xt7wwp9t2q46_109 https://exploreuk.uky.edu/dips/xt7wwp9t2q46/data/mets.xml https://exploreuk.uky.edu/dips/xt7wwp9t2q46/data/59m61.dao.xml American Liberty League 37 linear feet archival material English University of Kentucky This digital resource may be freely searched and displayed.  Permission must be received for subsequent distribution in print or electronically.  Physical rights are retained by the owning repository.  Copyright is retained in accordance with U. S. copyright laws.  For information about permissions to reproduce or publish, contact the Special Collections Research Center. Jouett Shouse Collection (American Liberty League Pamphlets), No. 112 "The President's 1936 Tax Proposals: The End of the So- Called 'Breathing Spell'," April 4, 1936 text No. 112 "The President's 1936 Tax Proposals: The End of the So- Called 'Breathing Spell'," April 4, 1936 2013 https://exploreuk.uky.edu/dips/xt7wwp9t2q46/data/59m61/59m61_112/Am_Lib_Leag_112_001/Am_Lib_Leag_112_001.pdf section false xt7wwp9t2q46_109 xt7wwp9t2q46 ]OIN
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(112) Document No. uz
April, 1936

   r r A The Pres1clent’s 1936 Tax
Proposals
A l *
  (The following analysis of the pending tax
`? program is confined to the broad principles out-
} lined in the President’s special message submit-
e ted to the Congress on March 3, 1936. It does
l not attempt to deal with the details of the tenta-
{ tive measure being formulated by the House
._ t Ways and Means Committee. The American
  Liberty League is concerned primarily with the
  theories actuating administration policies and
5 their bearing on constitutional government rather
E than with the specific items of legislation oyfered
  to carry out the program.)
T I
. .   Recommendations by the President for a com-
. , plete change in methods of taxing corporations
? mark a definite end of the "breathing spell"
promised by him to business in September, 1935.
`N ] _ _ _ Ill—considere-d and unsound devices designed to ~
r HEN you have llmshed Wulf mls accomplish alleged reiprms bat spre to have
A ~ · harmful effects make t e Presi ents program a
pamphlet please pass it On to Some threat to recovery. The proposed graduated tax
friend Or ¢Gqu¢i¤¢wr¤<3¢ who might be on undistributed profits of corporations reflects
» imeyestcd mum his attention to the the administration’s attitude toward thrift and
A ’ g . careful business management and represents an-
“ membership blank on page zo. r other attempt to substitute a policy of regimen-
l tation and control for the natural operation of
i economic processes. Political considerations are
_   in large part responsible for the character of the
{ plan.
{ Objectionable features of the President’s pro-
1 gram are:
  1. Insofar as the tax on undistributed prohts
f is designed to force "spe-nding" in lieu of "sav-
l ing" it is part and parcel of theories already
» discredited in New Deal experiments.
l. 2. The proposed tax is an arbitrary method of
compelling corporations to conform to the rigid
blueprints of a planned economy under which it
A ‘ would be impossible for boards of directors to
follow their b-est judgment in the determination
· of policies.
3. Failure to build up adequate surpluses
hereafter will make it difficult for corporations
to mitigate the hardships of future depressions
to such an extent as in recent years.
r 4. A graduated tax on undistributed profits
. will check the development of new industries.
