Splash!

Like a naked schoolboy on the edge of summer's first plunge, Congress last week stood shivering on the brink of a new tax bill. For four weeks the House Ways and Means Committee had stared bleakly at the dark waters into which Secretary of the Treasury Henry Morgenthau (TIME, May 5) gloomily urged them. One day they closed their eyes, held their noses, and jumped.

When they came up, gasping, what they clutched in their threshing hands was not quite the fearsome bill outlined by Mr. Morgenthau. Instead of the $1,517,100,000 new taxes on individual incomes proposed by the Treasury, the Committee asked for $1,360,300,000. But they more than made up the difference by jumping the Treasury's proposed $933,500,000 increase in corporation taxes to a whopping $1,255,200,000. It was, in short, the steepest tax bill in U. S. history--steeper by $164,900,000 than the amount Mr. Morgenthau had suggested--and a brave enough act for notoriously tax-shy Congressmen.

The Damage. The Committee's rates would bring the total U.S. tax bill on individual incomes to $3,583,600,000 in 1942--an average of $27 for every man, woman and child in U.S. On incomes in the upper middle brackets, taxes would be almost doubled. On incomes in the lower brackets, they would be doubled or tripled.

Some of the additional revenues would be raised by imposing a surtax which starts at 5% on the first $2,000 of taxable income, jumps to 11% (instead of the present 4%) on taxable income from $4,000 to $6,000, rises steeply to a top rate of 75% (as at present) on taxable income of $5,000,000 or over. All this is in addition to the present normal tax of 4% and the additional supertax of 10% for national defense.

Stam Taxes. During the Committee's hearings on corporation taxes, a battle blew up between Congress and the Treasury: John L. Sullivan,* Assistant Secretary of the Treasury, wanted an excess-profits tax based entirely on the rate of return on invested capital.

Aside from the fact that this proposal would confiscate the return on the actual investment of many a stockholder who had bought securities on the basis of their capitalized earning power, it would also sabotage badly needed industrial efficiency by leveling efficient and inefficient companies all down toward one level of profits. Moon-faced Colin F. Stam, chief of staff of the Joint Committee on Internal Revenue Taxation, stood out for the present type of tax which allows corporations to choose whether they will base their tax exemptions on capital investment or on average earnings over a four-year period.

The 1941 tax bill, as shaped by the Committee, would up corporation taxes to a staggering $4,354,200,000. It not only would impose the first surtax ever levied on corporate income: 5% on surtax net income of $25,000 or less, 6% on anything over that. But excess-profits taxes will start at 35% (instead of 25%), rise to 60% (instead of 50%), and, most important of all, will be calculated before instead of after deducting normal taxes, thereby greatly increasing the levy. Moreover, the present 8% credit on invested capital is cut to 7% on capital over $5,000,000. And a special tax of 10% on war profits (applying only to companies which base their excess-profits exemption on invested capital) will eat up any extra corporate earnings from defense contracts.

The tax bill was still far from finished. This week the Committee met again, bravely hoisted gift and inheritance taxes by another $113,700,000. They kept the present $40,000 exemption, bore down heaviest on small estates. Still to come were new excise taxes to bring in $905,000,000 more. When the bill is complete, it will be subject to many a change in the House and Senate. But the groundwork had been laid.

*No kin to the late great Strong Boy of Boston.

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