A study of this table, even to the uninitiated, will at once suggest some perplexing and very pertinent questions. The year 1921, of course, means that calendar year, ending December 31st. Then the maximum surtax rate was 72 per cent and the average paid by the highest net incomes was 63.59 per cent. In 1922, after the maximum had been reduced to 50 per cent, the average paid on million-dollar incomes was 35.02 per cent. The next year, with rates remaining the same, the average went down to 23.53 per cent.

Eighty per cent of net incomes above a million, under the 1921 law, paid the maximum of 50 per cent, yet, somehow, the average was figured at 23.53 per cent.

Also one discovers that, under Mellon's administration, net incomes ranging between $150,000 and $1,000,000, at lower rates, actually paid higher averages than did net incomes above a million.

It seems mathematically impossible to get such results of "administration" as have obtained under Mellon. An average surtax rate of 23.53 per cent on the largest net incomes, with a maximum of 50 per cent, when 80 per cent of the total net income was legally required to pay the maximum, is altogether incomprehensible. Yet that is precisely what happened in 1923.

There are but two ways of explaining this: (1) by assuming that the law contained "jokers" which permitted such a low average; or (2) by assuming that the Treasury Department so administered the act as to get that result. Certainly it was the intention of Congress that a five-million-dollar income should be taxed more than an average of 23.53 per cent. Whether you choose one or the other of these possible explanations, the responsibility is upon the Treasury Department: it was the Mellon bill which Congress had enacted, and it was the Mellon administration of its provisions under which that low average came.

In the Mellon bill, presented to Congress in 1923, the Secretary of the Treasury demanded a decrease in the highest surtax rate from 50 per cent to 25 per cent. That, based on the returns above noted,

would have meant an average tax probably under

15 per cent.

Now, Mr. Mellon is asking a reduction from 40 per cent to 20 per cent in the highest surtaxes. That, judging the future by the past, would mean not a maximum of 20 per cent, but an average perhaps of 8 or 9 per cent on the biggest incomes.

PRO

Corporation Tax Evasions

ROBABLY the largest, and least understood, "success" of "the plan" has been in administrative directions, concerning which we have presented a part of the picture. Next, undoubtedly, would come the issue of corporation taxes, where everything has gone the Mellon way.

The great corporations are evading surtaxes on an accumulation of between thirty and forty billions.

Their profits, which escape all excepting a flat tax of 122 per cent, with some of that apparently "refunded," are piling up at the rate of several billions a year.

This situation may be perfectly illustrated by reference to a Mellon concern-the Gulf Oil Corporation. As reported by Moody and Poor, for the year ending December 31, 1924, this company had net profits of $19,166,795. It distributed $6,523,230, about one-third, to Mr. Mellon and other stockholders in dividends, such dividends, of course, being subject to surtaxes as part of individual incomes. The balance-$12,643,565-being undistributed, thus escaped all federal taxes excepting the flat rate.

What these undistributed Gulf Oil Corporation profits for 1924 paid, assuming the full flat rate and no refunds, would be about one and a half millions. Either under the former excess profits tax, or if this surplus had been distributed in dividends, the amount of the tax should have been two or three times as much.

But that does not begin to tell the story. The result just suggested was for a single year. Up to December 31, 1924, the Gulf Oil Corporation had accumulated surplus profits of $78,093,941, which escaped surtaxes. Also this one company had set aside, as a "depreciation reserve," a total of $127,567,979, which escaped surtaxes. Here, then, was a grand total of $205,651,920 of surtax-exempt profits, an amount nearly double the $108,952,000 of the outstanding capital stock.

Further it should be recorded that in 1922 the Gulf Oil Corporation declared a stock dividend of 200 per cent, amounting to $80,000,000 of new stock created out of profits. Had this eighty million been distributed as a cash dividend, it would have been subject to the surtaxes. As a stock dividend, it paid no tax whatever.

