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The Treasury soon found that it was losing revenue by this arrangement. Wealthy men escaped high surtaxes by leaving part of their income with corporations which reinvested their profits instead of declaring dividends. Heavy taxes on undivided profits, kept by companies beyond their "reasonable" needs, did not prevent a large amount of rich men's incomes from escaping surtaxes because the word "reasonable" was hard to define. And, whatever profits a conservative corporation puts aside for surplus plant expansion or hard times to come, the Government collects only 12% to 15% in corporation income taxes.
The President's proposal would put an end to all this. No longer would small taxpayers have some 16%. of their income from corporate sources taken by the Government in return for only a 4% credit on dividends. Big taxpayers would gain little or nothing by leaving their income to be taxed at 35% in corporation hands rather than taking it in dividends and paying the personal surtax.
Groans. Grim and glum was many a businessman at the idea of a tax that would prevent corporations from putting anything by for a rainy day. "A ruinous tax!" "Breaking the nest egg!" "The breathing spell for business is over!" were some of the things Republicans called the President's plan. Even Ways & Means Committeemen were disturbed. If corporations were not allowed to accumulate surplus what would happen when Depression hit? First question put to General Counsel Oliphant and the Treasury experts was whether corporations could not be allowed to keep as a cushion against Depression a small part of their earnings, say 10% or 20% which would be taxed only 15% or 20%. Mr. Oliphant was firm in his opposition to a corporate cushion, pointing out that the tax plan would not yield the necessary $620,000,000 of taxes requested by the President if such an exemption were allowed.
Questioned by newshawks at a press conference, Franklin Roosevelt was equally firm: no undivided corporation income should be exempt from the full tax, except such ordinary reserves as are already allowed. Suppose, said the President, that he and Correspondent Raymond P. Brandt of St. Louis Post-Dispatch were rich men and owned 51% of the stock of a corporation and the other newshawks were minority stockholders. The majority stock-holders might decide to leave all their profits with the company, to declare no dividends. That would not be fair to the minority who might need money. The undistributed profits tax would force the distribution of the corporation's income in dividends. Then, if the company needed money for expansion or some other purpose, it could offer new stock to its stock-holders and thus get back the necessary amount of cash.*
Still reluctant was the Ways & Means subcommittee. It called on the Treasury for estimates of what other taxes would yield. Some alternatives and their estimated yield: