Evening star., 1938-01-02
OPERATING RATES
ARECURTA|LEDBY
LEVY ON PROFITS
Unwise Capita|izations Laid
to Inability of Business
to Finance Self.
BY Cambridge Associates.


When the Congress convenes in its
regular session one of the most press
ing problems will be a reconsideration
Of the tax structure Outstanding
among the taxes that will be consid-
cred for revision Is the undistributed
profits tax.
II this levy were responsible for as
many evil effects as its opponents have
claimed for it. the loss of revenue suf-
fered from its complete demolishment
would be small matter indeed, COM
pared with the economic benefits
achieved.
Objectively considered, the undis-
tributed profits tax represents a step
too far in the direction Of socialization
Of industry. Too far for the comfort
Of the average business man, and too
far from the standpoint of a Govern
ment which is not prepared to go the
whole way.
Among the many factors that con-
tributed to the alacrity with which
industry cut operating schedules in the
latter part of 1887, history will un-
doubtedly charge this tax with a large
measure of responsibility.
Uncertainties Intensified.
And the most directly traceable rea-
son is the fact that management is
deprived Of the will to continue to
provide employment against an un-
certain outlook when replacement of
depleted surpluses can be accomplished
only under heavy penalty
Among other results of this method
of taxation which have proved them
selves perhaps the most outstanding
is the tendency toward unsound cap
italizations. In a securities market
which does not tend to encourage ex-
pansion financing, corporations are
forced to retain earnings for this
purpose.
In doing this, they can only avoid
heavy taxation through the method of
issuing senior securities, such as pre-
ferred stock, in lieu of dividends. Now
such issues Of preferred stock or other
obligations bearing a fixed dividend
or rate of interest lesson the ability
of the corporation to meet poor busi-
ness conditions. Recapitalization pro-
grams to compensate for large dividend
accumulations have been all too COM
mon in recent years. but such pro-
cedures appear inevitable under any
provision which unduly expands fixed
obligations.
Relief Declared Urgent.
In the face of these criticisms the
undistributed profits tax cannot hope
to survive in anything like its present
form. Naturally, there will be an at
tempt to Offset any loss of revenue
from cancellation Of its provisions.
But under conditions obtaining at
present it will be relatively easy to
get a movement under way for re-
lief for three classes of corporations:
l. The small business enterprise.
2. Corporations in debt.
3. Companies which are prepared to
invest undistributed earnings immedi-
ately in expansion of plant facilities,
replacements of machinery, etc.
Expediency will furnish the pressure
in favor of the last group, since the
Congress is well aware of its mandate
from the country at large to favor
any project which will encourage i'm
mediate extraordinary expenditures
At this time it appears that this
tax will be considered early in the
session, but since there will be large
number of divergent views on many
points, quick action is not predicted.
And in a Nation of people daily grow
ing more conscious Of the necessity Of
balancing the Federal budget, no one
may suppose that the tax revision
program will relieve the burden: it
will merely distribute it in . manner
which the majority comedies is fair
and equitable. This means additional
taxes for those corporations which
are in a position to bear them.