_ r The automobile industry, which has contributed
to a higher level of wages for a host of workers
3

 end has dd ledlleed pllleee dd dd pleee eleeell eere "This declaration of the President’s is clear-
Wldllll the reeeh el ell eleeeee* leeelled lee present A cut and concrete. It means specifically that the
zggzieslell by llelllveeelllg the eemlnge el lee eerly basic program of reform has been compleléedi
‘ . . th t b l l d t »
5. The proposed_tax will handicap small and  egllgirtaenty uggnecis ,£§atOI;§;§, eign; ig J5;
elglggégggldligeglglgetggliieee mere dlell lllleee already future with respect to governmental measures: ·
· . . . h` d t ` J 1936, t
e· A new lellll el eellellee ellell dllplledlelleele Prlelsliddretbglaxeee ndnieiiesggflltlhe erieiwsererax prograrrll
effects and great administrative difficulties, _as A Submitted two months lawn He Said:
illueereeed by the eeeeeeley el. lllekleg epeelel ll "The state of national recovery is such that
pllevlelell lell eelpeleeleee lleellllelled ee ee dlVl` l receipts from prevailing tax sources on the basis
dend distribution by contracts with bondholders,   of present rates appeal, adequate for financing
gill) xl; tothe uncertainties which tend to retard Q, the Ordinary Operations Of She Cggvefinrgent ig
‘ . . . l 1937, ` l d` ` t ` t;
7. Graduation of the tax has as its chief ob- no nesvnenll Jggitigglgfiazgs 8§.Gp;rO;lOS€%_»» an
leeelve the eeeellzlllg el. elglleeelll lllle Wllh e It is true that the President’s statement was
perverted plllleeeplly Wliddh le elllld ee eee Pelle based on rates then in effect and that subse-
pleyed ey ledge eellpelleelelle lll plevldleig gleegel i quently the processing taxes under the AAA were
. eppelleeelllee elld dlllgllell eeelldelld el lvlllg er { invalidated and a further new burden upon reve-
th; Arfnleérigzgi 5150;; Ieémga in methods Of taxing 3 nues was created by the enactment of legislation
corporations constitutes a dangerous use of the gzilugee Igleggcgzlgi; Eggvrgegll Olgfhghiblfgéilliiflz
lexleg Pewel lle eeeelllellell eeelel ellde .elld de spell" declaration aslconstrued and reinforced by
plemete e lledlellllbllelell el Weeleh elld llleelee his Secretary of Commerce, American business
9* The edlelllleeleelell pllegleelll elllplleelzee had the right to expect that any proposals for
llleye el. exdeeelllg lllele revenue llem eel`pel`e` new taxes at this time would be in line with the
elelle Wldl e eeeeedllellli glleelel elllldell dpell existing system and would not attempt to revolu-
ellellleee llleleed el eeeeillllllelle el e .eelelleed tionize the entire scheme of corporate taxation
budget through a reduction in expend1tures. ~ ` _
Background Of Program High Points of Plan .
The librcathing spew, assured business by the The President in his special message of March
President in a letter addressed to Roy W. 3»1936»Pd‘¤P°Sdd lllledleeeel el eee plleeelle eel"
Howard on September 2, 1935, was intended to pelele; lex §l’l`eel°lfDl`el* me lgdms ege eeirperete m'
quiet the fears occasioned by the administra- - eelll; eX*t e eee}; e ellee leX*l° e.l`e.eled exeeee
tion’s tax program of last year and its persistent ` ple ee lex elld le e. exelepelee. el dlvldellde fllem
assaults upon buSin€SS_ i the normal tax on individual income. As a sub-
In his letter to Mr. Howard the President de- eeleltllle . he reeemmended el glledllelled tex ell
fended the Revenue Act of 1935 as part of a _ lllldleelllblleed plleeee el eel`pel`e}°lelle‘ The eem'
legislative program necessarily involving drastic   lllge el eelpelleelelle dlelllbelled dd Sleekheldere
and fm._m&ching action. 3 would be subject to the ordinary normal rates
d Th P ·d dd d. J from which they are now exempt, as well as to
eresienta e. 1, bl ___ _
"This basic program, however, has now reached 4 Sujglexei gev lee egetllltdlléldillel lgeemee . Hee
substantial completion and the breathing spell re ee e d ex ell lgll lie; gl e . {lie fe61(2`§6lle Y
of which you speak is here-very decidedly so." Q plepeele were gd lllle e f §6g6e000e060 * egge
An official interpretation of the President/s g gglggigyéygtelx Oigezgmlgion ’ ’ ever e
"breathing spell" promise was given by Secretary · ‘
dd e°mme’°° Pdddd dd Rdpdd in an ddddddd d "wrienhclefallre1el:(g>il;11el"elzsceaiweddlboseai fsslfslssin stl?
before the Associated Grocery Manufacturers of T ESSMS from nompayment Oryreglfm Of thepcut:
dgggddd at Ndw Yddd cdr dd Ndvddddd dd lawed sn processing taxes sss ss excise ssss
' · · on the processing of certain agricultural products
dgigiregigr I;§§ie_r eflell dddddg elem the Presb to be continued only over a period of from two
` 4 to three years. These two taxes, yielding an
, 5

 aggregate of $517,000,000 over the two- or three- 1`0g81?d€d 85 8 S1¤0€1”0 cffcrt tc h8l8¤08 thc
year period, were designed to reimburse the budg€l¤·
Treasury for costs of carrying out contracts
under the invalidated AAA. Spending Theories
The new revenue from corporation taxes was _ _ _
intended to cover the $500,000,000 authorized Frcrn 8h €00h0m10 Sh8hdP01hl§ th? chlcf 1'08S0h
annually as a permanent subsidy to agriculture f0I` 8dV0080Y cf 8 l¤8X 0h ¤hd1SlQ1`1b11t0d P1‘0hl¤S
under the new Soil Conservation and Domestic 8PP8Y€hl?lY IS tc PI`0Ih0'¤0 SP0h€hhg_ 88 8g81¤Sl?
