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G
eorge
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J r.
A M B A S S A D O R B U IL D IN G
S a in t L o u i s , Mo .
November 27, 1941Dear M r .Eccles:
I notice in the St. Louis papers that you are quoted
as desiring heavier taxes on corporations and more
prosperous individuals before a levy is placed on
wages of the lower income groups. With all respect
for you, I differ from your conclusions. Corporations
have reached a point where, to a large degree, all
initiative and all incentive to make money is being
killed.
1 think I know what I am talking about, in view of
the fact that I am a stockholder in several hundred
companies, and am also the head of my own business.
I have reached a point in my own life where my incen
tive to make money has been definitely killed, in view
of the colossal amount of taxes I am compelled to pay.
I am ambitious and hard-working and like to make money
and have made plenty of it. I am not unwilling to pay
taxes, but when I consider the amount of taxes that
I am compelled to pay and the amount of effort that
I have to put in to make them, I have come to the con
clusion that it is cheaper for me, and I shall probably
prolong my life, by making less money, and 1 have
heard other men mho are the heads of various businesses
express the same sentiment.
Speaking in terms of the future, this policy of tax
ing corporations to death, in my opinion, will retard
the progress of Our great United states. Incidentally,
it might be well to remind you that by taxing corpora
G e o r g e W it s m a , J r .
tions any heavier than they sure now taxed, will prob
ably be creating a hardship for many people who are
depending on the dividends from many corporations for
their sustenance. It is not my purpose to tread on
the under-dog, because my own conclusions are that
the country prospers when labor and other people in
the lower brackets prosper. But not until such people
are taxed, in my opinion, and definitely made to feel
the burden of this situation, will they ever oome to
realize how serious it is. Hitherto taxes have been
something that the other fellow always paid. I predict
that when they reach the great masses, there will go
up a cry to heaven, figuratively, which will make
our government a little bit less prodigal than it
has been in the past.
Surely a man of your experience and vision would be
willing to agree with me that to say the lea§rt, in the
last eight years our government has been extremely care
less with money. It has been suggested by Various
economists whose ranarks I have consistently followed
that the government could cut off many bullions of
dollars per year in useless expenses, m I t o re thinking
of higher taxes, may I suggesfythis^as^rSlie chief remedy.
Respe
Ur. tfarriner S. Eccles, Chairman,
Federal Reserve Board,
Federal Reserve Building,
Washington, B.C.
December 2, 194L*
Mr. George witsraa, Jr.,
Ambassador Building,
St. Louis, Missouri.
Dear Mr. M t sma:
This is to acknowledge your letter of
November 27 with regard to my recent talk before the
National Industrial Conference Board. As the news
paper accounts gave a very much abbreviated version
of it, I am enclosing a copy of the text.
However, I would not agree with you that
at this juncture there is any necessity from the
public interest standpoint for making the incentive
for investment any greater than it is under present
or, for that matter, prospective tax laws. As you
know, more and more production must go for defense
and we have reached, if we have not already passed,
the maximum of production for civilian use. Because
of the existing and probable shortages of strategic
materials, to say nothing of skilled labor, it would
not be wise public policy to attempt through incentive
taxation to build new plants for civilian production.
Moreover, there is no shortage of capital — quitejjie
contrary — and, therefore, no need in the public
terest to give capital further incentive to invest
Certainly our tax structure does not bear on capital
any more heavily than is the case in all the leading
countries that I know about today.
For a long time I have advocated spread
ing the income tax base* So far as the low income
groups are concerned, however, they have been heavily
Mr. George »«itsma, Jr.
-2-
assessed on consumption taxes, which have been great?^%
increased in the last decade.
Finally, I cannot go along vdth your on
your assumption that "the government could cut off
many billions of dollars per year in useless expenses."
That is constantly being said, but it is wholly un
realistic and, in my opinion, far from being the chief
remedy. I have no doubt that some expenditures could
and should be cut drastically, but the aggregate would
not be significant in the totals today.
While we do not see eye to eye, I neverthe
less appreciate your courteous letter.
Sincerely yours,
M. S. Iccles,
Chairman.
enclosures
ET:b
ROSS B. MATEER
LICENSED PROFESSIONAL
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ELECTRICAL ENGINEER
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1869 WYNNE W O O D ROAD
^
PHILADELPHIA, PA.
