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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.




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