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March 13, 191*5.
The Iditor,
The Washington Post,
Washington, D. C.
Dear Sin
In your editorial of March 7» headed "Capital Gains Tax", yon
briefly but inaccurately referred to my suggestion for a special wartime
capital gains tax and then repeated the familiar but fallacious Wall Street
argument (l) that instead of curbing, it would "aggravate inflationary developments", and (2) that it would have a "deterrent effect upon the flow of
capital into enterprise involving risk".
In a public statement which you apparently had not seen before
writing the editorial, I described the proposal as follows j
"I did not propose any change in the present capital gains tax.
My proposal would apply only to the sale of capital assets (as defined under the present law) acquired during a period to be fixed by
Congress. My suggestion was that this period be from January 1, 19^5
until such time as inflationary dangers have passed, which might be
two, or possibly three years after the war. This special wartime
capital gains tax would not be superimposed upon the existing tax,
but would apply only to assets purchased during this period. It
would not apply to real estate, stocks or other assets acquired at
any time prior to January 1, 19U5- These assets, if sold, would continue to be subject to the existing capital gains tax. The special
tax I have in mind would impose a 90 per cent rate on capital gains
derived from the sale, within two years, of capital assets acquired
during the specified periodf thereafter it would diminish by 10 per
cent, 0 T 1111$ a annually until equal to the existing rate. Capital
J 10*!
losses incurred on transactions subject to the special rata would be
deductible against profits."
Your editorial failed to give these facts and said that the levy
would be reduced only two (instead of ten or more) percentage points for
each year.
However, with regard to
drastic than you represented, you
this or a similar curb to protect
and other capital assets from the

what I proposed, which was far less
ignored all of the vital reas cms for
the prices of farras, homes, securities,
destructive effects of speculative

The Editor
The Washington Post



March 13, 19k5

operaticms that are not only permitted but encouraged by the glaring loophole
in the wartime tax structure. Hhile wartime surtaxes on individual incomes
are as high as 91 P®** cent and excess profits taxes on corporations as high
as 95 per cent, the capital gains tax has remained at prewar levels, with a
2$ per cent maximum, even though such gains are just as much war profits as
are high individual or corporate incomes resulting from war expenditures.
The inequity and inconsistency of this situation is the more indefensible because the benefit of this tax differential accrues only to those in the higher
income brackets.
Large operators, that is, so-called smart money, are taking more
and more advantage of the opening and this is a principal factor at present
in bidding up the prices of real estate, stocks and other capital assets.
It is not the bona fide investor or the small tax payer who is applying this
upward leverage to these prices. This is speculation, not investment. And
it is speculation in basic essentials, such as homes and fans. It adds
nothing to national wealth.
You offered no alternative suggestion for preventing these prices
from being bid up to higher and higher levels until the speculative bubble
bursts, with the inevitable ruinous consequences for the vast majority of
the people of this country — and that includes millions of war veterans.
Ma to your first points The outcry from certain financial quarters
against closing the loophole indicates that speculators who are profiting so
heavily because of it do not agree with you that the proposed tax would
aggravate inflationary developments. They complain bitterly because they believe the tax would be all too effective in arresting instead of accelerating
a farther upward trend of prices.
You say that as a result of the lesson learned in the collapse of
the 1919-20 postwar speculative boom, the law was revised severely limiting
the maximum tax on capital gains. If, as you argue, a high capital gains
tax will accelerate inflati on, how did it happen that this low tax in the
20Ts produced just the opposite effect? This so-called "free market" failed
entirely to keep stock market prices from going ever higher until the collapse of 1929« You are strangely silent about the failure of the low capital
gains tax to dampen the stock market inflation then» You can't have it both
If the proposed tax were to deter selling, as you contend, the
volume of buying would also decline, since there must be a buyer for every
seller. The record is all against you, however, in your conclusion that reduced volume would increase prices. In all past swings in the stock market,
volume and prices have invariably gone up and down together. I contend that
the tax will deter buying rather than selling because the proposed maximum

