18 



HARDWOOD RECORD 



January 10, 1921 



lug to efi&ciency and economy, tending to create inflation, a retard- 

 ant to production in many industries and incapable of impartial 

 application to the varying conditions existent in business and 

 industry. ' ' 



In addition he said: 



The opposition of public officials is due to the belief that the excess 

 profits tax, as provided by statute, is incapable of administration in 

 accordance with the provisions thereof or the intention of Congress ; that 

 the excess profits tax should be an emergeucy measure, because capable 

 of providing large revenues quickly ; and that the excess profits tax tends 

 to defeat itself through the disappearance of the so-called "excess profits." 



Another important feature of present Federal taxation is the high rate 

 of surtax on individual incomes, so great that the income from large 

 estates invested in high class taxable securities has been reduced in many 

 cases to a net return to the estate of less than 2 per cent per year, 

 although the return before the payment of tax may have been 5 per cent. 

 These high surtax rates have driven large investors into non-taxable 

 securities. Today there are approximately sixteen billion of such non- 

 taxable securities, representing an increase of uver ten billions during the 

 period of high Federal income tax rates. 



Under these circumstances, mortgages which have heretofore been 

 fundamental in the financing of construction are virtually without ready 

 sale because the income therefrom is subject to taxation at such rates in 

 the hands of larger holders, as to be relatively unattractive. 



A third defect of the existing law lies in the failure to allow for the 

 deduction from the taxable income of any year the net business loss of 

 preceding years not already deducted from otherwise taxable income. 



Were the excess profits tax to be discontinued ; the highest surtaxes on 

 individual incomes to be reduced to a rate not exceeding 20 per cent in 

 addition to the normal tax ; and net business losses made deductible from 

 the income of succeeding years, the total gross reduction of Federal reve- 

 nues from these modifications in the tax system would probably be one 

 billion two hundred million dollars in the year 1020. 



Assuming that the total Federal revenues must for the present be 

 maintained at approximately the present figure, additional sources of 

 taxation in the event the excess profits and other taxes were discontinued 

 would have to be set up sufficient to make up the loss in revenue caused 

 thereby. 



Under the income tax the partnership form of business is subject to 

 taxation as are individuals. The discontinuance of excess profits taxes 

 on the income of corporations should be accompanied by the provisions 

 for the taxation of corporations which would place a corporate form of 

 business as nearly as practicable on a par with partnership form, in so 

 far as the tax liability is concerned. It is possible that a flat increase 

 in the corporation income tax rate from 10 per cent to perhaps 15 or 16 

 per cent would be the only practicable way of relieving corporations 

 generally from the excess profits tax. 



Such a flat rate would, of course, not involve the determination of in- 

 vested capital but would apply equally to corporations large and small. 

 An increase in the flat corporation income tax rate would probably place 

 a larger proportionate burden on enterprises which ordinarily show a less 

 than average rate of profit. To the same extent, conversely, the most 

 profitable enterprises would pay a smaller tax in most instances than 

 they do under the provisions of the excess profits tax. 



In the event an increase in the fiat corporation income tax rate were 

 made not to exceed 16 per cent as a maximum ; and were the present flat 

 exemption of $2,000 discontinued in the case of all corporations, the 

 increased flat corporation tax would probably yield something over four 

 hundred million dollars as compared with nine hundred million dollars 

 estimated as the probable receipts from excess profits tax in 1920. 



Were the surtaxes on individual incomes reducetl as suggested above, 

 the receipts from individual income taxes would probably be reduced by 

 two hundred million dollars, viz., from approximately one billion three 

 hundred million to one billion one hundred million. It is to be remem- 

 bered, however, that the incomes of corporations which are taxed in the 

 hands of the corporation are also taxable as individual income in the 

 hands of the stockholders upon such part of the corporation income as may 

 be distributed in dividends. The reduction in the tax on corporations as 

 such, does not therefore involve any means on the part of owners of cor- 

 porations to escape taxation. 



Still further to make up the deficit which would ite occasioned by the 

 repeal of various existing provisions of the revenue laws, minor business 

 taxes such as stamp taxes on business transactions, excise, first class post- 

 age rates and revenues from other miscellaneous sources could probably, 

 without embarrassment to business or undue burdt*n upon taxpayers or 

 upon the consuming public, be increased by two hundred million dollars. 



Additional taxes on the sale of a limited group of commodities such 

 as are not absolute necessities of life but are in such strong demand that 

 a small tax thereon would normally be shifted without seriously affecting 

 the production or distribution of such commodities, and where the tax 

 would be capable of definite determination and easy collection would be 

 made to yield, in addition to the revenues already derived from such sources, 

 approximately two hundred million dollars. 



The remainder of approximately two hundred forty million dollars neces- 

 sary to make up the deficit may probably nc ^vnilablp through a systematic 



and scientific reorganization of customs tariff duties, which should produce 

 approximately six hundred million dollars annually. 



