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TO-FROM. Hr. Bryan _ Hiss Egbert REMARKS! 12/2/37 Mr. Eccles would like you to draft a reply to the attached for his signature. http://fraser.stlouisfed.org/ CHAIRMAN* S Federal Reserve Bank of St. Louis OFFICE J . M A R K W ILC O X 4 t h D i s t . F l o r id a November 30, 1937 Hon. Marriner S. Eccles Chairman, Board of Governors Federal Reserve System Washington, D. C. PERSONAL Dear Mr. Eccles: lour splendid talk last evening was, to me, a liberal edu cation in present-day economics. Frankly, it is most in spiring to those of us i&o are serving political apprenticeship to see men of wide experience and unusual ability assume such a responsible part in public affairs* Usually, during these forum meetings, a few written questions are submitted from the audience, but last night the Senators and Congressmen made so many demands on your time that there was no opportunity for such questions. I had hoped to ask you the following question and, if you can find the time to consider it, I shall appreciate it very much, for I value your opinion very highly. As an inducement to private capital to finance new construction, what do you think of a proposal to exempt from Federal taxation up to fifty percent of individual or corporate income, provided this percentage of income is expended on new construction during the year in which it is received? Such a proposal is embodied in the enclosed bill which Mr. Wilcox has recently introduced, in an effort to assist in the President’s new construction program. Naturally, since our forum was entirely "off the record", any answer you may give will be treated confidentially, unless you indicate otherwise. Whatever attention you may be able to give to this question will be deeply appreciated, for I know that you are very busy. With kindest regards, I am Sincerely yours, William A. Herin Secretary December 1 1 , 1957. ttr* llllian A. Heria, Secretary e/o Honorable J. *ark Wilcox*» Offlee flie Boose of Fepre&entatives Washington, D. C. Seer Sir* thank 70a very aoch for your exceedingly alee letter. X •eat you to know that I appreciate it aad an happy to have you say that you liked the talk* tke bill introduced by Hr. Ulcox to exempt from Federal taxation a aarlwna of 50 per cent of all individual aad corporate incoaes spent on new construction is neat interesting. You will understand, of course, that I can eoaateat only confidentially. From the standpoiat of residential construction, 1 suppose a uost important object of Government aaalstance would be to help saall people in attaining hone ownership or lower rentals. It la true, of course, that a substantial volaae of new construction would probably assist in lowering rents. Bat it seeas to ae that a tax exemption of the sort proposed would chiefly bcaoflt betterplaced individuals siuply for the purpose of permitting then to ase income, tax free, for the purpose of constructing rental property, which they would thereafter hold as owners. Xt night be acre desirable to leave in effect the present taxes sad, if the Government wants to subsidise housing construction, to apply soae fora of direct subsidy designed to assist lass woll-plscod Individuals in the nttninaent of hone ownership, this would have social advantages, 1 think, and, at the saae tine, it would not relinquish the desirable progressive features of oar present tax systea. As for industrial construction, X an inclined to question whether a tax exemption should be applied to those elenents of the business tax structure that are ia a senna notraal, that are a usual deduction frou had woes profits, aad that, in any plea of taxation ant resting with sxtrsno severity on ecasossrs9 purchases, nast bo utilised ia socuriag n rswmai sufficient to nant nsisara Mr. Villlan A. Heria * Z Government costs* la the long run, such a tax relief would simply serve to concentrate the already highly concentrated ownership of industrial facilities. Perhaps it would be preferable to use for the stimulus sose temporary relaxation of such a tax as the undistributed profits levy, which is in a sense not a normal tax intended to be paid by business bat is in part simply a penalty against those owners of corporate securities who are permitted to avoid individual income taxes by retaining earnings in the bnsiness. Se would then be in a position of saying: If yon will, for this period in which construction stimulus- is needed in the eoonoay, actually spend funds for that purpose, we will in turn permit yon to avoid a penalty assessment on retained earnings. I an a little puswled to know just how a tax relief progran would work out on the permanent basis apparently provided for in the bill. It seems to me quite possible that a permanent stimulus of this size might in the course of time result in excessive capital expenditures for construction and a consequent dislocation of the eeonoay. In addition, it seems to be the intention of the bill to limit the applicability of the proposed exemption to fiads spent for construction; and I am wondering, if a tax program of this kind is to be developed, whether it might not be well to consider the inclusion of plant equipment and perhaps ether items that would aerial ly increase the productive capacity of our industrial establishment. From the fiscal standpoint, I should also want to examine carefully iron what sources governmental revenues of the magnitude that would probably be lost by this proposal could be nade up with out at the time levying taxes that would have am equal or greater adverse effect on our economic operations. These are simply questions that have occurred to me as I have read your letter and the inclosed bill. Let me thank you again for writing me as you did and for giving me the opportunity ef seeing the hill that Mr. ffUeex has introduced* Cordially years, M. S. Eccles, Chairman. J . M A R K W ILC O X 4 th D i s t . F lo r id a December 1 4 , 1 9 3 7 Honorable Sferriner S. Eccles Chairman, Board of Governors Federal Reserve System Washington, D. C. Dear Sir: This is to thank you very much indeed for your most helpful letter of December 11th in which you so kindly give me the benefit of your views on the subject of partial tax exemption as an inducement to new construction. In the midst of all of your heavy responsibilities, it was most considerate of you to study the proposal as thoroughly as you did. You may be sure that your suggestions are much appreciated, and that your observations as to the probable effect of such legislation are indeed helpful. I understand that your expressions of opinion on this subject are entirely confidential, and you may rely on my treating them as such. With kindest regards, I am Sincerely yours, William A. Herin Secretary
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