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A manufacturers' sales tax at 5%: $530,000,000. An increase of the normal income tax from 4% to 6% : $121,000,000. Higher surtaxes in $3,000-to-$100,000 brackets: $226,000,000. About 30 excise taxes on farm products at rates lower than the extinct processing taxes: $221,000,000. An increase of the Federal gasoline tax from 1¢ to 1½¢per gal.: $80,000,000. Louder groans than before rose from the House committee. Compared to these burdensome taxes, with their low yield, the President's tax on undivided profits seemed the least of many evils.
Significance. After several days' cogitation even the gloomiest alarmist felt less anxiety over the enactment of an undivided profits tax. Part of this reassurance came from the fact that the Ways & Means Committee members stuck to their idea that industry must be allowed to build up some reserves as a cushion against Depression.
More reassurance came when men took pencil & paper and found that even a 35% or 40% tax on undivided profits would not in itself burden corporations so much that they would be unable to build up reserves for emergencies. An easy example: a corporation clears $1,000,000 a year. Some $160,000 now goes to the Federal Government in corporation taxes. If $500,000 is declared in dividends $340,000 remains for surplus. Under an undivided profits tax, the corporation might declare the same dividends with the result that it would have to pay 35% on the remaining $500,000. Thus the Government would get $175,000 in taxes and the corporation could still add $325,000 to surplus. Stockholders, on their own account, would have to pay the 4% normal tax on their dividends—$20,000 in taxes. Thus the corporation would be out an additional $15,000, the stockholders an additional $20,000. The Treasury would gain $35,000 in tax revenue which would be the equivalent of an increase of the present average corporation tax of 16% to 19½%.
*The President did not touch on the possibility that he and Mr. Brandt might not be able to subscribe to this new stock. Critics pointed out that Federal surtaxes alone might take up to 75% of their dividends received from the company; after paying Federal and state income taxes they might not have the necessary cash to return to the company.