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life** President* Baclosad i s a briaf BK^or&ndura on the Senate Fi&aaca Cotssittea* a tax proposal*. I feel that they are so unsfttisf&etory froia every gtaadpolntj economically, socially ws£ politically, and f a i l so eoapl^teiy to aeet the objectives which you hate onunciatod tliftt £ ipomld b« xr«sales in discli&rgiag the duties af this offica and ia ^r layitty to you If 1 filled ta rt»^<wti agr opislcm &£ to the effect* viiieh enactaeat of «ueh proposals hare cm business., bonklag sad your ^irtiro r»-> I ea taking the of burd^iing yoa with this aeeeesarily short st&teiseat of ab|«etions to the Senate Goawit- Honorable President of tb« halted States, The White House* lay £?, 1956» YQ THE Sffl&TS CQlfilITTl^fS TAI PROPOSALS of the Senate Oosodttee's tax proposals would, (!) penalise small corporations, (2) m k © the cost of the corporate form of enterprise well-nigh prohibitive for snail business mmi9 (S) eon«» atitute a departure fron the principle of taxing according to ability to paj, (4) perisdt wealthy .stockholders to continue to erode their fair share of taxation* (5) favor rather ttum ®h®ok the growth of at*economic oiga«ss, (S) be ineffectlv® 1 B forcing more porehasing power into circulation* the position of o«a«r@ of small corporations would be adversely affected because the corporate Income tax would be raised from percent to IS percent, && compared with only a 5 percent increase for large corporations. If, owing to their lack of access to the capital aarkets, saall corporations retained earnings for d#bt retirement parposes or for expansion, they would be subject to an additional tax of 7 percent, or 25 percent in all, M contrasted with 12§ percent now* If they distributed earnings a© dividends, the owners would have to pay a 4 percent normal personal income tax, or 22 percent in all* Such a tax, besides being unjust* would practically deny the benefits of incorporation to thousands of small busln@$s men, would lessen coatpetition and encourage the growth of large corporations* Th© income of stockholders in corporations retaining earnings would be subject to 10 percent aiore in taxes than under existing law (increase .fro® IS to 13 percent in the corporation income tax plus 7 percent)* This Is very much less than the surtax rates that would • 2 • apply to the incomes of many wealthy stockholders If earnings were distributed in dividends, but very much more than stockholders with low Incomes now pay* Consequently our tax system would be graduated downward rather than upward, contrary to the accepted principle of taxation in accordance with ability to pay* Furthermore, the r<ute of 7 percent applicable to undistributed earnings is so low that it would continue to be in the interest of wealthy stockholders to l<mve earnings undistributed with corporations* Since dividends would be subject to the 4 percent normal tax, the additional penalty upon retaining earnings would be only 5 percent* as against much higher surtaxes that would have to be paid if the income war© distributed* This means that nothing wuld have been accomplished in closing up the loophole through which the wealthy evade surtax rates. Consequently there would be no impetus to the disbursement of accuaulating idle corporate balances, to the flow of purchasing power, or to the recovery sioveiaent* In order to overcome just such objections I previously proposed! (1) retention of the present corporate tax structure* (2) exemption of eose $15*000 to relieve email corporations which compose 90 percent of the total. (5) a rate of 8 percent on earnings held back to oeet debt and statutory obligations* (4) a sufficiently high rate on undistributed earnings to induce corporations to pay them out to stockholders so that proper taxation would not be escaped* dear Sr« Secretary* i s & copy of & brief rtwd\m vhioh I tarn ssat to tiie Pre«io<wit# 1* »«lf-«3K>lsoatory «sd accords sdth viiat I h&ve pretlottsly discussed* Sincerely yours, the Hoaor&fci© SAeret«rj of the Troasury, ET:b
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