The method of determining the extent to which profits are due to war is a matter for most careful consideration. In 1918 the Treasury earnestly advocated that the war profits should be determined by comparison of the war income with pre-war income-the entire excess over pre-war income to be regarded as war profits and taxed at 80 per cent, which was the primary basis under the British system. Congress, however, adhered mainly to the use of invested capital as the basis of measuring excess income to be subjected to the tax. Under the 1918 act the income subject to the 80 per cent war profits tax was the excess of the net income over what was regarded as a normal business return upon capital, instead of upon the net income over pre-war income, and in actual practice in most cases the excess of the income over a 10 per cent return on invested capital. The use of invested capital as the basis for measuring the excess of income resulted in very great practical difficulties. The determination of invested capital was all important in fixing the tax, but such determination was in many cases very difficult and in not a few cases impossible. There is no question that the experience of the Government and taxpayers with the determination of invested capital was unsatisfactory and that this basis should not be used again except as a last resort. On the other hand, it must be admitted that Congress had certain substantial reasons for adhering to the use of invested capital for the purpose of measuring income subject to excess profits and war profits taxes. There had to be some method for determining the application of the tax to new concerns which had no pre-war income and also for determining the application of the tax in the case of concerns the income of which in the pre-war period was clearly subnormal. The commission recommends that the tax be applied to the excess of income over the average for three pre-war years. This would seem to be a sound and satisfactory basis for the normal case, which would avoid the serious administrative difficulties involved in determinations of invested capital. Special provisions should, however, be made for certain cases. It is recommended in the report of the commission that an adjustment be allowed for capital expenditures for war purposes by new and existing industries. This is an important matter in the formulation of a satisfactory war-profits tax. The profit in a war year is itself affected by war conditions and when those conditions have culminated may prove to have been illusory. Suppose that a business concern to meet the demand for goods during the war purchases a new machine or builds a new factory. The amount so expended is normally treated as an investment and not as an expense. After the war, however, it may be that the additional machine or the new factory can not be commercially used and will have salvage value only. If the war profits have been reckoned without allowance for this loss, they have been incorrectly reckoned. It was to meet this situation that the deduction of a reasonable allowance for amortization was provided for by the 1918 act. The operation of that section also gave a great deal of difficulty. In formulating a war-profits tax it might be possible to avoid or lessen the difficulty by providing that amounts expended for new facilities, if approved by some proper Government official or board, could be temporarily deducted in reckoning the profits, provided interest were paid on the amount by which taxes were so reduced. After the war the emergency value of the additions so made would be reckoned once and for all and the taxes properly adjusted. Some similar provision might also have to be made to protect the enterprise against the ultimate loss in value of its basic inventories due to postwar deflation. Provision has not been made by the commission for determining the application of tax to new concerns which had no pre-war income or to concerns whose income in the pre-war period was clearly subnormal. For concerns with subnormal income during the specified pre-war period a war profits tax on income as defined in the report of the commissioner would be unfair in comparison with other conDuring any 3-year period there are certain concerns whose income is below what may be expected over a period of years. A concern may be in the early stages of its development; it may be operating in a new industry or it may belong to an industry which is going through a period of adjustment to changed economic conditions. For these concerns and for concerns with no pre-war income, the general rule laid down by the commission should be supplemented by other measures of normal profits such as profits in proportion to invested capital. Although the experience of the World War clearly demonstrated the latter basis to be impracticable for general application, it could well be resorted to for concerns whose pre-war income fails to furnish a satisfactory basis for determining war profits. The taxation of individual income from all sources at a rate as high as 95 per cent of the excess above a 3-year pre-war average might result in undue interference with the economic process. clear that profits of the individual from business should be treated on the same terms as corporate profits and be taxed at war rates which would absorb the war profits in so far as they can be properly determined. Wages and salaries and income of the individual from the investment of savings, however, represent a different type of income. Under any thoroughgoing scheme to prevent price inflation during the war period wages and salaries would not be increased by war activities per se except in response to changes in basic economic conditions. In general, when economic conditions do not change, an increase in wages and salaries represents a reward for services rendered. A war tax at 95 per cent of the increase in such income over pre-war earnings would have very unfortunate effects on individual incentive. Furthermore, certain increases in wages and salaries would undoubtedly be necessary during a war period to take account of the new conditions brought about by the war. Even if it be assumed that the price structure existing at the