THE ECONOMIC EFFECTS OF THE UNDISTRIBUTED PROFITS TAX OF 1936

382 Pages·020.947 MB·English

by  BRYSON, JOHN ALEXANDER

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.67 Bryson, John Alexander, 1907- I l-ilF*-*
1942 ...The economic effects of the un-
.B8 distributed profits tax of 1956...
New York, 1942.
vii, 251 typewritten leaves, tables,
diagrs. 29crn.
Thesis (Ph.D.) - New York university,
Graduate school, 1942.
Bibliography: p.c2193-251.
"Corporation income tax forms, 1936-
1941” in envelooe on back cover.
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REV TDBJt UVZVERSITT
THE ECONOMIC EFFECTS OF THI
UNDISTRIBUTED PROFITS TAX OF 1956
■><>*
Xf'V
JOiiS A. BRXSON
A dissertation
in ths Depertcient of Economics
submitted to the faculty of the
Graduate School of Arte and Science
in partial fulfillment of the
requirements for the degree of
Doctor of Philosophy
April $ IMS
PLEASE NOTE:
Some pages may have
indistinct print.
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Pege i
PREFACE
Th* ilx years that here elapsed eiaee the peerage
of the undistributed proflte tax here witnessed greet
changes in the economic end eoelel relation ehipe and
erea no re import ant eheagee in international relation-
shipe. Truly change haa foliorod change with such a
degree of error Increasing rapidity that or on "generali­
sations* seen te wear oat faster* The number end impor­
tance of many qualifying el amenta or factors hem beam
growing, and it has become increasingly difficult to
analyse clearly these qualifying factors,
Needless to say, Public Finance, especially taxa­
tion, has been subjected to these new atresses and strains
as a result of first, the depression, second, defense and
third, "total all-out war.* The Federal Government has
felt the ftall impact of these forces. Federal Expendi­
tures have risen so rapidly that our govwrnnrat spends
about as anch in a week as it did in a full year a gen­
eration ago. Eren the colossal expenditures of |7
billion a year during the depression emergency now ap­
pear to be relatively in significant to the amount of
mon^ sprat or te be sprat during the present war emer­
gency.
Any attanpt te raise the necessary amount of money
with which to finance cur government during this crisis
is bound to iUolmdiboth an expansion of our public debt
1 7 8 3 STO
tad ca laeraaaa in taxation. Vhat changes tad lacrosses
In our to* systee «lli result fro* tha war effort only
tine will toll* Vo k&ov that new taxes will be intro­
duced and that tha rates of old established ta*oa *111
ba increased* Tha Federal Personal Zscone rat os have
already reached no* highs, and exaaptions naw lows, whila
tha rates of oorporatlon lnaoaa taxes have also boon
greatly increased* Za thia gigantic attempt to enlarge
revenues, tha aaad far "Justice aad equality* lu taxation
becomes greater than ewer before# In the light of past
experience, ho»sr«r( it la last in mob tine* that this
ala boooaa* aost difficult to achieve#
It wae tha hope of tha author that this thesis
would shed sow* light on a particular tax, the uadlatrl*
but ad profits tax, and contribute, although in a nail
way, to tha furtherance of the ideala of Justice sad
equality la federal Taxation. The tax wae exaslaed in
the light of conditions «tf 1986 to 1989, the period in
which the tax was in operation# The difficulties,
pvoblane and eventual repeal of the tax were considered
in detail* A few of the wore Important suggestions to
reintroduce a different undistributed earnings ware also
treated, Imt so attoapt was aade to evaluate the reeo-
tion of a new general tax on undistributed profits
*
which conceivably night be made neoeesery by tha war
1 tine snerysaejr. Evan is this ease, however, the writer
is of the opinion that much could be loarnad from a
oarafol study of tha difficulties sncountarod fay tha act.