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December 3> 1941«
Mr. Boss 6. Mateer,
1869 Vnynnewood koad,
Philadelphia, Pennsylvania.
Dear Mr. Mateer:
This is to acknowledge your letter of wovember ¿9 with regard to the
so-called withholding tax. This is not my particular invention, but one which
Treasury experts have considered and they, of course, have the responsibility
for presenting tax programs to Congress.
The name is perhaps an unfortunate one, but in principle the tax is
sound and equitable. xt is based on ability to pay. ¿t is collected at the
source, which is a relatively convenient way to collect taxes, and it would
bring funds into the Treasury currently out of incomes, dividends, etc. hS
I stated in a recent talk, I would like to see consideration given to coupling
such a tax with some form of compulsory savings.
.as for the general sales tax which you suggest, I have been and I
continue to be wholly opposed to it because it is not based upon ability to pay
and it bears with particular severity upon the lowest income groups who have the
least at stake and the least to defend. Moreover, they are already subject to
heavy indirect consumption taxes.
Sincerely yours,
M. S. Iccles,
Chairman.
ET:b
UJTe TAX MAGAZINE
214 N. MICHIGAN AVE., CHICAGO
EDITORIAL OFFICE
Chicago, December 2, 19^1
Marriner S. Eccles, Chairman
Board of Governors
Federal Reserve System
Federal Beaerre Building
Washington, D. C.
Dear Mr. Eccles:
May we have your permission to reproduce
as an article in TAXES your recent address (Government
Release Z-615) before the National Industrial Conference
Board in Hew York City? Use of the material of course
would be conditioned upon the Conference Board's agree
ment to release the material to us.
Please advise us at your early convenience.
Very truly yours,
TAXES
The Tax Magazine
William N . Wise, Editor
WNW:lw
A COMMERCE CLE AR ING HOUSE PUBLICATION
December 4> 1941♦
Mr. fcilliam jn. »-ise, i<iitor,
Taxes, The Tax Magazine,
214
Michigan avenue,
Chicago, Illinois.
Dear Mr. i/vise:
Chairman Eccles requested me to
acknowledge your letter of December 2 and
to say that you have permission to repro
duce as an article in "Taxes” his recent
address before the National Industrial
Conference Board, a copy of which I enclose.
This text was made public by being
given to the press at the time of the address
and therefore is released in full for publica
tion, so you do not need to obtain permission
from the Conference Board for republication.
Sincerely yours,
Elliott Thurston,
Special assistant
to the Chairman.
enclosure
ET:b
£We T A X
M A G A Z IN E
214 N. MICHIGAN AVE., CHICAGO
EDITORIAL OFFICE
December 30, 19^1
Marriner S. Ecclee, Chairman
Federal Beserve Board
Washington, D. C.
Dear Mr. Eccles:
Separately we are sending you, with our compliments,
5 copies of our January, 19**2 issue, at page 9 o f which
appears your article entitled "Financing Full Production."
It was a privilege and a pleasure to present your
interesting discussion to our readers, and we hope that in
the very near future we shall again he honored to number
you among our contributors.
Very truly yours,
TAXIS - The Tax Magazine
. Wise, Editor
WlW/da
»*■
’
is
A COMMERCE CLEAR ING HOUSE PUBLIC ATION
CC:
Marriner S. Ecclee, Chairman { /
Board of Governors
Federal Reserve Board
Washington, D. C.
Chicago, December 2, 19^1
national Industrial Conference Board
Avenue
Nev York, N. Y.
2V 7 Park
Gentlemen:
May we have permission to reproduce as an
article in an early issue of TAXES the address of
Chairman Marriner Eccles of the Federal Reserve Board
delivered before a meeting of your Board in Hew York
City on November 25, 19^1 (Government Release No. Z-165) ?
A copy of our correspondence with Mr. Eccles,
in similar vein, is attached.
Very truly yours,
TAXIS - The Tax Magazine
William H. Wise, Editor
VNW:lw
BOARD OF GO VERN O RS
o r THE
FEDERAL RESERVE SYSTEM
Office
C
Chairman Eeeles__________________
Fm m
Date December 3 , 19 m
C o r r e s p o n d e n c e
SubjectL.___________________________
Professor Hansen______________
I have read your paper which you gave before
the National Industrial Conference Board a week ago and
I think it is a first-class job.
