Evening star., 1947-11-05
Anti-Tax Reduction
Policy May Para|yze
Risk-CapitaI System
Big Firms UnobIe to Sell
Common Stocks to Get
Funds for Exponsion
By David Laurence e

FUNDS for ExponSIon
By David Laurence
While there's plenty of commotion
about Communists in Hollywood and
elsewhere, there seems to be little
concern over the growth Of radical
ism and communistic philosophy in
governmental circles.
The idea that the skillful and the
talented shall be penalized, that
thrift shall be discouraged and that
l profits are a sort of sin is the pre-
vailing doctrine now, especially in
that wing of the Democratic Party
which seems to have captured Presi-
dent Truman's political support.
There is evidence, for example,
that the administration will again
argue that tax revision or reduction
shall not be applied to cut down the
high rates put on during wartime.
There Is evidence, too, that the ad-
ministration is doing more by Its
antitax-reduction policies to frus-
trate, if not paralyze, the risk-capita!
system than all the Communists in
America put together.
Tax reduction Is needed not so
much for individuals who may have
enough income to survive the
shrinking value of the dollar but
because the largest companies in
America today cannot sell common
stocks to get the money to carry on
needed expansion. There is only
one class to which the securities as a
rule are sold-the middle class now
being heavily taxed.
Equity" Financing Crisis.
In the November issue Of the Ma
tional City Bank letter. attention is
called to the crisis that has de-
veloped in the so-called equity"
financing or stock-selling process SO
essential to the maintenance Of the
free-enterprise system. The letter
says:
I'm the present juncture, the sup
ply of new savings out of current
incomes of individuals is seriously
deficient In relationship to the de-
mands for capital. For example, the
individual investor has come close
to disappearing as the source of new
capital for private business. Esti-
mates of the Securities and Ex-
change Commission indicate that in
diyiduals in all of 1916 added moth
ing, net, to their holdings of cor
porate stocks and bonds. The same
Is true for the first half of 1947. A
major cause is income tax levels so
high as to force continuous dissav-
ing in the higher income brackets
and shut down new supplies OF saw
ing farther down the line.
1.-THE individual savings that take
place today In largest volumes are
either institutionalized savings, re-
flected In accumulations of insur-
ance and pension funds, or savings
in anticipation Of consumption.
These funds are not available for
equity investments in common
stocks. The absence of substantial
individual savings for taking risks OF
ownership is q serious missing link
In the structure of sound financing
of postwar prosperity. Without
them, the pressure is on the corpo-
ration to sell bonds and to go fur
ther into debt to the banks and to
the institutional investor. This has
been the cheapest and easiest way
of raising new funds. Often 1t has
been the only practicable way.
Rapidly accumulating debt Is
both a cause and consequence OF
the tnfationary pressures, for IN a
wage-price spiral, business con-
stantly needs more and more money
to keep going and this leads to the
incurrence of more and more debt
by business and more and more
spending by the individual. To
check this kind of spiralling-which
is to the ultimate benefit Of no one
and to the injury of all-is not
simple.
Way to Check Pressure.
lone way of preventing bank
credit expansion from aggravating
the infiationary pressure is to make
possible more equity financing with
individual investors. Here changes
are imperative in the tax laws that
not only cut off new supplies OF
risk capital but place all the odds
in favor of borrowing rather than
selling stock to raise new capital.
The corporation can charge inter-
est payments off as business ex-
pense in calculating its income tax
liability. On the other hand, earn
ings from new capital raised by SELL
ing stock are taxed whether re-
tanned in the business or paid out
as dividends. In the latter case
the earnings get taxed again as the
stockholder pays his personal in
come tax on the dividends"
Financing of long-term nature
by bonds or mortgages Is often
hazardous or impossible because not
enough earnings are available reg
ularly to insure fixed payments an
nually. Heretofore in America the
investor has taken the risks by buy
ing stocks wherein the return is not
fixed or guaranteed. A reward for
this risk has been high dividends in
good years to balance bad years.
Today dividends fare virtually con-
fiscated and any company that tries
to make q high enough profit to
warrant the sale of stock is pilloried
av q y,ro6feor There,s M ynora rar-
tain way than this to undermine the
capitalistic system and SOW the
seeds Of its rival-state socialism
under which the Government Is
master Of everybody and every
thing, including finance.
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