Slapdash Law

One afternoon last week conferees of Senate and House came to agreement on the Revenue Act of 1936. It was not the law proposed in general terms by President Roosevelt on March 3, not the bill cavalierly passed by the House on April 29, not the bill passed after more careful examination by the Senate on June 5. It was a brand-new tax bill, concocted in conference, a cross between the House and Senate bills. Day after its birth the hybrid bill was rushed to the House floor. No copies of the conference report had been printed. All that Representatives knew of it was what oral explanations their leaders gave. So weary were they, however, that they laughed, applauded, made speeches showing that they really did not know what they were voting on, then passed it, 221-to-98. More deliberate was the Senate : 3 1/2 hours were devoted to debate. Senator Byrd of Virginia and other opponents who had studied it, explained with fatigue how bad they thought it was. Then the Senate passed it, 42-to-29. Thus 48 hours after it appeared in the world the Revenue Act of 1936 became law.

Chief feature of the original House bill was that it virtually abolished all corporation income taxes save undistributed profits taxes, thereby encouraging dividend disbursements, placing the Government's income-tax burden squarely on individual taxpayers, avoiding, in theory at least, cumbrous double taxation (on corporations and again on stockholders).

Chief feature of the Senate bill was that it reduced the undistributed profits tax to a size where it would not greatly harm corporations which needed to lay by reserves out of profits, would not unduly discourage the creation of surpluses as cushions against depression.

The Act as passed doubled up taxation worse than ever, not only retained the old corporate taxes virtually in full but also abolished the normal tax exemption (4%) which individuals could claim in regard to dividends. It allowed no exemption from the undistributed profits tax on any portion however small of a corporation's profits retained for reserves, set the tax on undistributed profits on a scale ranging from 7% to 27%. Chief terms of the law:

Normal tax on corporations' net income: 8% on the first $2,000, 11% on the next $13,000; 13% on the next $25,000; 15% on all over $40,000.

Tax on profits not distributed as dividends: 7% on the first 10% of total profits retained; 12% on the next 10%; 17% on the next 20%; 22% on the next 20% ; 27% on the last 40%. Banks, insurance companies, corporations under contract to pay no dividends and corporations under contract to repay indebtedness out of current revenue will be exempt from this undistributed profits tax.

Individual income taxes: unchanged except that the normal tax exemptions on dividends received are abolished.

Capital stock tax: reduced from $1.40 to $1 per $1,000 with no change in excess profits taxes.

Special undistributed profits taxes on personal holding companies: on a scale from 8% on the first $2,000 to 48% on amounts over $1,000,000.

Windfall tax (to recover processing tax refunds): 80%.

Excise taxes on a list of imported oils-- whale, fish, coconut, palm, etc., etc.

Effect of the new corporation taxes is to increase the amount of taxes paid by corporations if they keep any considerable portion of their earnings for surplus or expansion. Thus a corporation which keeps half of its earnings will pay 5% more taxes if it earns $10,000 a year, 19% more if it earns $20,000 a year, 37% more if it earns $50,000 a year, 40% more if it earns $100,000. In the case of a corporation which retains all its earnings, taxes will be increased 15% even if it earns only $1,000 a year. If it earns $50,000 or more a year its taxes will be more than doubled.

Chief aim of the new law is, of course, to force declaration of dividends, collect high surtaxes from the rich. Incidental effect will also be to pinch pennies from small stockholders in big companies. Under the old law an individual who owned ten shares of stock earning $6 per share and paying $3 dividends, got $30 in dividends tax free. The Government took about $9 in taxes out of the profits kept by the company and $21 of his dollars remained in the company's hands for expansion, etc. Under the new law if the dividend rate remains unchanged he will have to pay $1.20 normal tax on his $30 dividend, the Government will take some $12.60 in taxes from the corporation and $17.40 of his money would remain for use by his company. If the corporation declares higher dividends, he may receive more in cash but more of the $60 earned by his investment will be taken in taxes.

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