The Ypsilanti daily press., 1941-12-06
By Roger W. sabson

Babson Park, Mass. Dec. -
What's the matter win the stock
market? am convinced that much
OF the answer lies With the tar
situation. Present taxes are .an
aid to higher dividends; but a
milestone around the neck OF prices.
Readers should remember that
about one-half OF government In
come comes from excise taxes and
about one-half Is obtained from
corporation and personal income
taxes. Customs duties. while form
erly large source OF incsme, have
now dried up. II Is with corpora
tion and personal taxes that inves-
tors are directly concerned.
Effect Of Taxes
Many OF us were brought up TO
believe that stock prices were gov
erned only by good or bad corpora
ton earnings. This is not true to-
day. International complications,
fear psychology. and principally
taxes are now in the picture. Ex-
cess profits can amount TO as much
as go per cent and must be COM
puted before normal taxes OF 31%
are deducted. Profits OF many cor
porations may continue high but
the cream is gone. The market
can no longer look forward merely
to earnings as an incentive for
higher prices. The worst feature.
however. OF he new taxes Is their
use in putting over social reforms"
and In aiding New Dealers to put a
ball and chain on merchants, manu-
facturers, and bankers.
Formerly. corporations could pile
up reserves in good years to tide
them and their stockholders over
lean years. Today, however, under
the 'undistributed profits" tax cf
Section 102 Of the Revenue Act.
there is no "fat" left. Under the
present forcing system Of social
changes many fine blue chip"
companies in the next depression
(and one will surely Gomez will
be obliged to go to the government
for help. That's exactly what cur
present government wants them to
do. Then, in exchange for continu-
ing managerial Jobs and providing
some interest for bondholders,
government may insist upon work
ing control through taking over the
rights OF stockholders.
Owners OF common s.ocxs provid,
ing high returns and relative safety
are now in wonde.'fu position.
This applies particularly to those
in the lower-income brackets. From
the point Of view OF collecting indi.
vidual taxes the government must
allow corporations to distribute
sufficiently high earnings to war.
rant the payment Of generous divi-
dends. Hence, feel that while
there will be lot more talk about
raising corporation taxes, that these
corporations will be allowed to
raise prices proportionately. This
is why Secretary Morgenthau's pro-
posal to limit the profit OF corpora
tions to only SO did not receive
any support even In New Deal
circles.
Stockholders should not be too
concerned about increased person
al taxes. In many instances these
can be passed on. This is true
in the ownership Of rentable pro
perty where higher taxes can be
overcome by raising rents. Inves-
tors are also realizing that cur
rently high yields for stocks are
solving their tax problems. Where
as five years ago an investment OF
$4,000 might yield Sc. or $500, to-
day the investor may find his taxes
increased by $500 to $500. Hence,
he looks around for, and insists
upon, yields OF So to 1919 for any
new investment. Switching OF old
investments may also have the de-
sired results. Thus, a wide-awake
stockholder can have suffcient In
come to meet his increased tax bill
and money left over for his custo-
mary spending needs. This very
fact, however, keeps down the mar
ket prices of these stocks.
Owners OF bonds and preferred
stocks are confronted With low
yields, high prices, and fixed in
comes. II this group continues to
hang on to these they will be un.
able to meet their increased taxes
unless they drastically cut their
personal expenditures. II and when