It presents in bold and
vigorous fashion precisely the point of view that needs
to be stated and restated throughout the country.
M S I .
THE SEABOARD REFINING CO., Ltd.
E. T. GEORGE. P R E S I D E N T
J. W. GEORGE. S E C Y .-T R E A S .
CABLE ADD RESS
S.
R.
X.
“ SEABOARD”
P R IV A T E
RAYMOND
TA N K
L IN E
0 54 8
53
LO N G D IS T A N C E
Refined and Crude Cotton Oils
Soap Stock - Raw and Acidulated
9 0 7 B A R O N N E BLDG.
•
N E W O R L E A N S , U. S. A.
Dee* 4, 1941.
Hon. Marriner S. Scoles,
Federal Reserve Board,
Washington, B.C.
Dear Gow*Eceles:
I write to congratulate you on the excellent address delivered in Hew
York at a recent meeting of the National Industrial Conference Board* It
cannot but prove enlightening to many and inspiring to all who are really
willing to do their fu.ll share toward national Defense.
There are, I regret to say, many successful business men putting forth
dire prophecies as to the inability of this Country to stand the amount of
taxation necessary to see World War No« E through to a satisfactory con
clusion* Likewise, equally as many perhaps predicting a long and destructive
depression, following a return to peace*
I am in hearty accord with your economic philosophy, as given in second
paragraph, page 2, of the timely and admirable speech mentioned*
I am particularly glad to note frequent favorable references in the
Press of the Country in recent days to your sound and specific recommenda
tions made to Congress some months ago, concerning methods of taxation, price
control, avoidance of inflation, etc* I earnestly trust a strong and helpful
influence will yet develop therefrom*
I am anxious to aid the Federal Reserve System in every way possible and
look forward with satisfaction to my third term of three years each, beginning
Jan. 1, 1942, as a Class B Director in the Atlanta Bank, to which I was
recently elected*
What are the prospects of a visit to New Orleans? Be sure to come
whenever the opportunity offers.
Hoping you and yours are well, I remain, with regards and best wishes,
Cordially,
ETG/IM
December 10, 1941*
Dear Mr. George:
You were very thoughtful to write me
your note of December U in regard to my recent
talk before the national Industrial Conference
Board. I appreciate having your favorable and
encouraging comments.
ifthile I do not see any immediate
prospect of getting to New Orleans, particularly
now that this war situation has c.ome upon us, I
have frequently recalled with pleasure my visit
in 1935 and the luncheon.that you gave for me.
I am glad to know that your interest
in t.he System continues and that the Atlanta
Bank is to have the advantage of your service
as a Class B Director.
Sincerely yours,
Mr.
The
907
New
Earnest T. George,
Seaboard Refining Co., Ltd.,
Baronne Building,
Orleans, Louisiana.
ET:b
RUTGERS UNIVERSITY
N E W BRUNSWICK
Ù
NEW JERSEY
(y
December 11, 1941
Dear Dr. Agger:
This is to thank you for your
thoughtful note of December 4 with regard
to my recent talk before the National In
dustrial Conference Board.
It is encouraging to have your
favorable comments, the more so because of
your knowledge of economic conditions.
Sincerely yours,
(Signed) U. S. Eccles
Dr. E. E. Agger,
Department of Economics,
Rutgers University,
New Brunswick, New Jersey.
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December 15, 19^1
Miss Mary P. Case,
Charlton Farm,
Avon, Sew York«
My dear Hiss Case:
taxation«
do*
This is to acknowledge your note of December 6 with regard to
Let me say frankly that I do not like it any better than you
Compared to other countries, particularly the British and
Canadians, we have not yet imposed taxes on individuals and corporations
as high as are thought vitally necessary in those nations, not so much
for the purpose of financing the war as to drain off the rising tide of
buying power coming on a market that must steadily shrink so far as
consider goods, especially the durable goods, are concerned* In a word,
our citizens have the choice between inflation or doing the things
necessary to prevent it* One of those things is to pay taxes* Another,
I agree, is to curb organised labor demand for constantly increasing
wages* In any case, it comes down to whether you would prefer the curbs
on inflation on the one hand or an inflation on the other that would
take as muoh or more away from you in high living costs.
