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March 24, 1936* APPMDIS OH DEPRESSION RESERVES A firm stand should be made against exemptions for •depression reserves** Ass much publicity as passible should be given to the feet th&tjthe go-called depression reserves were in actual fact not availed of to any extent in the depression on record* The holdings of cash and tax-exempt securities reported in the income tax returns of non-financial corporations declined from December 1929 to December 1952 from #10,859,000,000 to #9*070,000,000, or by only 11,789,000,000, while the reported holdings of other investments increased $5,594,000,000* The surplus of those corporations decreased by nearly #15,000,000,000, but this was due to cha-ge-offs rather than out-of-pocket disbursements* It should be pointed out that corporations in general have more cash now than they have ever had in the past and that if they feel they need still more there is nothing to prevent them from issuing new stock for this purpose* ^The whole argument for ^depression reserves* is a smokescreen to cover aversion to the payment of taxes and the weakening of despotic insider control that would be brought about by a prohibitive tax on undistributed earnings. The Administration should assuae a vigorous offensive on this point end make th^ facts knonn*< There is very little in the nucb-touted point that the retention of earnings in good times permits the payment of dividends in bad times, thus sustaining buying power* From 19ES to 1929 non-financial corporations reporting net income retained $£5 billions of earnings* Prom 1950 to 19S5 the payment of vate&raed dividends amooated to only $5f?68t000*000« during the eaise period no&~financial corpof&tlone reporting not iocoaee withheld eerninge amounting to H f 054 f 000 f 000* Thie reten- tion of turning© operated to counteract the increased buying po*er arising from the piyacnt of tme&rned dividends* form, iwu* fS#734tGQ0#000* The net figure, the re- then thla figure la con^tred with the a m of the deelinee in the national incom tron the 19£9 l e w l for the yoare 1920-55* —412B t&llionef It w l H be ©sen that the sustaining effecte due to th^ payment of unearned dividend© vera of an oxo^edingly alaor character* Another reason why no epeel&l coemption should bo nede for depression reeerires la that under the proposed monuments corporations sill have ample opportunity to put theaselvajs la a position to avoid bankruptcy in & depression* they see fit* S^all corporation « y dispose of their earnings as I^rge^cor^orjitiamj »&y not oaly retire th$ir indebtedness but* In addition, raise cash through new stock issues* A corporation which eatera a depreseioa with little or no indebtedness, with a plant well kept np and conservatively valued by the dedttetlon of aore th&n adequate depreciation allowances frosa e&rniage* In the past, with iaveatorlea and acooxmtB receivable that can be turned into each* Is In a position to avoid bankruptcy and needs no great amount of prssvioualy accumulated caslu Hot oaly can it strengthen Its each poaltion ly realising on Its inventories and accoxmts reooiv&ble end by diking further additions to Inventorize or extending further credit* but It cen> In addition* refrain from, using ltd current depreciation allowances for improvements and replacements* Theae wore the practicofl actually followed during the depression years* The fact that American aan"-financjUl corporations In the wor>t depression on record ootid pay out une^rn 4 dividends In excess of retained earnings* could retire debt, could sustain staggerw log losses* nil with little impairment of thfcir cach position, and actually increase their coabimtd cash ami investments, is clear evidence of the fact that thoir losses were attributable to write-offs rather thnn nctwl disbursements, and th&t thvy converted a substantial portion of their inventories* account** receivable,and, ip&ant, into cash* it say be pointed out that the surest m y to have a depression is for everybody to prepare for one* Should corporations ell build up large depression rt?s«*rves In the fora of cash, ehich, for the whole economy, is the one aeoet ultimately liquid, th? resulting interruption of th® monetary circulation would bring on a depression* If the monetary authorities sought to &oet the situation by providing more and mora cash to satisfy the would be fraught with danger* ode of corporations, thu situation One could never be sure that when bis- ineos became aore active corporations might not entrench upon these recurves for further expansion m d precipitate & boom. Thai, In f&ct, Is one of tha dangers of the preaont situation* Corporations h&ve built up unusually large accumulations of cash /ar out of line with their present xt^uirment% la the past few years and these holdings mill permit expansion later without recourse to the banks or the capital PROPOSED TAX ON CORPORATE ADJUSTED NET INCOME BASED ON PERCENTAGE OF ADJUSTED NET INCOME UNDISTRIBUTED* PER CENT 1 1 1 Tax Pate Effective (40% Unc distributed) 1 1 25 y \ 20 E ffective Tax Rc rte tribute (3 0% Undi is i 1 15 i 10 Tax Rate E-i~tect/ve (t 0% Undistributed) ^ i 1 1 5 * As reported 1 10 ADJUSTED by 15 NET Subcommittee, 20 INCOME of 25 30 IN T H O U S A N D S Committee on Ways 35 OF and 40 DOLLARS Means; March 45 50 26, /936