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dollar of the value of their bank shares. And strange as it may seem, this law was actually passed and the bankers of Virginia are paying taxes under this arrangement today, and with no apparent alarm about competing "moneyed capital" in the hands of individual citizens; the very thing that caused them so much distress at the time of the lawsuit. Of course the motive of the bankers in seeking this arrangement is transparent and easy to understand. It relieves them from paying on their shares at the very high general property rates that obtain at this time in nearly all of the cities and villages of Virginia; and at the same time places them in a position where they can successfully contest their taxes, whenever things do not go exactly to suit them. And yet in the face of this treatment they tell Congress they are afraid the legislature, unless limited in its power to tax, may treat them unjustly. The reasons which impelled the legislature to accept this arrangement are not so clear, but I am creditably informed that they acquiesced because they feared that if the general property tax was restored on intangibles it would drive much needed capital from the state. Thus the banks of Virginia are paying into the coffers of the state fifty-five cents on each hundred dollars of the value of their bank shares, not because the law exacts it, but in compliance with a socalled "gentleman's agreement". Such an arrangement ought not to be necessary. It does not comport with the dignity of a great sovereign state. And yet the humiliating plight of Virginia is shared by a number of sister states. Conditions like this ought not to be tolerated. Either the hampering federal statute should be so amended that the states may safely perpetuate their very desirable low rate "money and credit" and income tax laws, without bringing the tax on bank shares down to the same level, or else the states having such laws will undoubtedly be driven to repeal them and return once more to a system suited only to a bygone age. Because of defalcations and criminal mismanagement by a few unworthy bankers there is undoubtedly some prejudice against banks in a few scattered localities, but this feeling is neither general nor likely to become so, unless brought about by the bankers themselves. But whatever the public attitude may have been toward banks in other days, they are recognized everywhere today as among our greatest and most useful institutions. Modern civilization could hardly function without them, and they deserve and should receive every needed protection. But national banks have certainly cutgrown their swaddling clothes and it would seem that laws designed to protect them in their infancy might now be safely changed.

Bankers as a rule are very conservative. The very nature of their business makes them so. No thoughtful person would wish them to be otherwise. But surely a spirit of conservatism that

led them to insist that an outgrown statute, which has become a serious impediment to rational tax reform in every state of the Union, shall not be amended, to meet new and changed conditions is not to be commended. Such an attitude is utterly lacking in public spirit. It is conservatism gone to seed—“ standpatism" carried to the verge of folly.

Instead of obstructing the cause of tax reform, bankers should be among the first to lend a helping hand, and in any event their purely selfish wishes should be made to yield to the common good of all. If Congress does its duty, and I trust that it may, section 5219 will be amended in accordance with the resolutions adopted by the conference at Bretton Woods.

I have dwelt upon these resolutions somewhat at length in order to give you some idea of their present status and to emphasize once more their great importance. All three of them have a vital bearing upon tax reform, and I trust that they may have your earnest and unremitting attention, until they pass from the realm of contention into the realm of things accomplished.

CHAIRMAN ROBERSON: Mr. President, I am sure that I bespeak the minds of the conference when I say that we are greatly indebted to you for your masterly paper, and to add that you have set a very high mark for those who follow you in the responsible position of president of the association, in their annual addresses.

The chair takes it that of course it would not be appropriate to have a discussion of the president's address. It happens, however, that the two matters to which he has addressed himself-tax-exempt securities and the taxation of banks-are set apart as a special feature of the program later on, tax-exempt securities for this evening, and bank taxation for tomorrow afternoon. In that view of the situation it would seem proper to the chair that we should go immediately to a discussion of the next number on the program— tax-exempt securities. May I take the liberty of calling to your attention this quotation from President Harding which you will find on the front of your program, with reference to tax-exempt securities, to-wit:

"Many of us belong to that school of thought which is hesitant about altering the fundamental law. I think our tax problems, the tendency of wealth to seek non-taxable investment, and the menacing increase of public debt, federal, state. and municipal, all justify a proposal to change the Constitution so as to end the issue of non-taxable bonds. No action can change the status of the many billions outstanding, but we can guard against future encouragement of capital's paralysis, while a halt in the growth of public indebtedness would be beneficial throughout our whole land."

MR. WALTER W. Law, JR., of New York: At the risk of interrupting, I want to make just a very brief motion. It seems to me that the address of the president is such a remarkably clear and able presentation of very important matters that are before the conference, that it would be particularly fitting if it were printed in one of the Bulletins, so as to be given early, the widest possible circulation, and if it is in order, and you permit me, I should like to offer the motion that such action be recommended by this conference.

CHAIRMAN ROBERSON: Mr. Law, may I be permitted to make the suggestion that in view of the fact that the amenities of the occasion would hardly seem to allow a discussion of the president's address, you withhold your motion on that subject and have it made when the matter of bank taxation comes before the conference in its regular order.

MR. LAW, JR.: Certainly.