Under Mellon, then, a summarization of results with reference to tax evasion for corporation profits shows that:

1. The excess profits tax has been repealed;

2. A graduated tax no longer applies, only a single flat rate now being paid, exactly the same for small and large profits;

3. Evasion of surtaxes is accomplished by not distributing the profits in cash dividends; and

4. Further evasion on a gigantic scale results from a distribution of surplus in stock dividends, a process which takes none of the surplus out of the corporation's treasury, imposes an additional burden of "watered stock" upon the public, and thus places the amount involved beyond the payment of any taxes, even the flat rate.

Some figures from official statistics are pertinent at this point:

For the calendar year 1922, a total of 382,883 corporations reported to the Treasury. About onefifth of this number-79,529-that year had $20,246,843,000 of "surplus and undivided profits," not one dollar of which was subject to surtaxes.

In 1922, all corporations distributed $3,436,715,000 in cash dividends and $3,348,000,000 in stock dividends, almost an equal amount which was entirely tax-exempt.

As to returns for 1923, the Treasury analysis reveals that 165,594 corporations, 412 per cent of the whole number, reported no net income. Yet these same corporations that year distributed $348,498,000 in cash dividends and $104,118,000 in stock dividends.

What, do you think, would have happened if the army of 7,000,000 small taxpayers with incomes under $4,000 had reported "no net income" after declaring $450,000,000 in dividends?

It was Senator Simmons who led the fight against the inequitable Mellon surtax reductions in 1924. Another able Democrat, Senator Jones, of New Mexico, bore the brunt of the battle to reach these tax-exempt corporation profits.

The Jones amendment, in lieu of the flat tax imposed by the Mellonites, provided for a graduated tax on undistributed corporation profits, from "onefourth of 1 per cent if the undistributed net income is more than 10 per cent and not more than 11 per cent of the surtax net income" up to "40 per cent if the undistributed net income is more than 59 per cent of the surtax net income."

In discussing this issue, Senator Jones said:

"The Supreme Court has held that we can not assess the individual on account of the income of a corporation unless that income be distributed to the shareholders, for the simple reason that it is not income to the shareholder unless the shareholder has dominion over it. So long as it is an asset of the corporation it is under the control of the board of directors as to whether they shall distribute it in dividends or retain it in the corporation.

"I have had prepared a list going back over the last few years since the question of an income tax upon corporations has been of great and vital interest to the Federal Government, which I think discloses some interesting facts. I find, for in

stance, that for the years from 1916 to 1922, inclusive, the entire net taxable income of corporations amounted to $56,094,000,000 for those seven years.

"The total amount of taxes, including the income tax and the excess-profit tax, when that was in force, amounted to $10,798,000,000. Of course, for the year 1922, included in the tabulation, there was no excess-profit tax, and the total tax paid by those corporations for that year was $823,000,000. After deducting all of those taxes there remained for distribution $45,296,000,000. The corporations distributed in dividends only $18,151,000,000 and retained as undistributed income, which was used further to extend the plant or to be added to capital or surplus, $27,144,000,000.

"We have removed every tax upon corporations except the one flat tax. There is no excess-profit tax. The corporations are not required to distribute any of their net income in dividends, and judging from the history of the past we may assume that they are retaining these vast sums in their treasury as surplus or are adding it to capital and thus escaping any surtax.

"As further evidence of that, for the same year, 1922, referring to the same document which came from the Treasury Department, I find that while all those corporations making distribution of any cash dividends, as shown by their complete returns, paid out in cash dividends $2,763,000,000, they paid out in stock dividends $2,547,000,000, showing clearly that they have been retaining their corporate net income without distribution, and subsequently issuing stock certificates which can not be taxed against the shareholders under the decision of the Supreme Court.

"The proposed flat tax upon the corporation may be a discrimination either for or against individuals or members of a partnership. If the individual has a large income through its business, and there are many such, or if the members doing business as a partnership have a large income through the business they are taxed at the high maximum surtax rate upon individual incomes which, under the proposal adopted recently in the Senate, would reach a maximum tax of 46 per cent; whereas, if the same members of the partnership were doing business through the corporate organization the only tax would be the flat 14 per cent. Of course, if, after the payment of that flat tax of 14 per cent, which is called the normal tax, there are distributions of earnings, the individuals again pay surtaxes upon them.