Allotment Act of 1936 and $120,000,000 annually g. S8V1hg- Th? Pl8h_1S 8I10’¤h0I' V8{’18hl} cf l?h0
to amortize over e. peered er 9 years the extra Spcncnns pchcy which has bccn tncd in rncny
cost of the soldiers’ bonus by reason of imme- f0I`mS» 8lW8YS W1th0¤’¤ m81‘k0d $100058, but 8t
diate payment and the refund of interest on 8 hI`€m0hd0uS ccct *99 thc l»8XP8Y0YS· Thc 0XP0·
]OanS_ cr nents of the spendmg theory hold that there
It will be noted that the effect of the plan is W8S_ tcc much $8Vmg 8hd 1hV0Sl?m0ht lh 08P1l>8l
to shift the burden of financing the new agri- 00lh1Pm0h’¤ 8hQl ih SP00ul8l¥1V0 Qhl>0I`PI`1S0S PI`10I`
cultural subsidy from the consumers of farm tc tht! d0PI`0SS10h 8hd th8*· thc nndcrccncurnp-
products to the corporations Of the cOmm·y_ t1on wh1ch_ has eznsted 1n the face of unused
This is a crafty way of reducing to a minimum P18hl? 08P801l>Y cf 1hdUSl>1‘Y could bc 001‘1`00t0d
the adverse political effects of a new tax law If 8 gT08t01` P81`t 0_f thc h8’¤10h8l 1h00m0 W01`0
in a campaign year. d1V€I‘t€d Into Spendmg channels, · ·
The olaim fadvanced in connection with the
· · proposa to orce a distribution of corporate
Ullderlylllg Theories surpluses by prohibitive taxes is that the funds
Tho mooivoo of tho administration in oro_ thus placed in the hands of stockholders would
posing the new form of corporate taxation appear gc egellg A here el. llle fluids Welllll bc taken
to bo ohiofly tho following: y t e overnment in taxation and used in IJDS
(o) To foroo tho opoodiog of Corporatio Sub spending program. The remainder, the sponsors
pluses as advocated by those who believe that   She pgell eeellllleh Wculd bc elflpellgell fcg .3ll
a major cause of the depression was too much . lg St e °°“S“;EPh°¥} g§°dS» ll ele Y hc plhg
saving with a consequent overexpansion of the lll lle YY lllele an l ll e Selhe emellhll were
capital equipment of industry and of funds for llelelllled by eelpelielllelle ami .lllVeelled IP ex'
Soooolotivo iovootmooo cessive plant capacity or used 1n_ speculat1on. _
(b) To hit big ooroomoiooo by broodooiog tho The question of _relat1ve expend1tures for capi-
principle of a graduation of tax introduced in tel ellll eellSllmplleh.geedS IS h hlghly e°lllll`e"
tho 1935 ooo versial one. Even 1f it be granted that the
(c) To promote a redistribution of wealth by lllvellelellz cf e glllllgell pellllell tcf llll.e llllllellel
levying heavy taxes upon profits of corporations llleekllile tl? Spelllllg es elgelhe Sevlllg le. ele'
owned principally by men of large resources, elm. e* el`e.le l tc lll .l e.l`eeel`d cf edlhlhlS'
whether such profits are retained as surplus or lllllmell expelllllelllle ic lllellly eelllldellee that
poid out in dividoodo 5 the forced distribution of corporate surpluses
(d) To raise additional revenue amounting to Wfelllg eeléelllpllill the plll`peSe‘ Other eellelllee
not more than one-fifth of average deficits of e l e ll llllllle llellell heeell ell.lhe Spelldlhg
roooot yooro A theory are not only now discredited but have
The first of the four motives is in line with l p"°d“°"d harmful leSlllJ°S‘  llele IS BYGYY lea'
spending policies which have been tried through- Sellhle be °““l’l°El]S: lll eeeeplglghe plell lllvelvlhg
out the present administration and which have ~ Sue e" ell`l`ee‘e lllg use e ll e lexlhg power-
not produced the results hoped for.