CHAIRMAN ROBERSON: The subject for discussion-the matter of tax-exempt securities-is one which to my mind is full of responsibility for this conference. It is one that as time goes on the people of this country are bound to be more and more interested in. The thing that troubles me personally most is the possibility that the present situation may be allowed to continue. There is to my mind within the present situation a dangerous element of social discontent that may not know any reasonable bounds in the future. This matter of exemption of a certain class of people virtually amounts to the super-imposing of an additional burden upon reat estate, and as the amount of the exempt securities increases, it may in the years to come cause so much discontent among a very large class of the American people that it is somewhat disconcerting to think just what may really result. Mr. MacFadden, chairman of the banking and currency committee, has just written Mr. Holcomb that, due to the closing days of Congress and to the tariff act, in which he is particularly interested, he has found it impossible to be here, but we are extremely fortunate in having with us this evening Professor Adams, the vice-president of the association, and a man who is recognized, of course, as an authority on all questions affecting taxation in this country, and I am going to take the liberty of calling on Professor Adams to address us at this time.

PROFESSOR THOMAS S. ADAMS: Mr. Chairman and gentlemen: You observe a person drafted for the good of the service on sudden notice, to discuss this question. I feel very much like the Colorado recruit, who volunteered for service in the World War and felt a little nervous and said to a comrade in the trenches. "What is this here thing about going over the top?" His friend

said something like this: "They get you up about three o'clock on a cold morning and the captain says 'let's go,' and you rises up and runs forward one hundred paces, and you drop, and you whale around in the mud and rain for a while and the captain says, forward,' and you goes forward about another hundred paces and then you drop, and them Hun bullets whistle over the top and the shrapnel is shrieking and oh Lord, boy, and the captain says, rise up, boys, go some more,' and you go a hundred more paces. and them Hun bullets whistle and the shrapnel shrieks, and the captain says, 'drop,' and then you rise up and run another hundred paces and suddenly you says, 'good morning, Jesus'."

I don't know whether that is an appropriate story to begin such a serious subject with, because this is a serious subject. It is such an extraordinary subject that President Harding has felt called upon to notice it in a message in the words to which the chairman has already called your attention. In its principal aspect I feel that I can do nothing more than emphasize what has already been said as to the seriousness of the social problem that is likely to be created if there arises in this country a situation in which the wealthiest men - the men most able to bear taxation — get themselves, by reason of the existence of these tax-free bonds, into an isle of safety, in which they are absolutely sheltered from the burden of supporting government, to which, as Justice Holmes of the supreme court has said, they owe their protection and in sɔme senses their lives. It is necessary that the richer classes of the country pay taxes and be known and seen to pay taxes. There are many direct and indirect ways that are open by which it is possible to reach the very wealthy elements of the country, and I feel just as the chairman of this meeting obviously feels and as the president obviously feels; that this question of the creation of c'ass conflict, of hatred for the wealthier classes of society, is perhaps the most important phase of this problem. I don't know how many of you have had your attention called to figures which I think I originally prepared, showing the extent to which this exemption has gone.

I was interested to find out how rapid under the federal law the escape of very wealthy members of society was by reason of the tax-free bonds, and while the figures which I am about to quote did not describe this with scientific accuracy, in a rough way they represent what is happening. There was reported for the year 1916 by persons having an annual income of three hundred thɔusand dollars or more, practically nine hundred and ninety-three million dollars of net income. I am talking about the very rich now. The same thing would be true of any other group. I took that group because in treasury discussion at Washington it has been usual for a number of years to regard the people with in

comes of three hundred thousand dollars or more a year as typical of the very rich. Now, by 1919, after years of unexampled prosperity, during which the incomes of neither the rich nor the poor in this country were shrinking, but in which they were manifestly growing, the reported taxable income of that group had shrunk to four hundred and forty millions of dollars. In other words, there was a reduction to less than one-half of what there had been four years earlier. While that is to be explained partly by the variety of methods of avoiding federal taxes by the very rich, it has to be principally ascribed, in my opinion, to the influence of the tax-free bond. The testimony of bankers and of experts, and of people who advise the wealthier members of American society, is universal as to the extent that they are investing their new wealth in increasing amounts in tax-free securities, and as to their growing habit of transferring their old wealth to tax-free securities. That puts in concrete form the seriousness of this problem.

Now, President Harding and others have called attention to other baleful effects and results of the possibility of investing in tax-free securities, of which there are probably fifteen billions outstanding at the present time, in one form or another, enough certainly to take all the investments of the very rich people of this country, or sufficient to practically exempt them from taxation. The evils are first of all the unfair competition in which it places private industry. I want to stop to discuss that a moment, because I think it has sometimes been exaggerated, and that it ought to be placed in its proper light. Quite obviously, if you think about it, the man who buys state, local or exempt federal bonds is not wholly tax-free. I like, as Mr. Link said this morning, to concede all that is strong in the opposing case, if I am talking for anything. The man who buys a municipal bond or a state bond is not wholly tax-exempt. It is perfectly obvious that the so-called legal exemption feature of that bond makes him pay a higher rate of interest than he would otherwise pay. The city or the state floats its indebtedness at a lower rate of interest than it would otherwise pay. To that extent the individual is paying, because he takes a lower interest rate. He is paying some tax indirectly. Now, that is true, and it is also true that cities are enabled to borrow at lower rates of interest because of the tax-exemption feature, and it is true that the federal government is enabled to borrow at lower rates of interest. Now, in talking over carefully the real evil of the tax-exempt bond, we ought not to attempt to deny those facts. It is also true that the competition between the public borrower and the private borrower is not quite as unfair as it seems on the face, but it is nevertheless true that this thing is a grave evil, and that public bodies-states, municipalities, and the federal government-lose far more in taxes than they gain in reduced interest;

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