• U.S.

TAXES: Coming Up

5 minute read

Last week Franklin Roosevelt, in 85 not very specific words, asked Congress for “a steeply graduated excess-profits tax.” Congress was surprised. Week before, a hasty rewrite of the World War excess-profits tax, passed by the Senate, had been killed in conference committee under Administration pressure (TIME, July 1). The conferees had asked the Treasury for its idea of a good excess-profits bill by Oct. 1, and few Congressmen expected to have to face the problem until then. Suddenly, the same day that their tax leaders (Senator Harrison, Representatives Doughton and Cooper) were invited to the Treasury to talk excess profits, the President uttered his 85 words. Congressmen wondered what had made him change his mind.

Best guess was that of New York Times Columnist Arthur Krock, who pointed out that Wendell Willkie, champion of business, had been nominated by the Republicans few days before. Columnist Krock repeated a cloakroom story: When a Congressman asked Secretary Morgenthau whether politics were involved in the President’s message, he smiled and said, “A little.” A humanitarian ring in the 85 words confirmed this view: “We are engaged in a great national effort. … It is our duty to see that the burden is equitably distributed according to ability to pay, so that a few do not gain from the sacrifices of the many.”

His political purpose served by words, Franklin Roosevelt did not have to rush into hasty deeds, was expected to let Congress take its time. And time is what Congress needs. With an unscientific patchwork of tax irritants already on the books, Congress’ real job was to overhaul the entire U. S. tax structure, revise it toward two simple objectives: maximum revenues and maximum production. Meanwhile, with the President’s untimely words in its ears, many a U. S. corporation recalled the last time it had “a steeply graduated excess-profits tax.” The memory was not pleasant.

McAdoo’s Mistake. From the U. S. Treasury’s standpoint, the excess-profits tax of 1918 was a howling success. Together with the less lucrative war-profits tax, it raised $2,505,566,000 in its first year, was the Treasury’s all-time-record money raiser. But it was one of the most unpopular taxes levied in the U. S. since the Boston Tea Party. Years later William Gibbs McAdoo, whose job was to collect it, wrote: “The unpopularity of the bill . . . was undoubtedly the most potent factor in the defeat of the Democrats [in 1918]. We lost enough seats in Congress to give the Republicans a working majority.” For a decade the Bureau of Internal Revenue and Board of Tax Appeals were swamped with cases arising from the 1918 act. Vast sums (estimated at around $1,000,000,000) were refunded. Some cases are under litigation still.

The act’s chief fault was its crudeness. Its basic principle: any corporate earnings above 8% on invested capital were “excessive,” should be taxed at 30 or 65% (later reduced to 20 or 40%). This was in effect to treat all capital as though it bore the same risk, should earn the same return. But “invested capital,” an artificial concept, was only one among many income-producing factors. Results were a tragicomedy of discrimination. Small, growing, high-profit companies found themselves in higher tax brackets than mature, stabilized giants. Corporations with little capital other than their wits (advertising agencies, etc.) paid at higher rates than overcapitalized railroads. Firms of the same size in the same line of business paid widely differing rates on the same amount of profits.

Special provisions for cases of exceptional hardship merely added to the confusion. Most of the litigation centred around the complex problem of evaluating “invested capital.” Carter Glass, McAdoo’s successor, summarized the tax when he recommended its repeal in 1919: “It encourages wasteful expenditure, puts a premium on overcapitalization and a penalty on brains, energy and enterprise, discourages new ventures and confirms old ventures in their monopolies.”

War Profits Too? Not to be confused with an excess-profits tax is a war-profits tax, also used in 1918. Its principle: to measure each corporation’s “standard” profits (average of several pre-war years) and tax everything it earns above that. This was especially hard on corporations with a poor pre-war earnings history. Looking back on the deficits of Depressions I and II, many a U. S. businessman took no comfort last week in the thought that this tax, too, might be revived. The U. S. Chamber of Commerce thumbed down both taxes, suggested that ordinary income taxes on a growing volume of business should keep the Treasury satisfied.

But that is not likely to satisfy Franklin Roosevelt, who has supported measures calling for $10,000,000,000 of new expenditures in the last two months and is resolved to make no war millionaires. Best hope for businessmen last week: that he would give his Treasury experts time to overhaul all sources of revenue, devise a new tax structure that would both raise money and encourage production.

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