It la with a deep i« h of gratification that I
acknowledge the assistance that Z hare received fros
a any persons interested in this subject* I an especial­
ly indebted to ejr advisor Professor Paul Studandkl of
lee Zork university, Mr. Bewy Bredle of lew lork
University, Professor J. Casey of Georgetown, and exec­
utive secretary of the Aaerlcan Tax League, Mr. Hancock
of Lehean Bros., Mr. 0. A. Taylor of S. B. Kress and
Company, and Congressmen B. Caller of Brooklyn.
February 1942, J.A.B.
Page t
TAi>L& or COM TENTS
PACES
Pnftet.......... 1
CHAPTER X. The Origin of Undistributed Profit* Taxation... 1
Purpose of Undistributed Profit* Taxation - Type* of
Undistributed Profit* Taxation - Early History of the Tax -
Ciril War Taxation - 1917 Levy on Unreasonable Accumulation*
of Surplus - 1921 Proposal - Jones Am eminent of 1924 - De­
pression Problems 1932 - Revenue Act of 1934 - Reasons Ad­
vanced For the Heed of the Tax - Event* of 1936.
CHAPTER 2. Foreign Undistributed Profit* Taxation. 17
Sweden - Norway - France - Csechoelovakia - Swltserlend
• Great Britain - Netherlands - Denmark - Summary of Foreign
Countries.
CHAPTER $« The Passage of the Undistributed Profit* Tax 31
The President's Proposal - The House bubcommittee Bill -
The House Way* and Kean* Committee Bill - The donate Bill -
The Final Revenue Act - The "Haste" in Which the Aot was
Passed.
CHAPTER 4* The Federal By stem of Corporate Taxation in 1936.. 40
The Normal Corporation Income Tax - The Capital Cain*
Tax - History of the Tax - Conflicting Theories - Effect of
the 1936 Act - Recoataeoded Method of Taxing Capital Cains -
Excess Profit* and Capital Stock Taxes - Taxes on Improper
Accumulation of Surplus - Special Surtax on Undistributed
Income of Personal Holding Companies.
CHAPTER 5* The Undistributed Earning* Tax................. 94
Rate* of the Tax - Adjusted Met Income - Undistributed
Met Income * Taxable Dividend* - Carry-Over Privilege -
Specific Credit - Illustration* of Specific Credit - Corpora­
tions Exempted from Tax - Illustration of Computation of the
Tax.
CHAPTER 6. The Case For tha Tax........................ . 69
Meed For a More Effective Collection of Personal Income
Tax - Iield of the Tax - Economic and 8oci*l Argument* For
the Tax - Economic Instability - Mature of Corporation
Surpluses - Industrial Overcapacity - Proposed Corrective Ac­
tion by the Tax - Individual Investor* - Effect on Business
Cycle - Prevention of Tax Avoid an oe - Equalisation of Burden
of Taxes as Between Corporate and Mon-Corporate Business -
Summery of Validity of Claims Advanced For Tax.
Pag* vi
F40EB
CHAPTER 7. Bhortcoalngs of tha Undistributed Profits Tax
of 1936.................. .................. 8«
Effects of Hasty Drafting * Requirement that Dividends
ba in Hands of Taxpayer Bafora End of Taar - Hardships Im-
posad on Corporations - Examples - Effaot on Retailers -
Effect on corporations Having Impaired Capital Structures -
Examples * Inconsistency with State Lavs - Aggravation of
Harsh Features of Incona Tax Laws - Prohibition of Consoli­
dated Returns - Liaitatlon of Ret Capital losses to 12000 -
Examples - Ho Adjustment For Inventory Losses - Failure to
Provide For Debt Redemption - Admission of Weaknesses*
CHAPTER 3. Objections on the Grounds of Discrimination. .... 103
Types of Discriminations - attempt to Ease Burdens on
Snoiler Corporation* - Effect of Tax on Growth of Small Cor­
porations - Examples - Relative Effect on Corporations of
Varying Sixes - Dividend Policy of Large Corporations -
Costs of Floating Common iitock - Of Bonds - Heed of Smaller
Corporations For Retained Profits - Summary of Efi'eot of
Tax on Corporations of Various Sixes - Effect of Tax on
Hew Enterprises - Examples - Other Conditions Affecting Hew
Enterprises - Effect of Industries with Fluctuating Incomes -
Effect of "Xeariy Law* - Examples - Bunaary of Objections to
Discriminations Inherent in the Act.
