The CHAIRMAN. Do I understand you as opposing the alternative method?

Mr. REED. Unless a capital percentage is levied at the present rates which would make it relatively negligible; yes, sir.

Senator SMOOт. That would hardly be right.

The CHAIRMAN. Then I understand that you either approve or disapprove the arrangement in the bill as to the alternative tax?

Mr. REED. We disapprove very decidedly the increase in rates. We prefer to see that basis entirely out of the law.

The CHAIRMAN. The rates on the war profits tax, or the excess profits tax?

Mr. REED. The excess.

The CHAIRMAN. You do approve of the rate of the war profits tax?

Mr. REED. We approve of the rate of the war profits tax. We disapprove placing the 10 per cent capital deduction on the war profits tax on invested capital.

Senator SMOOT. And I think that ought to be done.

Mr. REED. It ought to be on capital employed; and if it is left in there it ought to be on a graduated scale applying on different businesses. What you lose on one you get on another. That is true of all this.

Senator THOMAS. Your position as counsel for your association requires you to be more or less familiar with taxing systems throughout the country, does it not?

Mr. REED. I beg your pardon?

Senator THOMAS. I say, the position you occupy as legal adviser for a very important organization requires you to familiarize yourself. to some degree, with the taxing systems of the country? Mr. REED. Yes, sir: it does.

Senator THOMAS. Do you know of a taxing system in the United States, anywhere, that invests the taxing power with an alternate method of assessment and levying.

Mr. REED. I never heard of it, Senator; but I am told that the State of Wisconsin does, in an indirect way, through the operation of its taxes; but I can not see that it is any more effective than, for instance, the provision that the tax shall be on war profits, but shall not exceed 10 per cent

Senator SMOOT. There is no such provision as that.

Mr. REED. It is not an alternative system; it is a limitation.
Senator SMOOT. We do not provide that at all.

Mr. REED. NO; but the alternative simply means that you will take two things, whichever is higher.

Senator THOMAS. The Government can find out which system can get the most blood out of the turnip and then levy it. If we can enact the two methods, why can we not enact half a dozen different methods?

Mr. REED. You could.

Senator SMOOT. You can.

Mr. REED. Whichever is higher or whichever is less.

Senator THOMAS. I would like, if you have time to do so, to make some legal investigation of the subject. I am too busy to make it myself, but I think it is a fundamental question in this bill.

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Mr. REED. If I have time after Thursday, Senator, I will take that up.

Senator PENROSE. I would like to address an inquiry to Mr. Reed. He may have covered the point, because I was called out several times.

This committee had a pure war-tax provision up last summer in the revenue bill, but the members of the committee found it almost impossible to meet the argument that many very large concerns would escape taxation altogether as a logical, pure, and simple war-tax proposition. For instance, if I recollect correctly, the Ford automobile concern has no war profits. Would you recommend that that company pay no war taxes, and other concerns of that character? Mr. REED. No, sir; I would not.

Senator PENROSE. How would you meet that?

Mr. REED. As I pointed out a moment ago, in a great many cases, where you take two apparently equal concerns, one was earning 8 per cent in the prewar period and the other was earning 15. The real value of those concerns, their invested capital, might be nominally the same, but the real value of those concerns in the prewar period was determined by what they were earning in the prewar period, and the consequence is that the one earning 8 per cent was selling at par and the one earning 15 per cent was selling at 150. That corporation is changing ownership all the time. The capital invested in a corporation 30 years ago furnishes no logical, sound, or just basis at all on which to levy a tax against the present owners.

Senator PENROSE. That does not seem to meet my point. We are reluctantly proposing a war-profits tax. Now, assume that at least a half a dozen of the largest concerns in the country, absolutely regardless of any capital or any other way of estimating the tax, have no increase of profits as the result of the war. According to your theory, they would escape any additional taxes?

Mr. REED. No, Senator. I said that we thought that the Government ought to have power to apply some additional factor to those concerns that were earning abnormally high returns in the prewar period as well as those who were earning abnormally low returns.