If you will reflect a moment upon the sales tax, you will
realise that it is not based upon ability to pay but falls heaviest on
those who not only have the smallest Incomes but have the least at stake
and the least to defend. It is wholly inequitable. Those who are
fortunate enough to be in the higher income groups have the most at
stake and the most to defend* Certainly they cannot wisely wish to
shift the tax load to lower Income groups which are already more heavily
taxed on consumption than I have felt was just* I recognise that there
are great inequities as there is, especially from the standpoint of the
fixed income groups, and I wish I knew of some practical way to avoid
this injustice*
I am venturing to enclose a copy of the talk I gave recently
before the National Industrial Conference Board, as 1 assume it was a
newspaper reference to this that prompted your note*
Sincerely yours,
^enclosure
M. S. Eccles,
Chairman.
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_
February 16, 19U2
Mrs. Mary P. Case,
P. 0. Box 28,
Avon, Hew York.
Dear Mrs* Cases
Chairman Socles was interested to have
your letter of February 9* I am sorry that we
addressed it incorrectly, but your previous letter
did not give us any oorreot indication.
In accordance with your request, I am
returning Mr. Booles* letter to you, and I am en
closing also a copy of his radio talk at the
?o,
wn Hall Meeting last week.
Sincerely yours,
(Signed) Liiioit Thurston •
Elliott Thurston,
Special Assistant
to the Chairman.
Enclosures 2
ET:b
REPEAL MISSOURI SALES TAX COMMITTEE
Phone
Main 1861
Elmer E. Walter,
Chairman
Chas* P. Johnson,
Campaign Director*
CAMPAIGN HEADQUARTERS
722 Chesnut St«, St* Louis, Mo.,
2/6/42
Mr. Marriner S. Eccles, Chairman,
Board of Governors, Pe. Res* System,
New York City, N.Y.
Dear Mr. Eccles:
a s stated in your Chicago address, because a
"general sales tax**« tended to drag the standard of living of
the lower Income wage groups to a point where health and national
morale would suffer"*
The direct appeal in your New York address fully
cohcurred in, that all states should eliminate state sales tax*
In my direct appeal to the Hon. Pres., Franklin D. Roosevelt, last
October and copy to your office, set out the dangers for both our
economic and social structures as well as gnawing at the founda
tion of democracy with a sales tax*
You: can list Missouri as the first State to take
the initiative for repealing this vicious tax* Survey of the State
shows, 75 per cent pf all business and consumers contacted in favftr
of repeal and 91 per cent for taking the tax off of food.
The repeal conducted by privileges set-forth in
both national and state constitutions, the right of petition* This
is to appear on our general election ballot Nov« 3, 1942« Our re
quirements, 5 per cent of signatures of legal voters of the last
general election in two-thirds of our 13 congressional districts*
AiJ.1 work carried on through volunteer contributions« We feel more
than confident, Missouri will be the No. 1 State in answering your
appeal*
Will keep your office advised from time to time
of progress and permit us to thank you in advance for further co
operation on this subject*
Very truly yours,
CPJ/m
Chas« P.^Jwmson , Director.
Ex-Capt/ SOT*
February 13, 19^.
Mr. Chas. P. Johnson, director,
Repeal Missouri ¿ales Tax Committee,
Chesnut Street,
St. Louis, Missouri.
Dear Mr. Johnson:
This is to acknowledge your letter of February 6.
The objections to a general sales tax would, of course, ap
ply to local as well as Federal taxation. However^ I am
strongly in favor of selective excise taxes at this time to
discourage civilian consumption of critical materials, and
I am wholly opposed to the principle of reducing local tax
ation at the present time in order to make it easier to pay
Federal taxes.
I am venturing to enclose a copy of what 1 said
at the Town Hall broadcast on February lk, as this, pretty
well summarises my general viewpoint. In otner words, I
would not want to have it thought that my appeal is in any
.sense for a reduction in local taxation, though of course
this would not bar repeal of unfair or inequitable taxes
providedj however, some effort was made to replace them by
taxation that would be fair and equitable.
S in c e re ly you rs,
(Signed) M. S. Eccles
M. S. Eccles,
Chairman.
Enclosure
ET:b
MINNEAPOLIS
STAR JOURNAL
JO H N
COWLES
PRESIDENT
and
TRIBUNE
December 22
1941
Mr. Marriner S. Eccles
Federal Beserve Board
Washington, D. C.
