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BOARD OF GOVERNORS OF THE — FEDERAL RESERVE SYSTEM O f f i c e C o r r e s p o n d e n c e To Chapman Eoeleg, From Richard A. Musgrave Datejarch i?f 1914 Subject: Treasury Meeting on Corporate fl Taxation. Thursday I attended the t h i r d meeting i n a s e r i e s of Treasury d i s c u s s i o n s o f postwar tax problems. Mr. Randolph Paul, i n a speech next week, i s going t o e x press the opinion—which i s i n accord with the view stated i n your address b e f o r e the Tax I n s t i t u t e — t h a t the e x c e s s p r o f i t s t a x should remain i n f o r c e during the t r a n s i t i o n p e r i o d , although p o s s i b l y at lower r a t e s . He sees three main reasons f o r continuing the e x c e s s (1) Without a continued e x c e s s p r o f i t s p r o f i t s t a x during that p e r i o d : t a x , the p o l i t i c a l d i f f i c u l t i e s o f maintaining o r d e r l y wage and p r i c e c o n t r o l s would be i n c r e a s e d ; (2) Those c o r p o r a t i o n s which manage t o return t o peacetime production f i r s t may o b t a i n a considerable comp e t i t i v e advantage. Continued excess p r o f i t s t a x a t i o n i n the t r a n s i t i o n p e r i o d w i l l tend t o reduce i n e q u i t i e s o f t h i s t y p e ; (3) High p r o f i t s made i n the t r a n s i t i o n p e r i o d are s t i l l i n the nature of wartime p r o f i t s because they w i l l be generated by a f t e r e f f e c t s o f the wartime economy, such as accumulated backlog demands and s h o r t ages o f supplies due t o as yet incomplete return t o peacetime production. With the e x c e p t i o n o f Milton G i l b e r t (income Unit, Department of Commerce), who would l i k e t o see the e x c e s s p r o f i t s tax repealed immediately a f t e r the war, those present agreed f a i r l y w e l l with Mr. P a u l ' s p o s i t i o n . Mr. Morris Copeland emphasized that an announcement now t o repeal the excess p r o f i t s t a x immediately a f t e r the war would make i t much more d i f f i c u l t f o r the W.P.B. t o keep rirms from s h i f t i n g prematurely t o peacetime production. Several people argued that the need f o r continued e x c e s s p r o f i t s t a x a t i o n would depend a great deal on the success o f the W.P.B# i n managing an o r d e r l y resumption o f peacetime p r o d u c t i o n . The o p i n i o n was expressed that maintaining the e x c e s s p r o f i t s tax during the t r a n s i t i o n would become even more n e c e s sary i f wage and p r i c e c o n t r o l s should weaken. I t was pointed out that the term " t r a n s i t i o n period* as used by d i f f e r e n t people means d i f f e r e n t t h i n g s . Most a l l agreed with Mr. Paul that the e x c e s s p r o f i t s t a x should be continued f o r the t r a n s i t i o n p e r i o d , i f d e f i n e d as the p e r i o d o f return t o f u l l p e a c e time p r o d u c t i o n . There was l e s s i n c l i n a t i o n t o continue the t a x f o r the e n t i r e t r a n s i t i o n p e r i o d , i f d e f i n e d as the p e r i o d during which backlog demand remains s i g n i f i c a n t . Again nobody advocated that the excess p r o f i t s tax be continued permanently. - 2 - The d i s c u s s i o n then proceeded t o v a r i o u s a s p e c t s o f the c o r p o r a t i o n income t a x . I t was f e l t that a c o r p o r a t i o n income t a x i n some f o r m -would most l i k e l y be continued a f t e r the war, mainly because i t i s a major revenue source. Other arguments i n f a v o r o f a c o n t i n u a t i o n o f some t a x on c o r p o r a t i o n income were t h a t i n i t s economic e f f e c t s i t i s a comparatively ^good tax*1 (Mr. Colm) and t h a t i t might serve u s e f u l purposes as an instrument o f c o n t r o l • There was g e n e r a l agreement t h a t the prewar t a x system d i s criminated against e q u i t y f i n a n c i n g . As one remedy the p o s s i b i l i t y o f d i s a l l o w i n g i n t e r e s t payments as deduction from t a x a b l e income was c o n sidered, There was much i n t e r e s t i n t h i s p o i n t which i s scheduled f o r more d e t a i l e d d i s c u s s i o n a t the next s e s s i o n .
@FedFRASER