One general proposition will show what I mean. We were speaking the other day with Judge Hull as to possibilities from this. The capital-stock tax represents capital invested by the present own

ers

Senator PENROSE. You are getting back to the excess-profits tax. Mr. REED. It is simply another basis on which to tax them. In order to make your tax complete, you have to reach these concerns. I understand that on one side of the Treasury they determine the tax on the basis of five or ten millions, and on the other side, with reference to the same corporation

Senator THOMAS. It is impossible to devise a perfect system of taxation. We can only approach justice and equity. Take such an institution as the Ford concern. If it is taxed, not upon its capital but upon its earnings-and its earnings, we will say, were $5,000,000 in the normal antewar period, but because of the increase of sales its profits are ten millions in a taxable year, there are five millions which, independent of any question of capital invested, would be subject to

this tax.

Senator SMOOт. That is war profits?

Senator THOMAS. Of course, the increase in the income tax is posed to operate uniformly everywhere.

sup

Mr. REED. Of course, you could put surtaxes on the income tax-Senator SMOOт. Of course, you get the income tax on whatever is declared in dividends. The Ford income, since the war-that is, the Ford Co.'s profits since the war-have not been as great as they were before the war.

Senator THOMAS. My information is to the contrary.

Senator SMOOT. I have a statement of every year.

Senator THOMAS. Then you have definite information. My information is that as compared with 1911, 1912, 1913, up to last year, it has been very much larger.

Senator SMOOT. Since the war?

Senator THOMAS. Yes.

Senator SMOOт. Oh, no; it has been less. The Ford Co.'s profits have been less since the war than before.

Senator McCUMBER. What objection have you to the present system, 7 and 9 per cent, as meeting those cases of abnormally low earnings before the war and preventing anyone claiming more than 9 per cent investment as a fair prewar earning and taxing as excess profits everything above that?

Mr. REED. I should say the chief objection is that it throws it over to invested capital and the capital percentage basis as the general basis of your tax. The war-profits tax is fairly, as a general basis, resorting to the capital percentage only as one factor in taking care of special cases.

Senator McCUMBER. How would you remedy that?

Mr. REED. I would think the war-profits tax, with the capital percentage feature as the English have it-where it is not equal to 7 per cent of the capital employed

Senator SMOOT. They have raised it to 9.

Mr. REED. They have raised it to 9—and 9 is fairer.

Senator McCUMBER. How about those who have had an abnormally high earning during the prewar period?

Mr. REED. I would certainly give the Treasury power to find that their earnings had been abnormally high.

Senator JONES. Mr. Reed, what have you to say to the suggestion that you give the Treasury Department the right to fix a normal reasonable profit for each line of business, and then levy the taxes en the excess; in other words, carrying out with reference to prewar conditions the idea that one business ought to earn in normal times more than another business, depending upon the hazard involved in the business? Why not accept that and give to the Treasury Department the right to ascertain what would be a reasonable return upon a given business, and then levy the tax upon the excess, and in that way make quite a variation between the businesses of the country, depending upon the risk involved?

Mr. REED. That is what absolutely has to be done if you are going to get an 80 per cent tax out of every person that you ought to get it out of without substantial injury to any large class. Under any arbitrary system what you take from one man you give to another. You have immunity and confiscation walking together, hand in hand. all the time.

Senator JONES. The House bill, as I understand it, gives a blanket exemption of 10 per cent, and that strikes me as being unfair. There are some businesses which in normal times would be glad to get 6 or 7 per cent, because they get it regularly. There is no risk involved. It is a sure thing, and they are satisfied with it. But other businesses must make a much greater profit in order to take care of the risk of failure in certain years and the risk in the nature of the business itself all the time.

Mr. REED. There are different risks in different classes of business, and a thing that is very often lost sight of is that there are different risks in individual businesses of the same class. A couple of young men go into a mercantile business and borrow all their capital. What they have is very much at risk. They may lose it all, while the merchant around the corner owns it all and there is very little risk.

