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Form 9, Ju til BOARD OF GOVERNORS or T H E FEDERAL RESERVE SYSTEM office Correspondence Tft Mr. Golrienweiser Prom George Jaszi Date M a y i, 191*2 Subject: Corporate Tax Plan of Uf J Ways and Means Committee According t o press reports Treasury o f f i c i a l s and the technical experts of the Ways and Means Committee have agreed upon an excess p r o f i t s tax plan t o be substituted f o r the plan o r i g i n a l l y advanced by the Treasury. The Ways and Means Committee i s to take a formal vote on the proposal today. The new plan provides f o r a f l a t 90 per cent tax on excess p r o f i t s . This rate compares with graduated rates running from 35 t o 60 per cent under the present law, and from 50 t o 75 per cent under the o r i g i n a l Treasury proposals. The new plan would also reduce the "normal" rate of return which i s exempt from excess p r o f i t s taxation under the option of determining excess p r o f i t s tax l i a b i l i t y by reference t o invested c a p i t a l . Under both the present law and the original Treasury proposal the excess p r o f i t s credit under the invested capital option i s 8 per cent on the f i r s t $5 m i l l i o n of invested capital and 7 P e r cent on the balance. Under the new plan i t would be reduced t o 6 per cent on invested capital in excess of §10 m i l l i o n but not in excess of $200 m i l l i o n , and t o 5 P0** cent on invested capital in excess of |200 m i l l i o n . No corresponding reduction of excess p r o f i t s credit under the base period earnings option i s contemplated. I t i s to remain at 95 V @ r c e n t of base period income. As f a r as normal and surtax i s concerned, i t i s l i k e l y that the Ways and Means Committee w i l l substitute a combined rate of lj.0 per cent f o r the original Treasury proposal of 55 V e r cent. Y i e l d of new plan The s t i f f e n i n g of the excess p r o f i t s tax would compensate only partly f o r the revenue loss that would be the result of reducing combined normal and surtax. Rough calculations indicate that the new plan would y i e l d only three-fourths of the original Treasury proposals. I f the original Treasury proposals would have yielded about $3 b i l l i o n additional revenue, the new plan w i l l y i e l d $750 millions l e s s . Incidence of new scheme The downward revision of the invested capital credit w i l l h i t hard a few very large corporations who had low earnings i n the base period. I t -2- w i l l be of lesser concern to smaller corporations with poor base period earnings. And i t w i l l not a f f e c t at a l l the bulk of corporations, whether larg^gmfr small, who had base period earnings s u f f i c i e n t l y high to make i t advantageous to them to determine their normal p r o f i t s by reference to base period earnings rather than to invested capital* Failure t o reduce the excess p r o f i t s credit under the base period earnings option means the passing up of a f e r t i l e source of additional revenue. Reduction of t h i s credit would have tapped more e f f e c t i v e l y corporations who were prosperous in the base period and who, under the present structure of the excess p r o f i t s tax, are allowed to continue to earn 95 per cent of these p r o f i t s — however high they may be — without becoming subject to the excess p r o f i t s tax. S t i f f e n i n g of the excess p r o f i t s tax and reduction of combined normal and surtax (as compared with the original Treasury proposal) w i l l have the e f f e c t of shifting the r e l a t i v e burden of taxation from corporations that have not experienced a great increase of earnings over base period earnings to corporations who have experienced such an increase. For a corporation choosing the base period earnings option aggregate tax l i a b i l i t y under the new plan w i l l f a l l short of aggregate tax l i a b i l i t y under the original Treasury proposals unless the corporation has experienced an approximately 3 2/3 f o l d increase over base period earnings. Only corporations that have experienced a larger increase w i l l be h i t more severely under the new plan. For corporations choosing the invested capital option the situat i o n i s e s s e n t i a l l y similar, except that in their case the increase of earnings w i l l in general have to be even larger f o r tax l i a b i l i t y under the new plan t o catch up with or exceed tax l i a b i l i t y under the Treasury proposals.
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