very
much better than the present law
which requires an earning of about
$l4,162 If you include per cent for
the banker and per cent for State
income taxes
Why should businesses attempt to
borrow money under such prohibitive
rates? The least OF the expense, it
will be seen. is the charge made by
the banks. The taxes are the most
disturbing part Of the picture.
For Plant or Equipment.
Naturally where there is a borrow
Ing for plant or equipment. there is
an opportunity to get some tax relief
by the deductions allowed annually for
depreciation or obsolescence. but for
working capital the borrower faces q
very difficult situation.
The truth OF the matter is that
businesses needing working capital
ought not to be borrowing it on notes
or securities nowadays, but on the sale
Of common stock or what Is usually
called equity money" The ad-
ministration's attitude. however, to-
ward equity money has been 50 dis
tressing that most people have been
afraid to buy new common stock issues.
Indeed, common stock offerings have
rarely been f1oated to the people since
the New Deal came into power.
Take the utilities, for example. The
Government, through the r. F. c.,
utilities on the assumption that they
are unable to float their loans to the
public. But there's limit to the
proportion of the securities which any
utility company should be allowed to
have IN the form Of bonds. Bonds
could easily be sold to cover future
expansion Of utilities provided there
was some certainty as to the ability
OF utilities to earn their interest
charges at least once and provide also
q margin for the existing stockholders
who hold preferred or common stocks.
Why should anybody put equity
money" In utilities when the Govern
ment threatens competition with them
constantly?
May Not Meet the Needs.
So while the r. F. c. will find some
utilities which can borrow on bond
Issues, 1t Is doubtful whether this will
meet the needs of the electric light
and power companies who want to
expand their facilities. For it will be
noted that Chairman Jesse H. Jones of
the r. F. c. in a speech this week
said: I'VE will not buy the stock of
any private business. Usually when
there Is demand for investment
capital that promises a fair return.
1t is forthcoming. and no doubt this
will be true again as business i'm
proves"
Unhappily, however, there is no
promise OF fair return on the utility
investments so long as Government
competition is threatened. And what
investor wants to take a chance on
common stocks when so much of the
net nowadays is eaten up by taxes,
Federal and State, as well as interest
charges. before there is anything left
on which to declare dividend for the
common stockholder. Since the owner
OF an equity in business does not
have his principal redeemed on
nxed maturity and does not receive a
specified interest return as is the case
with note or bond he has hitherto
been regarded as deserving Of a high
dividend.
Likewise If business gets into the
red. the bondholder or noteholder
can usually take the business and
property over very much as a mort
gage on any piece of real estate is
foreclosed. The business man who
borrows, therefore, runs the risk of
losing his business If he cannot meet
the payments on interest and principal
when due, whereas if he gets his
working capital through the sale of
common stock, he may pass a divi-
dend in a bad year or two and not
run the risk of losing his property,
IN which he himself will have in
vested time and money.
There are nevertheless some capital
loans which can be made through
the r. F. c. and these will be helpful
In bringing about Unemployment
The real relief, however, will not
come through lending. The borrowed
money has to be earned to be paid
back. Says Mr.. Jones Of the r. F. c.
on this point:
While our purpose will be to make
business and industrial loans that
will maintain or create work, we will
not feel authorized to make such loans
unless in our opinion the borrower
will be able to pay the money back"
And will borrowers be able to pay
the money back under present con-
ditions without paying terribly high
price for their money in the form
Of Federal and State taxes? Try bor-
rowing money at cost of 80 per
cent and see whether you will not
think there Is something in the notion
Of business men that tax relief, elimi-
nation Of Government waste, and re-
moval Of Government schemes that
eat up the taxes are all essential to