Cushions Provided

"That part of the fundamental philosophy of the New Deal which has come nearest to unanimous approval has been the resolve 'It must not happen again.' The determination to prevent the recurrence of wild booms and profound depressions has motivated some of the Administration's best work. . . . Now the Administration proposes a tax plan which, tosses overboard this sound philosophy. . . . The proposal is to prevent the accumulation of corporate surpluses by a prohibitive tax of about 33 1/3%. The principle is unsound. It is analogous to levying a prohibitive tax upon individual life insurance premiums. Surpluses are the life insurance policies of business firms. . . . To force industry to pay out all of its earnings in dividends in good years will, of course, have the effect of accentuating booms. And in years of depression, industry will find itself without means of paying for current operations -- in plainer words, without money to meet the payroll. Had American industry entered this Depression stripped of all surpluses, scores of the biggest of corporations could not have survived."

This blast against President Roosevelt's proposed tax on undistributed corporation profits (TIME, March 9, 16) issued last week not from a Republican diehard or frantic corporation executive, but from Today's Editor Raymond Moley, once officially and still unofficially a potent ganglion in the collective Roosevelt brain.

For once a group of Congressmen found themselves in agreement with a Brain Truster. President Roosevelt and Treasury experts had argued that to adjust the proposed tax so that corporations might put by some of their profits as a cushion against hard times would decrease its yield below the required $620,000,000. Last week the House Ways & Means subcommittee, assigned to write the bill, whipped out a graduated schedule of rates which it claimed would permit corporate cushions and still bring in all the money the President and Treasury wanted. Its scale: a 15% tax on the first 10% of undistributed profits; 30% on the next 10%; 45% on the next 10%; 55% on all over 30%.

Thus a corporation could put by 40% of its annual profits, still pay less tax than under the present corporate income tax laws which it is proposed to repeal. Explanation: the corporation would pay a 36.25% tax on its undistributed profits but that would amount to only 14 1/2% on its total profits whereas the average income tax paid under present laws is about 16%. The Treasury's gain would come:

1) from the 4% normal tax to be paid by individual stockholders on dividends currently exempt from the normal tax;

2) from the higher tax to be paid by corporations choosing to lay by more than 40% of their profits; 3) from wealthy stockholders who will be forced into higher income tax brackets.

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