Brookings Figures

To most U. S. businessmen, the undistributed profits tax--whereby the Govern-ment takes 7% of a corporation's retained net income if it retains only 10% of its profits, up to 27% if it retains over 60% --has been a favorite target in the well-appointed shooting gallery of New Deal economic legislation ever since it was passed in June 1936. Last week, while Congress was trying to work out plans to revise it in the regular session, the undistributed profits tax was subjected to the most efficient bombardment it has received so far, in the form of a 108-page pamphlet published by Washington's Brookings Institution.

Basis of the pamphlet was a questionnaire sent out last Spring by Oregon's Republican Senator Frederick ("Three Long Years") Steiwer to 3,600 U. S. corporations--Moody's complete list of industrial corporations excluding foreign companies, subsidiaries and corporations formed in the Senator's home State. When his questionnaire began to bring in the kind of replies he had expected, Senator Steiwer shrewdly turned them over to the non-partisan Institution which found them sufficiently informative for a detailed analysis. Prepared by Cornell's Economist M. Slade Kendrick, the Brookings report was a coldly effective volley which recorded: 1) exactly how much U. S. business dislikes the tax, 2) exactly why, 3) what the Brookings Institution thinks should be done about it.

For his pamphlet, Economist Kendrick used the first 1,560 answers to the Steiwer questionnaire. To the question "Do you believe the imposition of this tax is inconsistent with sound business policy, 1,212 corporations answered Yes. 13 answered No."

In the order of their overwhelming unpopularity, corporations found the worst features of the tax to be its failures to: 1) allow a prior year's losses to be applied to the next year's profits before estimating taxable net income; 2 ) allow corporations to retain some 20 or 30% of undistributed surplus tax free; 3) allow a period after the close of the fiscal year for ascertaining how much surplus to pay out in dividends.

First conclusion of the Institution's report--likely to get attention from more serious minded members of Congress when the question of revising the tax program comes up next session--was that the law should, at the very least, be amended to correct such failures. Final conclusion was "unequivocally that the tax should be repealed." Wrote Economist Kendrick:

"The general arguments in its favor pertaining to taxation equity, the distribution of income, and the control of the business cycle do not in the light of analysis weigh heavily as against the adverse effects of the tax in other ways. Its fundamental weakness is that it limits the possibility of prompt and flexible capital developments and handicaps with particular severity a multitude of small and medium-sized business enterprises. It bears with particular severity upon new companies or those which are endeavoring to recuperate from a period of misfortune."

Commonly suggested reliefs from the tax are: 1) exemption of debt-ridden corporations; 2) exemption of earnings expended for improvements; 3) exemption of corporations earning $5,000 or less. Said Brookings: "None of these amendments would reach to the heart of the' problem."

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