So there must be power, aside from the power to provide for an earning rate in different classes of business-there must be power te make adjustments to particular businesses, especially if you have borrowed the money, because that is where the biggest risks fall.

Senator JONES. Mr. Reed, are you going to print any part of your remarks that you have not delivered? Because I confess that I do not fully understand your argument, but I am not going to take up any more of the time of the committee with any further inquiries.

Mr. REED. I shall do that, and will furnish copies to the members. The CHAIRMAN. I wanted to ask a few questions.

I understand you to be objecting to the basis of ascertaining the amount of capital applying the deductions upon that capital. As I understand the House bill, if the deduction is to be estimated according to the war profits method, the amount of deduction allowed is 10 per cent on the invested capital.

In the case of the excess-profits tax methods, the amount of deduction allowed is 8 per cent of the excess profits.

You think that is not quite a fair method of ascertaining the deduction?

Mr. REED. I think that the definition of invested capital, throwing it back to the original investment of 30 years ago, is absolutely unsound and unfair

The CHAIRMAN. You do not approve of that. But eliminating this method of ascertaining the deduction, do you approve of the rates provided as to war profits and excess profits? Do you think the rates are properly and equitably adjusted in both of those methods?

Mr. REED. Speaking for a client, having no definite instructions, I received no objections from any interests to the rates as such. Our objection to the capital percentage tax is really based upon our objection to that basis of tax.

The CHAIRMAN. You have no objection to make to the adjustment of rates between those two methods?

Mr. REED. I make no objection or protest against the rates as to the war-profits tax, the rate as such; but the injustices, the necessarily unavoidable injustices and hardships under the capital percentage basis are so great that if we must have it the country can not stand it.

The CHAIRMAN. Your objection, then, goes to the method of ascertaining the invested capital

Mr. REED. Yes, sir; and to the capital percentage basis generally. The CHAIRMAN. Now, I understand you as taking the positionand that I think is the most important matter that you have brought out-that the bill ought to prescribe the tax that is to be paid by the man whose income is normal and whose income can easily be ascertained by a process of calculation, but you think there is a large number of exceptional cases where the income can not be easily ascertained, where the amount of capital invested can not be easily ascertained; and in that class of cases you think we ought to invest the Secretary of the Treasury with broad powers to ascertain what the invested capital is and what the proper rate of interest is?

Mr. REED. I think that is absolutely essential if you are going to get an 80 per cent tax and get it where it is to be had from those who really have the excess profits.

The CHAIRMAN. In other words, to set up a kind of exceptional case in this bill and to permit the Secretary of the Treasury in that exceptional case to ascertain the invested capital and to assess the income in his judgment and discretion?

Mr. REED. To ascertain the normal income.

The CHAIRMAN: Taking into consideration all the circumstances and conditions in each exceptional case?

Mr. REED. Yes, sir; that is the most important thing.

Senator GERRY. In other words, you make an exception in that case the same as you do in the exceptional case in the prewar case? Mr. REED. Yes, sir; I would.

I do not question the constitutionality of it, because I believe that constitutional questions must be determined on broad general lines. If you have power to levy a war tax on the excess above the normal income, there is only one way in which you can do it, and that is to have the normal income determined and fixed, because it can not be prescribed by statute.

The CHAIRMAN. If it is a normal case, under the process of assessing this income tax provided in the bill, probably no great injustice would be done as between businesses and as between persons subject to this tax.

Mr. REED. I would only say that as to war profits taxes; not as to capital percentage taxes.

The CHAIRMAN. But no great injustice would be done as between the taxpayers, no great discrimination as between the taxpayers by the application of these two methods to the normal case. The injustice will come by its application to the abnormal case; and to avoid that possible injustice you propose this exceptional case with power in the Secretary of the Treasury to adjust equities?

Mr. REED. I should say very decidedly that in my judgment the capital percentage tax with increased rates rests unjustly in the normal case.

Senator SMOOT. Without doubt.

Mr. REED. And destroys the values that have been invested in stock and securities in the last 5 or 10 years.