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Form F.Jte. 131
BDARD DF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

Office Correspondence

n«
»«

To

Chairman Bccles

Subject:

From

Malcolm H» Bryan

Jwiyi,

__
_

In accordance with your desire to be kept abreast of the discussions of taxes to repel foreign capital and gold, I am reporting
conversations with the Treasury staff that occupied all of yesterday
(Wednesday, June 50).
1* Progress has been made on a good many points* But the staff
is handicapped in going further because there is in the group no clear
definition of controlling objectives»
The chief fact before us is that taxes mist be heayy enough
to repel in considerable measure the flow of capital and gold into the
United States and to impede the transfer of present bank balances into
the securities markets*

If this consideration could control a decision,

it is probable that we could now quickly reach an agreement to recommend
(1) an increase in the present 10 per cent rate on fixed items of income
in order to deter investment capital, and (2) a speculative profits tax
on stock certificates in order to deter the inflow of speculative
capital.
Z* Our problem appears to defy solution when the question of
discrimination against foreigners is brought into the discussion.
Repeated exploration of the subject seems to have convinced everyone
who has followed it closely that we can only deal effectively with the
foreigner by flat rates (of which our present tax is an example).




But

Chairman Eccles - 2

July 1, 1957

no flat-rate tax is entirely equitable on the small foreign security
owner in contrast with the large security owner; and there seems to
be no real basis for saying just what rate on foreigners would be
equitable in comparison with the variety of domestic graduated rates
on Americans. About the only point on which there is clear assurance
in this connection is that our present flat rate must be raised
considerably above its existing 10 per cent level in order to make it
of much use in keeping capital and gold out of this country*
3. At the morning session of the staff yesterday, Mr* Segrest,
of the Bureau of Internal Revenue, reported a plan for withholding 22
per cent from a foreignerfs interest and dividends and other items of
fixed income in the United States, with the foreigner allowed to file
returns and reduce his tax, on the basis of a return, to a minimum of
10 per cent. Mr. Segrest was himself very critical of the proposal,
and Mr. Zucker expressed serious doubts regarding its desirability.
The following points were made concerning it.




(a) The administrative load on the Bureau would be large
and especially troublesome in trying to deal with a type of
return that is unreliable and made by a taxpayer whose person
and, in many instances, whose property is beyond the jurisdiction
of the United States.
(b) The plan would not impel foreigners to file returns
when their fixed incomes from American sources were small in
comparison to capital gains, unless they had losses to offset
their gains.

Chairman Eccles - 3

July 1, 1957

(c) The plan would run athwart of laws in many foreign
countries that prohibit brokers in those countries from revealing their clients*
(d) The foreigner would realize his capital gain abroad,
where the United States would be practically powerless to check
up on his return*
(e) The tendency to realize capital gains abroad might have
the undesirable effect of developing foreign markets in American
securities and facilities for American trading abroad*
(f) The American administration would be powerless to prevent
foreigners from splitting their income by a multitude of devices
into many small parts in order to secure the advantages of the
lowest effective American rate*
(g) If the returns were permitted on the same basis as
Americans, an advantage would be created for the foreigner to
hold his capital here until he could obtain the lower capital
gains rates in accordance with the length of time property is
held*

If this procedure were not allowed for foreigners, we

would still have a discrimination.
All in all, the conclusion seems to be that, as Mr. Segrest
put it, a provision for foreign filing of returns would be simply
1
1

a gesture* and in practice the rate on foreigners would be what-

ever minimum rate is provided for fixed items of income—under the
proposal 10 per cent, which is no increase over the present law*




fihairman Eccles - 4

July 1, 1957

4. Both yesterday morning and yesterday afternoon a great deal
of attention was devoted to a speculative profits tax to be levied on
the gain from each stock certificate from the time it passes into a
foreign hand to the time it is resold by a foreigner to an American.
The whole procedure of applying this tax was canvassed. Mr. Francis
Greene, of the Securities and Exchange Commission, has expressed himself as favoring this tax. Mr. Segrest, of the Bureau, who went over
it with us, has expressed his opinion that it is fairly easily and
effectively administrable without substantial addition to the present
administrative procedure of the Bureau. Mr. Zucker, of the Treasury,
has expressed himself as feeling that this tax is the most promising
of the proposals for effecting a deterrent against speculative capital.