The gditor
The Washington Post


March I3, 1945

rate of 90 per cent would, certainly put a damper on the speculative buyer
after January 1, 19^5, while the low rates of the existing capital gains
tax would continue to apply to the selling of all capital assets acquired
prior to that date, The most that can be said for your contention is
that if there were very little buying and selling, the market might be uncertain. But, in any event, no dangerous inflationary upswing could take
place — and that is exactly what the proposed tax is intended to prevent.
As to your second point: The low capital gains tax was of dubious
benefit to small business and new enterprise in the 2Q*s. Instead of making
money the hard way by investing in new plants which, in turn, would give employment and produce real wealth, investors were more and more lured into
making money the easy way by stock market operations that added neither to
employment nor to production. That was the heyday of corporate mergers,
combinations and consolidations, of monopolistic growth, of the holding company
and the investment trust- Over 1200 mergers, involving ijOOQ companies, took
place in the 20's. Holding companies flourished in industry, trade, transportation and in most every other line from chain groceries to utilities.
While it lasted, it was wonderful for the Insulls, but small business enterprise was all but forgotten. It has been estimated that of more than f j
billions of domestic corporate issues floated on the booming stock market
in the 20*s, some #10 billions were the offerings of investment trusts,
holding companies and financial institutions. Those |10 billions, together
with about $6 billions more of corporate refunding issues, were reinvested
in existing securities, not in new and productive enterprise. The remaining
$2ii billions of flotations did not by any means represent investment in new
plant and production. Relatively high interest rates could not dampen the
speculative fever. Low rates on fixed interest-bearing obligations today
make potential stock .yields
look all the more tempting to the investor,
as well as the speculator.
I took care to emphasize, though you neglected to mention it, that
the wartime capital gains tax should be discontinued, like any other inflation control measure, when inflationary dangers no longer threaten the
economy* Virtually all tax measures have some effect on the flow of risk
capital, but this particular objection to the capital gains tax has been badly
overworked by those who profit fro® speculative and not genuine investment
activities. As 1 have previously pointed out, the proposal I have in mind
would simultaneously reach and discourage all such speculative transactions,
whether in homes, farms, stocks or coraaodities, and whether based upon credit
or cash — and would do so without interference with normal, nonspeculative
transactions, whereas, if credit restrictions alone were applied, they would
fail entirely to reach cash transactions for speculative purposes and would
interfere with legitimate, nonspeculative credit transaction®* The bona fid®
investor would not be deterred either now or in the reconversion period by
the proposed tax, for he puts his money into a farm, or into stocks of existing or of new enterprise for the purpose of obtaining current income and for
long-range appreciation of values. It is the speculator, not the investor,.

The Editor
The Washington Post



March 2J., 19U5

who puts money into capital assets in anticipation of a quick rise in price
from which a speculative profit can be realized through selling before the
price breaks. However, should the investor be obliged or desire to sell
while the wartime rate is still in effect, he would not be injured, since he
had not purchased in anticipation of selling In order to make a speculative
profit. In any event, under the proposed tax, he would be peraitted to retain a profit of 10 per cent, or sore, depending on how long he held the
asset. To the extent that the proposed tax would discourage surplus funds
fro® going into speculative fields, to which they will be attracted so long
as prices are rising, there will be that much more available to go into
Government securities where they should go to help finance this war.
Finally, I know of nothing that would be worse from the standpoint
of reconversion and new investment after the war than failure to hold the
line against inflationary forces that are now unchecked in these important
sectors of the economy represented by capital assets. It will become increasingly difficult, if not impossible, to prevent inflationary price and
wage increases unless the values of homes, farms and other capital assets
are also curbed. My proposal is frankly an expedient to deal with an effect,
not with the cause of these inflationary forces, which are due to the huge
deficit-financing of trie war. The home front — the stay-at-homes — have
an inescapable obligation to take whatever steps say be necessary to protect
the values of homes, farms and other necessities so that they will not be
hopelessly out of reach of the veteran *s purse. There are no war profits in
that purse.

Very truly yours,

M. S. Ecoles,
Chai nssn.

Uff JBaaljiMghjn fast







March 17, 19*45»
Dear Mr. Elliston:
This is to thank you tar your thoughtful note
in regard to the letter to the editor which I wrote on
the capital gains tax* Z wanted you to know that X
appreciated the excellent treatment of this letter on
the opposite editorial page» It was another example of
admirable f&irplay.
Incidentally, 1 thought the editorials of that
saae day on foreign trade and oa Governaent officials who
take pay for articles and speeches were absolutely firstrate, possibly because I agreed as thoroughly with both of
thes as X disagreed with the one on the capital gains tax*
Sons years ago a prominent nagasine sent is a check for a
thousand dollars for an article I had prepared« X returned the check with a request that they donate it
anonymously to a school of finance for scholarship purposes. They did*
Sincerely yours,

Mr. Herbert Klliston,
Associate Editor,
the Washington Post,
Washington, D. C.