The estimated receipts from taxes and duties under existing Federal 

 revenue laws for the calendar year 1921 is about four billion five hundred 

 million dollars. The additional sources of revenue herein described, to- 

 gether with the sources already existing under present laws other than 

 the excess profits tax and the higher surtaxes on individual incomes, 

 would probably produce an equal amount of revenue with a much less 

 disturbance of business ; a greater degree of certainty ; a conspicuous 

 increase in the ease of administration and the promptness of final deter- 

 mination by the Treasury Department of the taxpayer's liability and a 

 decrease in the cost of tax collection. 



This can be accomplished without resort to a general sales tax. If, how- 

 ever, a general sales tax at a low rate is preferable to the individual income 

 tax and the tax on sales of the limited group of commodities described 

 therein, such a sales tax could be readily imposed to produce between a 

 billion and a billion and a half dollars. This would make possible a con- 

 siderable reduction in the income surtax rates on individual incomes. A 

 general sales tax is, however, likely to be as inequitable in practice as is 

 the present excess profits tax. Its strongest recommendation is the prob- 

 able greater ease of collection and administration and the practicability 

 of increasing or decreasing the rate of taxation to meet the fiscal needs 

 of the Government, probably without causing serious business disturbance 

 in most industries. 



A general sales tax. however, if adopted, should carry with it provision 

 for the relief of those enterprises which have an unusually high rate of 

 turn-over annually, which might in some cases, even at a rate as low as 

 1% on sales, be subjected to a tax annually equal to 75% of their capital 

 invested. 



In my opinion, after having given careful study to the conditions created 

 by existing Federal revenue laws, the excess profits tax is, in practice, 

 defensible chiefly for emergency needs where the equitable distribution, 

 of taxes is a consideration secondary to the quick productivity of revenue; 

 that it cannot be administered in practice in accordance with the principle 

 laid down in the .statute and that it is incapable of prompt and economical 

 administration. These conditions, if true, are sufficient to warrant the 

 repeal of any tax. 



I believe that the highest surtax rate on individual incomes nuiy wisely 

 be reduced in the expectation of inviting investment in other than non- 

 taxable forms. A tax on the sales of wisely selected commodities the tax 

 on which can readily be shifted, is, in my mind, preferable to a general 

 sales tax. I believe, also, that under present conditions the customs 

 tariff duties should be so rearranged as to secure the highest possible 

 revenue from such source without discouraging the imports of commodi- 

 ties from countries debtor to the United States. This is the only prac- 

 ticable means which debtor countries have of paying their obligations, 

 which, to the United States Government alone, not including the amount 

 due to private creditors in the United States, amount now to over ten 

 billion dollars. 



No change in the Federal revenue laws can relieve business anil indus- 

 try fi'om a heavy burden of taxation. The United States Government is 

 confronted by the early maturity of more than five billion dollars of its 

 bonded obligations in addition to nearly two billion dollars of other forms 

 of indebtedness. These obligations must be met, although a large part of 

 these debts may practicably and wisely be funded into long time bonds. 

 An effort should be made constantly and gradually to reduce the public 

 debt. The cost of the war should not be wholly saddled upon the present 

 taxpayers : it should be distributed over a considerable period. Until, 

 however, the cost of Government through the institution of economies in 

 the public business,— for which economies there are many opportunities, — 

 shall have decreased the Federal revenue needs, any substantial reduction 

 in the burden of taxation on citizens generally may not reasonably be 

 expected. What may be expected and appropriately demanded is that the 

 Federal tax system shall be scientific and systematic ; that it shall be 

 capable of simple and prompt administration ; that it shall be such as to 

 enable the taxpayer to ascertain with reasonable promptness his total tax 

 liability, so that undetermined and contingent amounts due to the Govern- 

 ment in back taxes shall not be allowed to hang over the taxpayer's head 

 indefinitely like the sword of Damocles. 



The taxpayer is willing to pay his share of the needed public revenues. 

 The administration of Federal taxes is a business in which the Govern- 

 ment is engaged and it should he conducted in a .businesslike way. 



Mr. McClure's Opinions 

 John W. McClure of the Bellgrade Lumber Company, Memphis, 

 first vice-president of the National Hardwood Lumber Association 

 and president of the National Association of Wholesale Lumber 

 Dealers, likewise opened his letter with a eastigation of the excess 

 profits tax. Mr. McClure disclaimed any attempt *Uo analyze and 

 grasp all of the details or even study closely" the broad question 

 of Federal taxation. He wanted it understood that his *' ideas are 

 very general on this question." *'I feel, in common with a 

 majority of the business men of America," Mr. McClure continued, 

 '*that the excess profits tax is absolutely wrong in principle and 



(Continued on pdge 24) 



