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Form F. R. 131 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM L - . U t C o r r e s p o n d e n c e Chairman Eccles Date May 25,1956. Subject: Lauchlin Currie r^cr Attached is a brief statement of objections to the Senate Committee^ tax proposals. May 23, 1936. OBJECTIONS TO THE SENATE COMMITTEE'S TAX PROPOSALS ^nactment of the Senate Committee's tax proposals would/') US penalize small corporations^ ny* w m u M make the cost of the corporate form of enterprise well-nigh prohibitive for small business menfC^) constitute a departure from the princif£Le of taxing according 00 to ability to pay) m m m A permit wealthy stockholders to continue to evade their fair share of taxation! tr?favor rather than check (4Y the growth of uneconomic bignessj ^MMbwMfci be ineffective in forcing more purchasing power into circulation* The position of owners of small corporations would be adversely affected SMPPPfML^u^i^^ the corporate income tax would be raised from 12 l/2 percent to 18 percent, as compared with only a 3 percent increase for large corporations* If, owing to their lack of access to the capital markets, small corporations retained earnings for debt retirement purposes or for expansion, they would be subject to an additional tax of 7 percent, or 25 percent in all, as contrasted with 12 1/2 percent now* If they distributed earnings as dividends, the owners would have to pay a 4 percent normal personal income tax, or 22 percent in all* Bfcafey^icar that*Such a tax, besides being unjust, would practically deny the benefits of incorporation to thousands of small business men, would lessen competition and encourage the growth of large corporations* Uae income of stockholders in corporations retaining earnings Wirvw^ be subject to 10 percent more in taxes than under existing law (increase from 15 to 18 percent in the corporation income tax plus 7 percent) ^ This is very much less than the surtax i 1 i JiliH 1 'mmHftttT''' 1 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 rate of 7 percent applicable to undistributed earnings is so low that it would continue to be in the interest of wealthy stockholders to leave earnings undistributed with corporations. Since dividends would be subject to the 4 percent normal tax, the additional penalty upon retaining earnings would be only 3 percent, as against much higher surtaxes that would have to be paid if the income were distributed. This means that nothing would have been accomplished in closing up the loophole throiogh which the wealthy evade surtax rates. Consequently there would be no impetus to the disbursement of accumulating idle corporate balances, to the flow of purchasing power, or to the recovery movement. nf trfaflf nbjjritiTnr tr A Su. J p^Y^^c; (Fj AJJ^M^ /LOU ^ *£} /> Wi. •C ' >- " r ,,r