CHAPTER 9* Effect of to* Tax on Capital Formation Growth. •• 129
Growth of Capital - Roundabout Production - Income
Stream - Importance of Hew Capital Investment, Correlation
Between Factory Payrolls, Factory Employment, and Hew Bus­
iness Investment - Hew Capital Investment ana the Depres­
sion - Theories of Recoveries - Reasons For Collapse of 1;37
- Factors Restricting Hew Capital Investment - Importance of
Corporation Barings - Adverse Psychological Reaction of Bus­
iness Hen to the Tax - Retarding Effect of the Tax - Examples
- Effect of Tax on Dividend Policies - Estimates of Dividends
Paid - Effect of Other Federal Taxes - Tax-Exempt Investments
- Summery of Combined Effects of Federal Taxes of 1936.
CHAPTER 10. The Repeal of the Tax....................... 152
The Interests of Little Business - The Cellar Bills -
The Effect of the Recession of 1937 - Recommendations of the
Brookings Institute - Btatsment of A.F.ofL. - Action of House
Ways and Means Committee 193$ - Action of Senate Finance Com­
mittee - Provisions of the Revenue Act of 1933 - Virtual Re­
peal of Undistributed Profits Taxation - Hew Corporation Tax
Rates - Corporations Benefitted by Act - Comparison of 1936
and 1933 Acts - Hew Provisions for Corporations Unreasonably
Accumulating Surpluses - Treatment of Capital Gains and Losses
Taxation 1931 - 1936 and 1933* - Revenue Act of 1939 - Agita­
tion for Complete Repeal of the Tax - Rates of Revenue Act
Page Til
pages
of 1939 - Treatment of Capital Gains and Losses - Recent At*
tempt to Enforce Tax on Unreasonably Accumulated Surpluses.
CHAPTER 11. *hat of tha Future........................... 177
Bumasry * Effacta of the Tax * Proposal 6 to Curb Tax
Avoidance - Redefinition of Mat Income to Include "Unrealised”
an Fell aa "Realised* Income - Collection of Income Tax at tbe
■Source* * Enactment of Federal Corporation Leva - Propoeala
of the Rational Tax A&soelation * Strict Enforcement of a
"Selective Undistributed Profits Tax" * ImpreetebULity of
First Four Propoeala - "Selective Undistributed Profits Tax",
ttost Practical Solution - Other Recommendations - Capital Gains
Taxation * Advocated Changes in Corporation Income Tax Lav -
Consolidated Returns - Treatment of Inventory Gains and Losses -
Carry-Over of Losses - The Personal Income Tax - High Surtaxes
- Tax Exempt Bonds - War Reeds - War Taxes.
APPERD1X A. Chronology of the Tax Treatment of Capital Gains
and Losses, 1913-1911* ......... 205
Part I - Individual
Part II - Corporation
APPEBDU B. Tields of Federal Taxes .... 211
Tields of Federal Income Tqxss, Jtaer Direct
and Indirect Taxes. (1916-1928)
Federal Receipts by Major Sources (1929-1911)
Comparison of Direct and Indirect Federal
Taxes (1929-1941)
APPSiDIX C. Capital Formation and Indices of Factory Employ­
ment and Factory Payrolls, 1919-1938.••••••••••» 215
Cross Business Capital Formation, Business Cap­
ital Consumption and Bet Business Capital
Formation.
Indices of Factory Employment and Factory Pay­
rolls.
APPENDIX D. 218
(See Envelope on page following the Bibliography)
bibliographx 219