The second and third motives are in keeping Economic Planning
with the inclination of the administration to . . . . _
array class against class by inflaming the people Tellellell le belhg “lV°k€d tc ehlel`ee.eeehem{e
of the country against large corporations and hlehhlhl? The hlllepllhle cfthc·adn1n1¤.trancnS
groat Wealth planned economy call for the distribution of a
The new revenue which might be gained is so ercatcr Sllele cf eelipelihle pllellle tc thc Stock'
relatively small that the tax program cannot be hel‘lel`S· The plehlhlllye tax le ll method cf
6

 compelling corporations to comply with the pro- have been so large as perhaps to have given an
. gram. Through such a system corporate man- impression that its part in mitigating hardships
agement is brought under arbitrary control by was greater than that of private industry.
the Government. Under the inflexible applica- Actually, however, private industry during the
tion of a prohibitive tax there is no opportunity four years from 1931 to 1934, inclusive, expended
for separate action to meet the varying needs of from its reserves to meet operating deficits twice
different corporations. All classes of corpora- as much as the Federal Government borrowed to
tions, whatever their present condition or future meet its deficits during the same period.
uncertainties, must distribute the bulk of their   Some idea of the manner in which industry
earnings or be subject to a heavy penalty. `“ l1as drawn from its savings during this depres-
In the absence of such a tax the boards of sion may be gained from estimates of national
directors now decide what portion of the earn- income by the Department of Commerce. Its
ings shall be distributed. The members of these Q, figures show national income produced and
boards are intimately acquainted with the national income paid out. Business savings or
special needs of the corporations. They know business losses are the difference between na-
whether it is desirable to reinvest earnings in tional income produced and paid out.
new facilities, whether previous surpluses have Business savings in 1929 were estimated at
been so depleted during the depression as to $2,402,000,000, being the excess of income pro-
necessitate the laying asideof extra amounts as duced amounting to $81,034,000,000 over income
a safeguard for the future, whether special paid out of $78,632,000,000. In each of the five
amounts should be set aside as reserves against succeeding years from 1930 to 1934, inclusive,
obsolescence or unforeseen events such as the the income paid out was greater than income
recent disastrous floods, whether funds should produced, resulting in a substantial total of
be held for payment of interest on money to be business losses. The business losses, which were
borrowed and whether more than a normal absorbed for the most part from prior savings,
D amount should be retained in order to establish included SB5,015,000,000 in 1930, $8,120,000,000 in
or maintain credit at the banks. 1931, $8,817,000,000 in 1932, $3,051,000,000 in
The effect of the tax would be to discourage 1933 and $1,624,000,000 in 1934, a total for the
individual initiative and to regiment industry. five years of $26,631,000,000. The Federal
Through the taxing power the Federal Govern- Government had deficits only in the last four
ment would accomplish regulation which would of these five years, the aggregate of the four V
be impossible under the commerce clause of the being about $11,000,000,000, or about half the
Constitution. It would be a step toward the type deficits of private business during the same four
of control prevailing under European dictator- years. Without the surpluses actually drawn
ships. upon by private industry the collapse of our
_ _ _ economic structure would have been complete.
P1‘0tect10I1 Aga1nst DCPICSSIOHS Reports of the Internal Revenue Bureau show
While the distribution of corporate profits thee elle? m 1929*.61 Per eeee ef the emeere ef
might tend to speed up business during a period egeh dlgldende pale by eerpemtlene eeme from
of prosperity, it could not fail to accentuate   t eee S Owmg n°_n:et meeme Ie .1930 the per"
hardships at the low points of the business cycle. eeeeeee Wee 165* m 1931* e7‘1; Ht 1932* 403;
When future depressions occur—and there is no A eine ie 1933* the Ieeeee ree? fer Whreh mf°I`m&'
reason to believe that the New Deal has dis- I mlm 1S aVm1eb1e* 23‘7.‘ Wltheee edeeueee Sm"
covered a method of preventing depressions- ' gueee there eerpemtlene .ebV1e¤e*r eeuld eee
there would be no profits to distribute nor would ere eentmued re pay dmdeede-
there be an accumulation of earnings from which
to continue to pay normal wages and dividends. {Development gf New Industries
The present depression would have been much L
more severe but for the existence of substantial Witheut the PI`iVil€g€ ef I`€i¤V€Sti¤g their
corporate surpluses. Nothing short of catastro- €eI`¤i¤gS» many ef the large COTPOYBUGHS and the
phe could be expected in the event er another industries ef Whieh they ere e vert never would
1]],3501- depression   comparable I·€S€rV€S_ have I°€3»Ch€d their pI°€S€Ht stage of d€V€lOpHI€I1`ll».
