TAXING SAVINGS

Evening Post, Issue 37, 12 August 1936, Page 11

TAXING SAVINGS

OBSTACLE TO PROGRESS

"EATING THE SEED CORN"

Taxation of companies' savings, or reserves, as they are called, is regarded with grave misgivings in the United States. Recent legislation designed to tax reserves is dealt with fully by Dr. B. M. Anderson, Economist to the Chase National Bank of the City of New York, in a bulletin issued by that institution. He described such legislation, when it had passed the House of Representatives, as "eating the seed corn." Its effect would be, he said, to put "a progressive penalty tax oh the savings of business corporations,"^ as a substitute for existing Federa* taxes on corporate incomes and capital stock. The proposal involves taxing dividends received by company stockholders, or shareholders, at the 4 per cent, normal rate from which they are now exempt. The avowed i purpose, Dr. Anderson explained, is to force a larger distribution of dividends and a reduction in corporate savings. He predicted "grave trouble for business" as the certain result of such legislation. ! SAVINGS ATTACKED. ' Dr. Anderson states that the underlying philosophy of the legislation in question is the theory originating with Sismondi and Rodbertus, passing on, with successive modifications through Karl Marx to John A. Hobson, and from him to J. M. Keynes and Wad-j dill Catchings, that "excessive savings are responsible for our troubles." This theory is indefensible. Pathologies in recent American financial histoty are attributable to excessive bank expan-i sion, rather than to savings. The four normal sources of capital are defined by Dr. Anderson as follows:—(1) Individual thrift; (2) business thrift and especially corporate, thrift; (3) taxation for capital purposes, as where the Government taxes incomes' for the purpose of paying down public debt, returning funds to the capital market in the process; (4) direct capitalisation, where new, concrete capital is created without the intermediate step of money transactions, most important in agriculture.

Air four of these sources of capital are held to be normal, wholesome, and dependable. All four are good for the country and all except the first source lead to the increase of the country's capital without an increase in the country's debt. . . , BANK CREDIT. The fifth source of capital was new bank credit. On the face of it, it seemed absurd to contend that the signing of a note by a bank's customer, accompanied by the entry of a new deposit credit on the liability side of a bank's balance-sheet—the mere creation of two debts—should mean the creation of new capital. But the .business man, armed with this new bank credit, could buy the materials and hire the labour which he needed to provide him with new.capital equipment. It must be recognised that held within proper limits this was the real source of new capital. This fifth source of capital, wholesome and sound when held in proper relation to the general growth of industry and to the growth in the first four normal sources of capital, was greatly abused during the war in most countries. AN APPALLING DIFFICULTY. But the "important thing from the standpoint of the sound growth of the country," Dr. Anderson contends, is that capital should increase more rapidly than debt. The most appalling difficulty that we (the United States) have faced in the years following 1929 has been the great volume of debt resulting from easy money policies in the preceding period. Dr. Anderson adds that the United States is launched upon a course which means a gigantic increase in debt and which is discouraging or even "paralysing most of the sources of capital which do not involve the creation of debt." The rates proposed to be applied to j corporate savings he describes,as "appallingly high progressive penalty rates." . - . In conclusion, Dr. Anderson states that in his judgment the taxation of company reserves or savings would operate powerfully towards forcing on American corporate business many of the unsound financial policies of American agriculture. (1) The proposed law would drive many small corporations to disincorporate, while it would operate to prevent all corporations from accumulating adequate reserves in prosperous times. (2) It would tend to increase the debt of corporations for needed expansion in prosperous times. "Our financial troubles," he remarks, "have come from excessive creation of debt," not from excess of savings.