"In the first place, I may say there is no requirement that the net incomes thus taxed to the corporation shall ever be distributed, and it is quite possible; moreover, we have reason to know that the corporate plan is being availed of for the purpose of evading taxation beyond the one tax levied upon the corporate net income. There is no reason why an individual owning the corporation should withdraw the income from that corporation beyond the amounts necessary to pay his actual living expenses. It is much easier for an individual at the time of his death to distribute to his heirs shares of stock in a corporation which he owns than it is to divide the real estate and the personal property into shares among the members of his family. So there is no reason why an individual, who, himself, is doing business, through his own corporation,

should ever declare any dividend beyond his actual necessities.

"Those actual necessities, indeed, may be covered by salaries which he might vote to himself, and in such case there would be no necessity for declaring any dividend. It furnishes a means to use the corporate organization for the purpose of evading taxation.

"This also brings about a situation which is unfair to a great many shareholders of corporations. As I said, there are a number of corporations that pay no dividends. Just the other evening, as a matter of curiosity, I picked up a paper and counted the number of stocks dealt in upon the New York Stock Exchange that day. There were 480 different stocks dealt in. There were one hundred and fifty-odd which were quoted as paying no dividends whatever. On Sunday I picked up another paper and I found that 43 per cent of the stocks dealt in actively on the New York Stock Exchange last week pay no dividends whatever. Unless the dividends are distributed there is no reason why an individual should not only organize a corporaton to serve his individual purposes, but as to the 43 per cent of the corporations whose stocks is dealt in actively on the stock exchange, he can buy their stocks and simply allow his wealth to accumulate by failing to distribute any income which the corporation may earn. These stocks are all selling for money, some of them a few dollars a share, some of them many dollars a share, but they pay no dividends, and the owner of such stock is simply getting his benefits through the accumulation from month to month and from year to year and paying absolutely no tax upon the increase in value of the stock which he buys.

"The Secretary of the Treasury and the majority of the Finance Committee have no right to inveigh against tax-exempt securities so long as by their own act they are rendering wholly exempt from taxation $20,000,000,000 of Federal securities which were made subject to surtaxes by the law under which they were issued.

"Not only that, Mr. President, but we know there are such corporations as holding companies, which own the stock of other corporations; and when such holding companies receive any dividends those dividends are free from all tax in their hands. That such corporations are being organized is undisputed, because we find in the Statistics of Income for 1921 that there were paid in dividends to corporations by corporations over $500,000,000. The holding company pays not a cent of tax upon that $500,000,000, and there is no suggestion by the majority to relieve that situation." The report of the minority of the Finance Committee, on this point, said:

"Moreover, the Secretary of the Treasury and the majority members of the Finance Committee have made no attempt to change the provisions of the present law which afford the greatest avenues of escape from the high surtaxes. Under existing law the tax upon corporations is a flat or normal tax of 122 per cent. This has been increased by the majority of the committee to 14 per cent. Under this arrangement there is nothing to prevent an individual with an income taxed upon the aver

age above 14 per cent thereof from organizing a corporation and transferring to it all his incomeproducing assets. The corporation would only pay a flat normal tax and the owner of the corporation would need to draw therefrom in dividends an amount only sufficient to pay his actual living expenses. It follows, therefore, that in the bill as presented there is a direct inducement for every one having a net income which would be taxed to him as an individual in an amount in excess of 14 per cent to organize a corporation and evade the payment of more than that percentage of taxes. It is true a penalty against the organization of a corporation for the sole purpose of evading taxation is included in the present law and increased in the proposed bill. In actual result, however, such penalty provision has been and will be for all practical purposes a nullity. The penalty of the present law has only been applied in one or two cases. Secretary testified before the committee that corporations were not being availed of so as to result in a decrease in taxation. Before another committee of the Senate a prominent attorney from the city of New York testified that such was generally being done. We believe that so long as the inducements exist in the law they will be availed of by interested taxpayers.

