Evening star., 1938-04-13
Text of Presidents Letter
Note to Harrison Urges Profits Tax Principle Be
Kept in Revenue Bill
BY the Associated Press,

BY the Associated Press
The text of President Roosevelts
letter to chairmen of the Senate FL
nance and House Ways and Means
Committees, supporting retention of
the undistributed profits tax, follows:
The revenue bill as it passed the
House and the revenue bill just adopt
ed by the Senate differ in many par
ticulars.. While differences in detail
can, am confident, be ironed out in
conference committee without sacri-
fee of fundamental principles. in two
major respects important principles of
fairness in taxation are in issue. I
wish to bring these two matters briefly
to your attention at this time.
l. Capital gains-For many years
the country has accepted without
question the principle of taxation in
accordance with ability to pay This
principle applies to all forms of addi-
tional wealth accruing to individuals
There is no fairness in taxing the
Salaried man and the merchant upon
their incomes and taxing at far lower
rates the profits on the capital of the
speculator. Nor is it fair to subject
the salaried man and the merchant
to progressive surtaxes upon their
earnings and at the same time to tax
capital gains. large or small. at the
same fiat rate, to the particular ad-
vantage Of the taxpayer VINO other
wise would pay much higher surtax
rates. In other words, as matter of
principle. if additional wealth in the
form of earnings from business, such
as dividends, interest, or wages, is
taxed at progressive rates then capital
gains should also be taxed at pro-
gressive rates.
Treated FavOrably.
The present law treats capital gains
very favorably-more favorably than
dividends, interest or salaries earned
over similar periods of time. The ad-
vantage gwen to capital gains under
the present law, as compared to Or
dlnary income, IN many cases, runs
as high as SO per cent Under the
Senate bill this preferential advantage
is further increased by reducing the
tax to a fiat rate, no matter how large
are the taxpayers capital gains or how
large his other income. For example,
a man who makes capital gain in
a given year amounting to $1,000
would have to pay tax of not more
than Is per cent; while at the same
time the man who makes capital gains
OF $500,000 in a given year will also
pay tax Of not more than is per cent.
Desirable as it is to foster business re-
covery. We should not do so by creating
injustices in the tax system, particu-
larly injustices at the expense of the
man who earns his income-injustices
to the advantage of the man who does
not.
Corporate Taxes.
2. Corporation taXes-For many
years the Congress has sought to de-
wise fair system for taxing incomes
from business. whether received by in
dividual propriators, by partnerships,
or by corporations. Legally. the cor
poration is separate entity from the
individuals who own it. Hence, while
individual proprietors and partners are
taxable at the usual normal tax and
surtax rates upon the entire incomes
Of their businesses, whether taken out
Of the business or left in it, the cor
porate charter sets up q Chinese wall
which prevent the earnings from being
taxed to the shareholders who really
own them, unless those earnings are
actually distributed to the shareholders
in the form of dividends. Thus wide
and basically unfair disparity between
the taxation of individual proprietors
and partnerships on the one hand, and
of corporations on the other, Is created.
unless some provision for taxing un-
distributed corporation earnings ap-
pear in the law.
At present, corporations are taxable
on their earnings at a normal rate OF
to Is per cent, whether the earnings
are paid out in dividends or not. II
dividends are declared, the individual
stockholders who get the earnings pay
tax. If their incomes are large enough
they pay progressive surtaxes also.
Consequently the Treasury stands to
lose where the corporation does not
distribute earnings, whereas 1t earn
ings were distributed the Treasury
would collect additional taxes on the
personal income tax returns OF the
stockholders. Moreover, with no un-
distributed profits tax, the partnership,
or individual proprietor, is discrimi-
mated against as compared to the cor
poration. Finally, with no undis-
tributed profits tax, the avoidance of
Surtaxes through the use of the cor
poration becomes a readily available
device for those persons in the higher
surtax brackets who seek legally to
keep their net personal incomes down
for taxpaying purposes and to hide
their actual profits by leaving them
in the corporations they own.
Urges Profits Tax.
For these reasons and others,
recommended the undistributed profits
tax in 1896, and the Congress adopted
it. Notifications shown by experience
to be desirable, in particular the ex-
emption Of small corporations, should
be made, but the principle Of the tax
is sound, and 1t should be retained in
our tax system. Otherwise we grant a
definite incentive to t1he avoidance of
personal income tax payments through
methods which are legal but which