My dear Marriner:
I was sorry not to get to see you when I was in Washington last week, but I can well
appreciate how swamped you were with the new war developments.
Your address before the National Industrial Conference Board in New York on November 25th
interested me very much, and I find myself in pretty complete agreement with all of your
views. You are certainly right in saying that finance must be the servant of economic
activity and must be used to stimulate production and employment, so that we will attain
both a larger total and a more equitably distributed national income.
You will undoubtedly have considerable to do, either directly or indirectly, with framing
the new tax law, and there are two points in connection with it that I would like to bring
to your attention.
First, under the terms of the existing excess profits tax law, borrowed money capital is
treated substantially less favorably than equity capital in computing the excess profits
'•.ax credit, whereas, in my opinion, borrowed money capital should be at least on a parity
vrith equity capital and should conceivably be given a slight edge.
If a corporation is forced to suspend dividend payments on its common stock (or equity)
capital, the corporation's future existence is not thereby jeopardized. Borrowed money
capital, on the other hand, is a much more onerous thing than equity capitals If a company
defaults on either its interest or its debt retirement provisions, it faces receivership.
While obviously from now on taxes are going to have to be extremely heavy, unless corpora
tions are allowed an opportunity to earn enough, above interest and taxes, on borrowed
money capital (l) to justify their taking that risk, and (2) to enable them to repay the
borrowings out of the net earnings on that additional capital over a reasonable period of
years, there will be no new borrowing or lending and the economic system will stagnate.
And if companies now owing borrowed capital in amounts large in proportion to their total
capital are not permitted to earn net after interest and taxes amounts sufficient to enable
them to retire their indebtedness over a reasonable period of time, we will have a lot of
technical receiverships.
This would probably mean that we would have to have a new super-E.F.C. to refinance companies
that, because of taxes, cannot meet debt retirement provisions. I also know various
individuals who have purchased a business and had the company give its notes for the pur
chase price in the apparently reasonable expectation that over a period of years net earnings
would be sufficient to retire the indebtedness. If the present discrimination against
borrowed money is not eliminated in the new law many such individuals will lose'their
eauity due to their inability to net sufficient above taxes to enable them to meet their
Ybligations.
Under the present law, a company owing $5,000,000 of notes or bonds payable at 4fo interest
coNTikuATitoN
Min n e a p o l is
STAR JOURNAL
AND TRIBUNE
Mr. Marriner Eccles
Page 2
December 22
1941
is allowed a credit for excess profits taxes of eight percent on half of that borrowed
capital, which credit amounts to $200,000. In addition, half the interest paid (half of
$200,000 or $100,000) is regarded as a deductible expense, so the total credit before
interest amounts to $300,000. Prom that $300,000 credit, $200,000 of interest must be
paid, leaving $100,000. $100,000 is 2$ of the $5,000,000 borrowed. If, because of
borrowing that $5,000,000, the company's earnings before interest increased exactly
$300,000 the company, after paying interest of $200,000, would have $100,000 left. This
$100,000 would be subject to the normal income tax of 31$, leaving net after interest
and taxes $69,000, or only 1.38$ on the $5,000,000.
In other words, the company could only earn 2$ before normal tax, or 1.38$ after normal
tax, on its borrowed capital before being liable to excess profits taxes.
I realize that the problem is complicated, but I do not believe that our economic system
will properly function unless it is possible to retain more than 1.38$ net on borrowed
money capital before paying excess profits taxes.
If the borrower were paying 5$ interest he could then retain only slightly over 1$ before
paying excess profits taxes on the earnings from that borrowed capital. If he were paying
only 2$ interest, he could retain more than 2$. This variation in itself is an inequity.
It favors the strong companies, that can borrow at low rates of interest, and penalizes
the smaller or weaker companies that must pay a higher rate of interest.
My specific suggestion for remedying this inequity in the present law is that all companies
be allowed to earn, net, say 5$ above interest on existing borrowed money capital before
being subject to any excess profits tax. That is certainly not an excessive percentage
because if the normal corporation income tax is increased to 40$ it would leave only 3$
net after normal tax as the maximum that a company could retain on borrowed money capital
earnings without being subject to excess profits taxes. That would enable companies,
however, if they prospered, to earn enough on their borrowings to rex>ay them over a period
of 33 years.