The

"In this connection we desire to refer to information from the Treasury Department which has just been made available in response to Senate Resolution No. 110, which was passed in January of this On examination of the summary of this information we find that out of a total of 78,923 corporations making complete returns for the year 1922, 30,048 of them with a net taxable income of $896,254,485 paid no cash dividends during the year, notwithstanding the fact that they had an accumulated surplus of $3,954,966,686.

"One thousand eight hundred and sixty-seven other such corporations with net taxable income of $247,802,166 paid out in cash dividends less than 10 per cent of their net earnings, or only $14,350,718.

"There were 29,688 corporations making only fragmentary returns which showed net taxable income of $1,197,500,436 which paid out in cash dividends only $249,459,248. The total number of all these corporations reporting net taxable income was 109,313. The amount of the total net taxable income was $6,586,744,764, and the total cash dividends was $3,031,324,385, showing that the total amount of cash dividends paid out by all these corporations only averaged 46.02 per cent."

The Jones amendment, to impose a graduated tax upon undistributed corporations profits, passed the Senate May 7, 1924, 43 to 32, as follows (C. R., p. 8033) (those next up for re-election being in italics):

YEAS-Adams, Ashurst, Bayard, Brookhart, Broussard, Caraway, Copeland, Dial, Dill, Ferris, Fletcher, Frazier, George, Gerry, Glass, Harris, Harrison, Howell, Johnson, Minn.; Jones, N. Mex.; Kendrick, King, Ladd, McKellar, Mayfield, Neely, Norbeck, Norris, Overman, Pittman, Ralston, Ransdell, Reed, Mo.; Robinson, Sheppard, Shields, Shipstead, Simmons, Stephens, Trammell, Walsh, Mass.; Walsh, Mont.; Wheeler. NAYS-Ball, Brandegee, Cameron, Capper, Colt, Cummins, Curtis, Dale, Ernst, Edge, Fernald, Fess, Gooding, Hale, Herreld, Keyes, Lodge, McKinley, McLean, McNary, Moses, Oddie, Pepper, Phipps, Reed, Pa.; Smoot, Stanfield, Wadsworth, Warren, Watson, Weller, Willis.

NOT VOTING -Borah, Bruce, Bursum, Couzens, Edwards, Elkins, Greene, Heflin, Johnson, Calif.; Jones, Wash.; La Follette, Lenroot, McCormick, Owen, Shortridge, Smith, Spencer, Stanley, Sterling, Swanson, Underwood.

It will be noted that the Jones amendment was adopted; yet it did not become a part of the law. Later, in the report of the conference committee, this provision was eliminated, and Mellonism thus prevailed.

Moreover, although the bill as it was before the Senate when Senator Jones made the speech above quoted, provided for a flat rate of 14 per cent, that was later reduced to 122 per cent.

The Senate Situation

WHAT will happen to the new Mellon bill may

be quite safely predicted-until the measure reaches the Senate. The Ways and Means Committee of the House has been preparing the bill. That body is pro-administration and, of course, will make its work "conform."

Next the House machine will undoubtedly adopt a typical gag rule, limiting debate and shutting off most amendments. In that farcical way, the bill will go through.

Then the Senate will take a hand-with results which no one may foretell. Had Mr. Dawes succeeded in getting cloture, the Mellonites would prevail as easily and as swiftly as they will in the House. But, under the Senate system of free debate and real deliberation, there is almost an equal chance that the measure may be defeated. Certainly an illuminating discussion will feature the contest.

As to the "success" of the new Mellon bill, in whole or in part, that depends almost wholly upon the attitude of Democratic Senators.

Strong as it is, the present administration machine cannot dominate in any vital controversy without Democratic support. The Senate today, assuming that recent gubernatorial appointees will be seated, is composed as follows:

Old Guard Republicans...
Democrats

Independents .--.

46

39

11

identifica

Independent

Democratic Underwood, Heflin Ashurst .Caraway, Robinson

Johnson

.........

Bayard

Fletcher, Trammell Harris, George

Borah

Brookhart

...