The amounts poured out by the Government _ Some of these corporations, notably in the auto- _
for emergency purposes during the depression m0bil€ i¤duSt*I`Y» did e Pi0¤€€I` W01`k at 3 time
8 9

 when the bankers did not have sufficient confi- work and research and mass production facili-
dence in future possilbilities tc;) {inance ghem. tated by tlge reijnvestment of profits in the early
According to an aut entic ta u ation o in- years of t e in ustry.
vested capital in the automobile industry in While the tax on undistributed profits is aimed
1926 the Ford Motor Company expanded to a at large corporations, it would actually have the
capital of $694,000,000 from $40,000 merely by effect of giving companies which have already
reinvesting its profits, while General Motors accumulated substantial surpluses an advantage
reached a capital of $593,000,000 by reinvesting over newer organizations which lack adequate
$$06,000,000 of profits and Dodge Bros. attained . cagiltal. f h 1
a capital of $115 000000 by reinvesting $102- ? any o t e argest corporations are now
000,000. The tansitrié invested capital of these distributing 60 per cent or more of their profits.
three companies together with Studebaker, }_ In many cases these corporations might pay less
Packard, Hudson, Nash and Reo amounted in s tax than at present. The smaller corporations
1926 to $1,657,723,399, of which $1,322,752,071 “` which need to retain a larger proportion of their
came from reinvestment of profits. earnings would find the new plan more burden-
Large industries which thus have developed some._
new fields by foregoing current distributipns of l11_ 11S _6ppl166tl01gi 1% l11d1i1St1‘{eS Evhgh are [Eo-
profits have been of great importance in meri— 11661*111g 111 6 116W e_ 6H a So 0 e sma er
can economic progress. They have made possi- and weaker corporations a tax on undistributed
ble the absorption of large numbers of workers profits W0Ul§l be 11015 011lY UI1f61I` but Would re-
released by technological improvements in other 16111 111d11St1‘16l d€V6l0Pm6I11'»·
industries. They have contributed to an im-
E§§ii?“f§$$§“s}lt}?laili‘§ JESSE “§?’irl§’32§§ El Ieiustiess and Ueemeieeies
the population- Through lower priees arrdhetter Without numerous special exceptions, a tax
W6g6S 1»l16Y l16V6 11611160 to 1116k6 P6SS1bl6 6 on undistributed profits would work an injustice
l11gl161` 616110610 of l1V111g· _ on many corporations and would drive a large
_ Tl16 6660111Pl1Sl1111611”6S of 6 P61`1Qd of 20 Y661‘S number into receivership or bankruptcy. In
in the development of the autornob1le_ and related Such snsnsinnns ground Would be given fm. an
ircidnistries Yhinzgpériogltls v;ley, whe he-S figured
problem of business cycles will not be reached Prnrnlnently els all 9·€lVlS91` to tn€ 9·dl1llr1lStl`&tl0n,
by tearing down or penalizing large aggregations nas nnndelnnnd tnn Pr0Iil0S€d t€lX 011 Undis-
gf capi1;3,]_ tributed profits of corporations in an editorial n
. ent1tled “Toward Insecurity" in the March 14
Improper Use of Taxing Power _ lSSl~l9 lll T0g¤»il/- 1
` 't ·` P f M l `d' z
1h_hel»h the 1935 and the 1936 tax preerame the eleurlliuien   three niacin3u(l~;zlrc;rl>311iI;ii3);rr;£
Pr€§ld€llt has Sought to USB tn9 tllxlng P0W9r te business firms. Neither Congress nor any ad-
achieve soc1al ends by promoting a redistribution e minjetretive egehey can determine fairly hen,
ef Wealth and leeeme- The emeuet of revenue much insurance anv one corporation needs That
lnV0lV€d in tnn 1936 Pr0P0§alS_ ie S0ln€Wn·9t differs with the nature of its business and with
greater than tn€ r€latlV€lY lnelgnlncnlnt 9»l1l0lll”lt the condition of the corporation itself Some
llndnr tn€ hi