Unless some such provision is written into the new law in regard to borrowed capital, I
fear we will be permanently crippling the functioning of the economic system.
Another opinion regarding the new tax law that I want to throw into the hopper is somethin^?
that a dozen different business men fientioned to me when I was in England last winter with
Wendell Willkie. They said the greatest fiscal mistake the British government had made
was to establish a 100$ excess profits tax. They said the unintentional effect of that
levy was to encourage higher costs and reduced efficiency; that during a period when there
was already a shortage of man power, it was a serious mistake to levy a tax so high that
there was no financial incentive for corporate managers to try to get along with fewer
people on the payroll. They said that the theoretical possibility that part of this excess
nrofits tax might be repaid after the war was not psychologically important enough to
influence business executives' actions, and that because all earnings over the previous
base figure had to be paid to the government in taxes there were needless employees and
unnecessary xiaste in the administration of almost all businesses in England.
I assume that some people will advocate extreme increases in our present excess profits
tax rates. I think it important that these rates not be put so high that they will eliminate
bhe incentive for efficient, economical operation. I do not know the percentage of tax
continuation
MINNEAPOLIS
STAR JOURNAL
AND TRIBUNE
Mr. Marriner Eccles
Pag6 3
December 22
1941
at which the psychological breaking point comes, but there obviously is some such
breaking point. If we pass that point I think we shall unintentionally encourage
inefficiency, reduce the government's tax collections from corporations, and increase
the economic forces trending toward inflation.
If and when you have the time, I should appreciate your writing me whether you are in
general agreement with the views that I have expressed. If you are in such agreement
I think you will be performing a genuine public service in seeing that your views are
impressed upon the people who will be writing the new tax measure.
With warm personal regards, and the hopes that our paths will cross again in the not
too distant future*
Sincerely yours,
John Cowles
January 5$ 1942
U r. John Cowles, P re s id e n t,
M in n eapolis S ta r Jo u rn al and T rib u n e ,
M in n e a p o lis , M innesota.
D ear John:
T h is is t o acknowledge your l e t t e r o f December 2k, I am
g la d t o know th a t you a re in g e n e ra l accord w ith my t ^ lk b efo re th e
N a tio n a l In d u s tr ia l Conference Board. I am s o rry I d id not have an
o p p o rtu n ity t o t a lk w ith you when you were in W ashington.
You ra is e two p o in ts in reg ard t o ta x a tio n th a t I have
discussed w ith our s t a f f h e re . W hile I a p p re c ia te th e im portance o f
e n a b lin g c o rp o ra tio n s t o meet fix e d o b lig a tio n s to repay d e b t, I do
n o t b e lie v e i t would be w ise t o in c re a s e th e allow ance fo r borrowed
c a p ita l as i t stands in th e presen t la w . M eeting o b lig a tio n s t o repay
debt is a method o f re in v e s tin g p r o fits and i t is d i f f i c u lt to see why
th e stockh old ers o f A c o rp o ra tio n should be allo w ed t o make a la r g e r
amount o f p r o f it s fr e e o f excess p r o fits ta x (because th e y in v e s t p a rt
o f th e p r o f it s in th e repayment o f d eb t) th an th e stockh old ers o f B
c o rp o ra tio n who have an equ al e q u ity investm ent b ut no co rp o ra te debt
t o rep ay .
The example you c it e p a in ts th e p ic tu re a l i t t l e b la c k e r
th a n i t a c tu a lly i s . A c o rp o ra tio n th a t makes 6 p e r cent on money
borrowed a t 4 p e r cent would have o n ly 2 p e r cent to devote to th e
repayment o f d e b t, i f i t had no ta x e s a t a l l t o pay on th e s e earn in g s .
The sum th a t can be devoted to th e repayment o f debt is not th e amount
earned “b e fo re being lia b le t o excess p r o f it s * but th e amount l e f t a f t e r
excess p r o f it s a re p a id . Earnings on e q u ity c a p ita l a re a ls o a v a ila b le
f o r th e repayment o f d e b t.
I am v e ry much in te re s te d in th e c r itic is m s o f th e 100 p er
cent excess p r o fits ta x r a te you heard on your t r i p t o England. In th e
course o f my statem ent in September on th e p ric e -c o n tro l b i l l b e fo re th e
House Banking and Currency Committee I expressed my o p p o sitio n to excess
p r o fits ta x ra te s so high as t o im p a ir e ffic ie n c y .