.Ransdell, Broussard

Fernald, Hale

Weller

Bruce

Ferris
Harrison, Stephens
Reed
Walsh, Wheeler

Couzens Shipstead

Pittman

Edwards

Norris, Howell

As a matter of fact, those of small incomes compose the class who pay and pay and pay. They do this, of course, through indirect taxes-transportation, tariffs, etc. A family that would contribute two or three dollars of income tax probably is compelled to pay two or three hundred dollars of tribute to profiteering in various forms, due directly to governmental policies such as are embodied in the Fordney-McCumber tariff and the Esch-Cummins railroad law.

There is indeed a wide gulf of incomprehension between industrialism and statesmanship.

THE

'HE FINAL squelching of the Federal Trade Commission by the Coolidge Administration has created what promises to be the most important issue of the next Presidential campaign. This and the newly announced high-tariff policy will make "High Prices" the chief topic of discussion by the platform makers of the 1928 conventions.

The Federal Trade Commission was created by Congress for the purpose of enforcing the Sherman Act, a law which forbids practices in restraint of trade, such as concerted production curtailment, price-fixing and the creation of monopolies. President Coolidge has never been in sympathy with these purposes and he lost no time, after becoming President on his own, in signing their death warrant.

Last summer, after a long investigation into the restraint-of-trade activities of Secretary Mellon's Aluminum Company of America, the Commission, by a unanimous vote, issued a report against that monster monopoly. This deeply offended Mr. Coolidge. He bided his time but, when the 16,000,000 mandate votes were announced, one of his first acts was to promise the business organizations of the country that certain commissions should be reorganized. His reason given for the move was that, in the case of the Trade Commission, the Mellon Aluminum report had been published for the purpose of influencing the election. This, mind you, in the face of the facts that the case in question was a particularly flagrant one and that the report had been signed by the two Republican members of the Commission.

Later, Attorney General Stone created a mild sensation by publicly endorsing the action of the Com

TARIFF LIFT

"Going Up"

mission. It was not long till he was benched, and it is interesting to note that he wrote the majority opinion of the Supreme Court in the case which drew the best teeth of the Sherman Act. Of this decision in favor of the Maple Flooring and the Cement Manufacturers, more later.

Incidentally, it may be mentioned that the other commission which excited Mr. Coolidge's resentment was the Tariff Commission. Absence of sufficient rate hoisting was its sin of omission. It had sent eight tariff schedules to him for

action. Two decreases in rates were proposed. One was the recommendation that the sugar rate be lowered, which he has at last turned down, and the other involved the rate on linseed oil and its byproducts, which is still pigeonholed. But the "reorganization" of the Tariff Board is a story in itself.

When the announcement came from the White House that the Trade Commission was to be "reorganized" it was at once understood that this was merely the President's way of saying, "Huston Thompson must go."

Mr. Humphrey Commissioned to bore from within

When Mr. Coolidge placed Former Congressman Humphrey on the Commission the friends of Unrestricted Monopoly knew that even though the Supreme Court might fill, bridge and strengthen in a dozen ways the teeth of the Sherman Act, unfair trade practices, price-fixing and production-curtailing were safe pursuits. For over seven years Thompson had stuck on the Commission, while others came and went, fighting these devices of the bad men of Big Business, and when the news of his promised elimination from official life came it was hailed with back-slapping and circle-dancing by the junkers of Politics and Business.

All sorts of expedients had been tried by the Stalwarts in Congress who wanted to hamper or hoped to destroy the Commission, but, chiefly through the balance of power votes of the Progressives, many of the hostile moves were blocked. Efforts were made to curtail its powers, to starve it out of existence by refusing adequate appropriations, and, failing in these expedients, to place it under the suzerainty of Herbert Hoover, that greedy collector of bureaus and commissions.

All of these flank attacks having proved futile, Mr. Coolidge, fortified by the 16,000,000-votes mandate, made a simple frontal assault, and it was indeed a Gordian knot coup. Legally the Commission is a bi-partisan body, but Mr. Coolidge knew that if its majority membership was composed of men opposed to the purposes for which it was created it would be as harmless as a dead garrison armed with