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or THE


Office Correspondence

Crhair^^ Tfccles


pate ^ e 26,1957

Malcolm B. Bryan

Dear Mr. Eccles:
Here is the memorandum, bat I am afraid it is not
entirely what you wanted* I got started and could not stop.
I will be at home (Columbia 3674) after eight this
evening. I will come down early in the morning and try to
revise this in any direction you desire, in case a revision
would be useful.


Form.F. B. 131



Office Correspondence

Chairman Eccles

Subject: « f w « MmmaBmd


Malcolm H. Bryan

t>»» *yfi** of fmMd.pi capital and gold.



In accordance with your request, I am making the following brief

statement regarding the discussion of taxes to repel the inflow of foreign
capital and gold:

There seems to be substantial agreement that increased taxes

(of a withholding-tax type) will be required in connection with recurrent in—
come of foreigners from interest, dividends, and other such items as are listed
in the present law*
2. While there has been less agreement on the taxation of capital
placed here for speculative profits, there is no reason to alter the position
that speculative capital mast be subjected to substantial taxation if we are
to ilBpede the Inflow of capital urid gold to t-he extent reotriTed in the present
Even with the most inclusive taxation of foreigners that
is constitutionally and administratively possible, there will
still be broad avenues for such investment—state, municipal,
and (probably) Federal issues, plus direct investments in
American real estate and business property. If the speculative
markets are in addition left open to untaxed capital gains, the
avenues for the inflow would be so easy and attractive as to
make taxation hardly a useful tool for getting us out from under
the gold problem.
II, You are familiar with the tax proposals forwarded to you in various
memoranda. These may be briefly recounted as follows:
1. The first has been an increase in present withholding rate in
order further to reduce the attractiveness of the United States to investment

(^airman Eccles - 2

June 26, 1957

2. The second has been a capital gains tax to deal with speculative
This tax has been suggested (1) at a flat rate of from
10 to 25 per cent (depending on a final decision as to the
rate necessary), (2) without deduction for losses (in order
to provide a large deterrent to the in-and-out speculator
who expects a gain on balance), (S) confined to stock
certificates, on which the chief capital gains occur (in
order to make the tax easily administrable), and (4) the
tax has been proposed in a capital gains form, in preference
to other taxes to accomplish the same purpose,so that a
premium would not be placed on dealings in American securities
in the foreign as against American security markets.
The administration proposed is through American transfer
officesand American brokerage houses who hold stock securities
for foreigners. In the discussion of the tax, a very large
number of various examples have been put forward from all sides
but no example has thus far come to view in which the administration would not be easy and effective.
Two Treasury criticisms of which I have been verbally informed are that the non-deductibility of losses is a discrimination against the foreigner and that the administration would involve making American brokers and transfer offices discretionary
agents of the Treasury* The first is correct; and that element
of the proposal can be eliminated, though its elimination will
remove a useful feature of the tax. The second criticism
(regarding discretion) is incorrect. Even if it were correct,
the criticism would be relatively unimportant and easily remedied*
There may, of course, be other and fatal criticisms of this
suggestion that the Treasury has for some reason not seen fit to
convey to us.
III. It is impossible at this time for me to inform you precisely regarding the Treasury1 s current thought on the problem of taxing for^capital. The
only information available to me is from informal conferences to which I have
been invited. At the moment, however, (Saturday, June 26) Treasury opinion
appears to favor taxes of the following character:

§iairman Eccles - 3

June 26, 1937

1. The first tax would be a withholding tax of 22 per cent on
interest and dividends and other recurrent items of income payable to nonresident aliens and non-resident foreign corporations*

Provision would be made for fjlinp pf ryiairnM^fct least in
the case of individuals), *wiiich would include not only all income from American sources but all income from foreign sources*
The foreigner would be taxed upon the basis of the rate applicable (if less than 22 per cent) to an American national
having the same total income, and would be accorded a #1,000
personal exemption, plus an allowance for dependents if he
were the resident of a contiguous country* It is said that
the administration of this tax could be accomplished by
(1) having the foreigner who wishes to"Wie-«hr«»tag* if ^ £*** *
notarized before American consuls abroad. (2) submit copies
of his foreign income tax return, and (5) submit such other
proofs of total income as would be satisfactory to the Bureau
of Internal Revenue. It is added that in the administration
of the tax the proofs of income required of a foreigner would
be so severe as to make the privilege of filing a return,
practically speaking, an illusion* The idea is, I am told,
that nearly all foreigners would in fact pay the 22 per cent*
The following points can be made:
(1) It will be necessary for the tax rate to be applicable
on at least the security income of resident foreign corporations
in the United States. Otherwise (as is true in our present law),
avoidance will be widdbpen though the procedure of Setting up
offices or places of business in the United States and taking
of the 85 per cent exemption of domestic dividends.
(2) The administrative reliance proposed is not convincing.
a) An affidavit by a taxpayer is only useful when he
is open to criminal prosecution for false swearing,
which would not be true in case of a foreigner
because his person is beyond the jurisdiction of the
United States.
b) If a foreigner submitted a valid copy of a foreign
income tax return, it would be unsatisfactory because
the elements entering into income—in Great Britain,
for instance, the non-taxability of capital gains—
differ so widely from taxable income in the United
States. It would be necessary for us practically to
reconstruct the taxable income.

