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25 Maroh 21, 19*4-5. Honorable Harry Flood Byrd, United States Senate, Washington 25, D. C. Dear Senator: I was glad t o have the chance t o talk with you the other day, and knowing of your interest in the matter, I am venturing t o enclose a copy of my statement on the capital gains tax« The objections, coming c h i e f l y from the f i n a n c i a l d i s t r i c t , which I have so f a r seen, narrow down to two points: One, that the tax would tend to f r e e s e the market, and the other that i t would det e r r i s k capital in postwar. Neither o f these arguments seems valid when compared t o the help this tax would be in holding the economic s t a b i l i s a t i o n l i n e . As I stressed in point 6 , this i s frankly an expedient and, of course, I do not l i k e these d i r e c t controls any more than the next f e l l o w . They should be taken o f f j u s t as soon as i n f l a t i o n a r y dangers pass. I t i s understandable that the brokers who thrive cm volume and i n s t a b i l i t y of the market should not l i k e the proposal, I think there i s nothing in t h e i r argument that i t would have the opposite e f f e c t from the one intended; that i s , that i t would tend to freeze the s e l l i n g of stocks. I t would, I hope, c h i l l the speculative f e v e r . I f stock and other prices of capital assets were to continue going up with this tax in e f f e c t , i t i s hard to imagine to what levels they would go to without i t . So long as the stock market or real estate r e f l e c t s underlying values and longer-range prospects and prices move upward i n an orderly way, there can be no o b j e c t i o n . I t i s the specul a t i v e manipulations and gyrations that ought to be stopped, and I think this tax would e f f e c t i v e l y do i t . I have not undertaken t o say whether values are too high or t o o low. The point i s that speculative whipping up of p r i c e s , such as i s invited by the capital gains tax loophole, should be nipped in the bud. I t i s too bad that t h i s action was not taken sooner. I t i s too l a t e once the speculators have driven the prices up to the point where the bubble i s bound t o break, with disastrous consequences t o the entire economy. Xn any case, there could not be any dangerous speculative i n f l a t i o n of capital values i f t h i s tax were in e f f e c t . Honorable Harry Flood Byrd (2) March 21, 191+5 ©16 other objection i s that such a tax would deter private enterprise i n the postwar. This argument against the capital gains tax in peacetime has been overworked, in my judgment. Anyway, nothing would so help to draw risk capital into new enterprise as to encourage investment in equities, which i s preferable t o debt forms. This encouragement, in turn, can best be provided ( l ) by r e ducing the double taxation of equity c a p i t a l . I would give a credit t o corporations f o r dividend disbursements, the c r e d i t to be 25 P®** cent or the f u l l amount of the normal corporation t a x . As the dividends thus received would be subject to the individual income tax, double taxation should be avoided by giving the 25 per cent credit or exemption t o the corporation disbursing the dividends. Such a credit would, on the one hand, be an inducement to the corporation to d i s burse earnings, and, on the other hand, an inducement to the investor t o put his money into equities f o r the income; (2) by providing an exemption of 125,000 from the excess p r o f i t s tax. Hhile this would not matter much so f a r as the large corporation i s concerned, i t would be a great boon t o the smaller and medium sized concerns. Instead o f having a very low capital gains tax or none at a l l , i t would be far better to retain the tax in such a form as t o penalize the speculator, who i s thinking in terms o f a r e l a t i v e l y quick turnover, and thus t o encourage the real investor, who i s thinking in terms of income o r longer-range appreciation, to put his money into equities. The low capital gains tax of the late 20*s, f a r from encouraging venture capital to go i n t o new production, provided a strong incentive to turn instead t o making money the easy way i n stock market speculation that furnished neither employment nor new wealth. I t i s upside down now» We have necessarily high wartime surtaxes and excess p r o f i t s taxes which discourage investment, but a low capital gains tax that encourages the speculator. I f the wartime capital gains tax proposal should be put up t o the Congress, I hope you would give i t very careful consideration in order t o form your own opinion a f t e r weighing a l l of the pros and cons. With kindest personal regards, Sincerely yours, M. S. Boeles, Chairman. H A R R Y FLOOD B Y R D , V A . , C H A I R M A N KENNETH MC KELLAR, TENN. CHARLES O. ANDREWS, FLA. SCOTT W . LUCAS, ILL. JOHN H . B A N K H E A D , A L A . BURNET R . M A Y B A N K , S . C . ° E T E R G . G E R R Y , R . I. 4EODORE G . B I L B O , M I S S . ARTHUR H . VANDENBERG, MICH. WALLACE H. WHITE, JR., MAINE ALEXANDER WILEY, W I S . HENRIK S H I P S T E A D , M I N N . HARLAN J. BUSHFIELD, S . D A K . HI Craieò ¿òiaie:* Verteile COMMITTEE ON RULES M . J. M E N E F E E , C L E R K March 22, 1945 & Honorable M. S. Eccles Chairman, Board of Governors Federal Reserve System Washington 25, D. C. My dear Marriner: I have just received and noted with the greatest interest your letter, with enclosure. Thanks so much for giving me your views respecting this very vital matter. I am always glad to see o r hear from you. With kind regards, I am Faithfully yours,
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