beginning of the emergency can, in some measure, be pegged or frozen, it is recognized that in order to meet the war demand for goods, higher cost producers must be drawn into production with certain inevitable increases in prices. If the general standards of living prevailing at the beginning of the emergency are to be maintained, wages and salaries must be increased to take account of the new price structure. A tax at 95 per cent of such increases would virtually result in a reduction of the individual's wages and salaries as compared with the preemergency period. The possible evasion of the war-profits tax through the payment of excessive salaries is one of the many problems requiring special administrative provisions. If the war profits of business are absorbed by a war-profits tax, an increase during the war period in individual income from investments would reflect primarily additional savings. Furthermore, the profits of the enterprises in which these savings are invested are subject to the war-profits tax. An additional war-profits tax levied on the individual's income from investments would constitute double taxation and would put a very serious penalty on savings. These are some of the important basic principles involved in devising tax legislation contemplated by the War Policies Commission. They relate to problems which should be carefully considered prior to the formulation of a war-profits tax law. In view of the fact that the seriousness of the particular war emergency and the circumstances under which it arises can not be foreseen, it does not seem possible to prepare in advance a tax measure which in all details would be suitable for immediate use. The Treasury is of the opinion that the most advantageous procedure would be to make a thorough study of the experience under the tax laws employed during the World War emergency and is conducting such a study. Very truly yours, OGDEN L. MILLS, Secretary of the Treasury. О GENERAL AND SPECIAL CLAIMS COMMISSIONS, UNITED STATES AND MEXICO COMMUNICATION FROM THE PRESIDENT OF THE UNITED STATES TRANSMITTING DRAFT OF A PROPOSED PROVISION PERTAINING TO AN EXISTING APPROPRIATION FOR THE DEPARTMENT OF STATE FOR THE GENERAL AND SPECIAL CLAIMS COMMISSIONS, UNITED STATES AND MEXICO JUNE 13 (calendar day, JUNE 14), 1932.-Read; referred to the Committee on Appropriations and ordered to be printed The PRESIDENT OF THE SENATE. THE WHITE HOUSE, Washington, June 14, 1932. SIR: I have the honor to transmit herewith for the consideration of Congress draft of a proposed provision pertaining to an existing appropriation for the Department of State for the General and Special Claims Commissions, United States and Mexico. The details of this proposed provision, the necessity therefor, and the reason for its transmission at this time are set forth in the letter of the Director of the Bureau of the Budget transmitted herewith, with whose comments and observations thereon I concur. Respectfully, The PRESIDENT. HERBERT HOOVER. BUREAU OF THE BUDGET, SIR: I have the honor to submit herewith for your consideration draft of a proposed provision pertaining to an existing appropriation for the Department of State: DRAFT OF A PROPOSED PROVISION PERTAINING TO THE APPROPRIATION GENERAL remain available for the same purposes until June 30, 1933: Provided, That no portion of the funds herein made available for the fiscal year ending June 30, 1933, shall be available for expenditure during that fiscal year unless the duration of the General and Special Claims Commissions, United States and Mexico, or either of them, is further extended in accordance with Senate Resolution No. 480 of February 28, 1931. (Conventions of September 8, 1923, vol. 43, p. 102, pt. 2; September 10, 1923, vol. 43, p. 110, pt. 2; act February 23, 1931, vol. 46, p. 1318.) The General Claims Commission was established by the convention between the United States and Mexico signed September 8, 1923, and the duration of the commission was extended for a period of two years by the convention of August 16, 1927, and for a further period of two years from August 30, 1929, by the convention of September 2, 1929. The Special Claims Commission was established by the convention between the United States and Mexico signed September 10, 1923, and the duration of the commission was extended for not to exceed two years from August 17, 1929, by the convention concluded on that date. Senate Resolution No. 480 of February 28, 1931, requested the President to negotiate and conclude with the Mexican Government such agreement or agreements as may be necessary and appropriate for the further extension of the duration of the commissions, and while negotiations have been in progress for some time, no agreement has been concluded, and the commissions expired on August 30, 1931, and August 17, 1931, respectively, leaving a large number of claims awaiting settlement. An appropriation of $367,000 was made for the General and Special Claims Commissions for the fiscal year 1932, but no estimate was included in the Budget for the fiscal year 1933. The Department of State advises that if the extension of the General Claims Commission should be agreed to in its present form it will become effective immediately. The present appropriation is available only until June 30, 1932, and if the pending agreement now under negotiation becomes effective the Agency in charge of the preparation and presentation of the claims will be obliged to suspend work on July 1, 1932, if no appropriation is available after that date. The purpose of this proposed provision is to make available until June 30, 1933, the unexpended balance of the appropriation for the fiscal year 1932, with the provision, however, that the funds shall not be available for expenditure during the fiscal year 1933 unless the duration of the commissions, or either of them, is further extended in accordance with Senate Resolution No. 480 of February 28, 1931. This proposed provision pertaining to an existing appropriation is to meet a contingency which has arisen since the transmission of the Budget for the fiscal year 1933, and its approval is recommended. Very respectfully, J. CLAWSON ROOP, Director of the Bureau of the Budget. о |