dtairman Eccles - 4

June 26, 1937

c) Even if income under foreign tax laws were
identical with the United States, and we
accepted foreign tax returns as proof, then
our income tax administration with respect to
certain foreign nationals would be no better
than the administration in their home country,
which is in many instances notorious.
d) There is little or no possibility of our providing against foreigners splitting their income
into several different tax returns, so that each
return, even if honestly made, would fall in a
bracket much below our 22 per cent rate; and this
criticism would apply whether we attempt to allow
the filing of returns with respect to a foreigner's
total income or merely with respect to his income
from American sources*
e) The proposal that a foreigner be allowed #1,000
exemption on his income would permit a substantial
amount of capital coming into the United States tintaxed, the amount of capital depending on the yield
of his securities•
Altogether, the program for allowing foreigners to file returns
does not appear to be a neat and practicable device and is likely to develop
into an administrative mare*$ nest» However % if the Treasury feels assured
(1) that avoidance by means of resident foreign corporations nil! be closed
find (2) that the option permitting; the filing of returns can be oAm^festered
so stringently as to make the minimum rate in practice 22 per cent on recurrent items of foreign income from American security investments, then there
is no reason why the proposal for a 22 per cent withholding tax should not be
a real deterrent to incoming investment capital* The suggested rate is,
curiously, more severe than any proposal ever made in this connection in behalf
of the Board,
2* The present Treasury thought regarding a tax to deter speculative
capital is in the direction of a 2 or 5 per cent tax on the gross proceeds
of all transactions for foreigners. It is assumed that such an amount withheld

dlairman Eccles - 5

June 26, 1957

from each purchase and sale would pile up a large sum and compel the foreigner
to file an American tax return.
(a) The assumption behind the tax on proceeds is contrary
to any reasonable expectation* All foreign transactions in
American securities would occur on foreign markets except at
such times as there was bt&ftg a net outflow of securities from
the United States or a net inflow* On such occasions the
foreign price would be the American price plus tax or the
American price less tax. The fact is, therefore, that with a
transactions tax the United States would withhold only twice
during the foreign career of each security certificate: once
when the certificate left the United States and once when it
returned.* A 2 per cent on gross proceeds, therefore, would
amount to a total tax of 4 per cent.
(b) The transactions tax would cause a loss of between 8
and 10 per cent of the total volume of business done by American
The preceding considerations with regard to this tax do not mean that
it could not be used. All that is necessary for its use is sufficient determination in the face of American brokers who will point out that a premium «*
placed on foreign markets and a large business loss occasioned when an equally
effective tax less likely to have similar results is available. It is w&
opinion, however, that a tax of much more than 2 per cent on purchases and
sales will be necessary in order to make the tax a really effective deterrent
to the inflow of speculative capital, since a 2 per cent tax, spread over the
large number of transactions through which the securities would go abroad,
would become an exceedingly small levy on each actual transaction.
It has been orally suggested that we could prevent securities from.
going abroad because of the transfer tax by levying a heavy stamp tax on all
securities exported or trusteed in the United States for foreign trading. This
is impracticable because of the Constitution prohibition of export taxes.

^airman Eccles - 6

June 26, 19S7

The last verbal suggestion made, of which I am aware, is that
we levy a 2 per cent tax on transactions and, if the security is exported
abroad or trusteed in this country, it should be stamped (as in the plan
suggested in my memorandum of April 27) with its purchase price and other
data, so that, when resold to an American, a flat capital gains tax of 22
per cent could be applied to all profits* If I have understood this verbal
suggestion correctly, it should be administrable and quite as much of a
deterrent as any proposal made in behalf of the Board. In fact, it is somewhat more severe than such proposals because, on any transaction in the American
market, there is a 2 per cent^on thejproceeds, regardless of whether the foreigner
has a profit or a loss* The fact that the 2 pear cent tax on transfers will
cause foreign transactions to be taken from American markets and consummated
in foreign markets, under the conditions noted above, is the only objection to
this combination of a transfer tax and a capital gains tax in the same way that
it is an objection to a transfer tax alone.