Evening star., 1939-03-02

have been Strug-
Cling with debt ever since 1929. 1t
is the question of encouraging debt
ridden col operations to arrive at
settlements with their creditors by
removing impediments in present
tax laws.
Thus if the railroad wishes to buy
in it's own securities which may be
selling on the market at 20, the tax
laws require that the difference be-
tween the original par value of 100
and the price at which the securities
are bought shall be regarded as
Income"
Many 8 creditor who wants to help
his customer by arriving at lump
sum settlement or even cancella-
ton Of an existing debt finds that
the debtor under present laws must
regard the amount wiped out as
income For instance, if small
business is earning SIS 900 year and
has had hard time reaching that
status after a period of red ink for
several years, the creditor who sup
plies goods may decide that he will
forego $4,000 out of an existing debt
OF $4,000 and accept $4,000 as full
payment The amount wiped out,
namely $4,000 becomes income"
and must be added to the profit of
$4,000, whereupon the business pays
a tax on $45 900.
Laws Consider No Debts.
Then there is the case of the
company which borrowed in 1929
when tax rates we're different than
they are today. Whatever was bor-
roWed in 1929 must now be paid
back out of an income from which
the Government takes much
higher proportion than it did be-
fore. To pay back debts and earn
a profit, business finds itself al
most strangled. The more that is
earned the bigger the proportion
that must be paid to the tax COL
lector, and the Government makes
no distinction between the COM
pany which is paying back debts
and the one that has no debt to
retire.
The plan under discussion is to
grant some form of tax deduction to
the business which is retiring debt
incurred before the depression. The
purpose is tWofold namely, to en-
courage the settlement of overhang-
ing debts, and to recreate for credl-
tors certain capital which up to now
has been frozen and hence has been
useless to its owners.
AS for debts wiped out, especially
In reorganizations, or scaling down
of debts by mutual agreement, the
plan is to differentiate such items
from income as the term heretofore
has been used.
Affects individuals, Too.
There are, of course, many other
ways by which the tax laws can be
used as an incentive, but the amend
ments which will affect existing debt
are among the most important. In
dividuals are in the same boat
They may want to pay their debts
but, confronted by severe tax, they
may postpone and defer payment.
For an individual who seeks honor
ably to meet his Indebtedness and
finds his creditors ready to accept
lump-sum settlement now rather
than wait for deferred payments
must consider the hazards of a pres
ent tax law. An individual who earns
q modest income but has big debt
to settle might find it possible to
borrow enough to make lump-sum
settlement and pay it off on the
installment plan, but when he sees
what will happen to him with re-
spect to taxes he is dissuaded. Thus
to reduce a $4,000 debt. which
might be cut down to $4,000 or
even less by a willing creditor, may
mean that the individual under
present tax laws develops an in
come" on which he must now pay
q heavy tax, especially since rates
today are much higher than they
were when he incurred the debt.
There are other tax law inequi-
ties which have been built up over
the last 20 years under Republican
as we'll as Democratic administra-
tions, but not until America came
into the serious economic situation
that exists today was attention
given to the possibility that tax
laws can be an impediment to re-
covery irrespective of questions Of
revenue.
In nearly every one of the cases
cited above, the Treasury would
really not lose any revenue that
would otherwise be collected and yet
the American business structure
would be expanded and encourage
ment to unemployment would be
brought about through the impetus
given small business enterprises.
(Copyright, 1890