I hope I w i l l have b e tte r lu c k th e n ext tim e you a re in town
and we can g et to g e th e r.
M th k in d e s t p erso n al re g a rd s ,
S in c e re ly yo u rs ,
(S ig n ed ) M. S. E ccles
».^,'.1111
BOARO OF GOVERNORS
O P THE
FEDERAL RESERVE SYSTEM
Office Correspondence
jfrmwi
Date
December 31. lQJil
Mr» Thurston_________________
RnWjftr.t; Comments on Cowles Letter
Martin Kro^t_________________
/*iiK
______________________ _____________
1. Most people would say excess profits ought to be defined in
terms of return on funds provided by stockholders, not by creditors. If the
stockholders of A corporation have an equity investment of 0100,000, they
should be entitled to make the same profits, free of excess profits tax,
as the stockholders of B corporation, who also have an equity investment
of $100,000. If B has borrowed $100,000, the law allows it to deduct
interest on the amount borrowed. If it makes more than interest on the
money borrowed, B»s stockholders will make more profits than A* s stock
holders. If A*s profits are just enough, B’s are excessive and properly
subject to tax. In meeting its obligations to repay the principal of the
debt, B is adding to its stockholders* equity and increasing their wealth.
Why should the Government allow B* s stockholders to make a tax-free rein
vestment of profits and not A»s stockholders, because B happens to be in
debt and A does not?
In f a c t, however, th e law does make a concession to stockholders
o f debtor co rp o ratio n s and allow s th e same ra te o f re tu rn on h a lf o f
borrowed c a p ita l as on e q u ity c a p ita l. The d iffe re n c e between th e in te r e s t
a c tu a lly p a id on borrowed funds and th e 8 p er cent s ta tu to ry ra te o f re tu rn
allow ed rep resen ts a co n sid erab le concession, which should not be fu rth e r
in crease d .
2. The trouble with the corporation cited in Mr. Cowles* example
is not excessive taxes, but inadequate earnings before taxes. If it makes
only 6 per cent on its borrowings and pays 4 per cent interest, it would
have only 2 per cent to devote to debt repayment even with no taxes at all
to pay. If it makes 10 per cent on its borrowings, it will have ij.,5 per
cent to devote to debt repayment after paying normal and excess profits
taxes at existing rates. Tfilhat is available to repay debt is not what it
can earn before it pays its first dollar of excess profits tax but what it
has left after paying its actual excess profits tax liability. Moreover,
anything earned on equity capital is also available to repay corporate
debt, if the stockholders wish to dispose of profits in that way.
3. The simplest way to eliminate the differential cited by
Mr. Cowles between earnings allowed to companies paying low rates of interest
and companies paying high rates of interest would be to make no allowance
for borrowed capital at all.
1|. The Chairman is on record in the price-control hearings as
being opposed to excess-profits tax rates so high as to destroy the incentive
for efficiency in management.
5 . The fo llo w in g paragraphs attem pt to express these ideas in a
form s u ita b le fo r a rep ly«
To:
Mr. Thurston
-2 -
Tihile I appreciate the importance of enabling corporations to
meet fixed obligations to repay debt, X do not believe it would be -wise to
increase the allowance for borrowed capital as it stands in the present
law. Meeting obligations to repay debt is a method of reinvesting profits
and it is difficult to see why the stockholders of A corporation should
be allowed to make a larger amount of profits free of excess profits tax
(because they invest part of the profits in the repayment of debt) than
the stockholders of B corporation who have an equal equity investment but
no corporate debt to repay.
The example you cite paints the picture a little blacker than it
actually is. A corporation that makes 6 per cent on money borrowed at 1*
per cent would have only 2 per cent to devote to the repayment of debt, if
it had no taxes at all to pay on these earnings. The sum that can be
devoted to the repayment of debt is not the amount earned "before being
liable to excess profits” but the amount left after excess profits are
paid. Earnings on equity capital are also available for the repayment of
debt.
I am very much interested in the criticisms of the 100 per cent
excess profits tax rate you heard on your trip to England. In the course
of my statement in September on the price-control bill before the House
Banking and Currency Committee I expressed my opposition to excess profits
tax rates so high as to impair efficiency.
@FedFRASER