Evening star., 1939-06-29

exemption from Government secu-
rites, but at the same time he de-
livered himself of some very en-
Tightening doctrines on the subject
OF income taxes and how they re-
tard business progress in America.
There is much more attention be-
Ing given today than for several
years to the problem of how to get
Equity money! moving in America,
how the idle dollars in banks can
be transformed into active instru-
mentalities for the upbuilding of
the business curve. But the sources
of equity money" are not often ex-
plored. Mr. Hanes points out that
the high surtaXes give the Treasury
very little money. relatively speak
Ing. but create situation which
discourages the investment of capi-
tai
While we are, of course, inter-
ested." he said, I'm the maintenance
and increase in the public revenue,
a much more important considera-
ton is the health and expansion of
the economy. 1 have already point
ed out the role which investment
in enterprise plays in our economic
life. I should like to stress again
the Importance of that investment.
The employable population of the
country is increasing each year at
the rate of about 100000. Several
thousand dollars of capital are re-
qulred to give employment to each
person. 1t is, accordingly, highly
important that conditions be made
favorable to such investment.
Investment Discouraged.
Il have already pointed out how
the existence of taX-exempt Sc
curltleS acts to discourage the invest
ment of venturesome capital. 1t is
perhaps unnecessary to point out
also that even aside from tax
exempt securities the effect of high
income tax rates is similarly to dis
courage investments of this kind.
The effect of high taxation in dis
couraglng investment in securities
having substantial elements of risk
as compared with safe securities may
be indicated by an illustration.
Let us assume that a person in
investing funds has an opportunity
to secure 2 per cent net rate in
an investment that is free of risk
Let us assume also that he has an
opportunity to place his funds in
an investment in which there is a
$3.50 chance that the principal in
vested will deteriorate so as to be
worth only so cents on the dollar
at the end of 10 years
In this case if there is no tax
and the investor requires no bonus
for taking the risk, the gross in
tereSt rate required in the case of
the second investment would have
to be 8.l4 per cent per annum to
be equal to the 3 per cent net rate
free of risk
Nov let us consider the case
II an annual so per cent income tax
is in effect. The gross interest
rate on the risky investment would
have to be 144 per cent to make
1t equal to the risk-free investment.
HOarding in Limited Periods.
High surtax rates are sometimes
defended on the grounds that per-
sons with large incomes hoard their
funds, neither spending nor invest
Ing them. 1t is urged that high
tax by bringing money into circula-
ton would help to restore prosperity.
Hoarding of the type mentioned
takes place only during limited parts
of the business cycle. The deterring
influence of heavy taxes would
operate to create permanently the
very situation that is sought to be
corrected temporarily. That is, when
heavy taxation discourages invest
ment, the result is likely to be more
idle funds than less.
The fact that the top surtaX rates
apply to only a few persons does
not mean that they affect the in
vestment decisions of only those per-
sons. The psychological effect of
having high surtaX rates continually
discussed in the press and in pri-
vate conversation is unfortunate,
since taxpayers whose incomes are
much too small to be subject to
such rates are inclined to consider
their tax burdens as if they were
subject to them"
Every word of the foregoing quoted
passage is many years old. 1t has
been said over and over again since
the high surtax rates were imposed,
but the important fact is that no
high official in the present admin
istration has said them. What is
significant is that tax doctrine is
being considered intelligently in re-
lation to economic recovery. Con-
eress knows there is trivial amount
of total revenue, relatively speaking,
in these high brackets, but the de-
terring effect of these prohibitive