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it is a losing proposition, and must be a losing proposition wherever you have a system of progressive taxation, and that is easily demonstrable. It is also true that private industry does suffer from unfair competition by reason of this exemption; and worst of all, this exemption, in my opinion, perverts the normal and naturai habits of investment.

Municipal and state and public securities of this country are gilt-edged; they offer the best security, the nearest approach to absolute safety that we have. They ought to be investments of those persons who have small amounts to invest, in which safety is paramount. Now, what happens is that under the existing situation the very rich become the principal owners of these bonds; the men who ought to be taking the grave industrial chanceswho ought to be investing in the hazardous things-who ought to be supplying the money for those dangerous investments which are legitimate and necessary, but which ought to be invested in and be supported by the people who can afford to lose. The oil schemes, the dangerous mining ventures, are getting in increasing degree the investments of the poor, and the rich, who ought to carry those grave risks, are turning from them to invest in tax-free securities. Thus the normal habits of investment have been perverted.

It is also true that many of our private enterprises which have through past habit and custom been accustomed to rely for support upon the well-to-do investor, find that he now is seeking the taxfree bond. The testimony of investment bankers and brokers is all unanimous to the effect that the ordinary customers, to whom they have turned to support the railroads, the industrials, and to take over the new bonds that must be issued from time to time, are no longer available. In those ways private industry has been seriously handicapped.

I return just for a moment to the assertion I made a moment ago, that while the states and cities, by reason of this exemption feature, are enabled to borrow more cheaply than they can borrow without the exemption feature, it is nevertheless a losing game for the state and city. I think that is plain if you stop to think a moment. You have federal taxes running from 58 per cent down. The highest rate in the federal income tax is a little less than 58 per cent. Now, let us take a very wealthy man, subject to a 50 per cent tax, and then take another man less wealthy, subject to a 25 per cent tax; let us suppose, just for the purposes of convenience, that the rate on absolutely secure taxable investments is five per cent. Now then, the man paying a 50 per cent tax, if he invests in taxable securities, is going to net two and one-half per cent. That is all he is going to get. He is going to pay fifty per cent in taxes, half of his interest. He could then afford, if neces

sary, to lend to states and cities and to the federal government. on tax-exempt federal securities, at two and one-half per cent. It would net him just as much as a five per cent taxable bond. But, he important point is that there are very few, relatively speaking, of those men who are paying the fifty per cent tax, and if the states and cities want to float all the bonds that it is necessary for them to float, they have to seek classes of taxpayers that are payng a smaller tax. They have to come down and get into the market of the people who are subject to twenty-five per cent taxes. But to the man who is subject to only a twenty-five per cent tax, this exemption is worth one-quarter of five per cent, which is one and one-quarter per cent. All he will bid for this privilege of exemption is one and one-quarter per cent; and if you go down to the man subject to only twenty per cent income tax, the exemption feature is worth only one per cent, and that is all he will pay for it. Now then, to float the large volume of state and municipal securities—and they must be floated-you have to appeal to the taxpayers subject to from fifty per cent taxpayers down to the forty, thirty, twenty-five and twenty per cent, and you are going to sell your privilege of exemption at that figure which will appeal to the lowest of the classes of taxpayers to which you must sell. In other words, all you are going to get for your exemption privilege is one per cent, but every taxpayer subject to more than twenty per cent tax is going to save more in taxes than he loses in taking the smaller interest rate. That is the reason why under any system of progressive taxation, an exemption feature must cost the government more in taxes than it saves them in reduced interest payment.

There are one or two other features of this discussion less commonly alluded to, to which I want to refer. I have hopes that every state tax official here will become an ardent advocate of this federal constitutional amendment, for the reasons to which I have alluded and because I think this exemption creates a grave social problem.

I want to say to you state tax officials that I think there is one feature of this campaign against the tax-exempt bond which is unfair and more or less untrue, and I for one want to refute it. and that argument is this: federal officials are very fond of stating, and corporation officials are very fond of stating, that the taxexempt feature has greatly stimulated public borrowing, and they have intimated that the cities and counties and states of this country have, since the cessation of the war-largely by reason of their ability to borrow at low rates-gone into a period of debauch-of borrowing and spending money like drunken sailors. I don't believe in any such nonsense. I don't believe that the cities and states of this country are borrowing money merely because they can

borrow it a little more cheaply. As a matter of fact, the explanation of the enormous output of municipal and state securities after the war is the simple fact that the states and cities of this country had, like patriotic organizations, left off all their development work during the war; roads and schools and institution after institution were in bad shape, and they needed money, and they went out and borrowed it, just like the industries of this country did. That one particular argument I have personally no patience with, and it is not necessary to the making of an absolutely convincing case for the desirability of passing this constitutional amendment.

Now, I have only one cther aspect of the subject, which I say is an aspect not so frequently referred to, that I want to mention. The amendment which has been proposed, the resolution which has been introduced and which has been referred to, strikes me as mcst eminently fair. It seems to me to be a gentleman's proposition. It extends to the states all the powers which the federal government asks, and it keeps entire faith with the taxpayers of this country, by not attempting to remove the exemption under which the vast volume of tax-exempt securities was sold. I think that is right. I don't believe that we could have removed that exemption, and it is absolutely necessary to retain it for reasons of fairness and good policy. The states and the federal government should be put upon an equal footing in this regard, namely; that after the passage of the amendment the states shall have the power to tax federal issues and the federal government shall have the power to tax state and municipal issues.

But, there are fifteen billions or more of tax-free securities outstanding. This is the last aspect of the problem to which I want to refer: Until they are retired, or for fifteen or twenty years or so, we must labor under the disadvantage of having outstanding all the time this enormous volume of securities which anybody can buy at any time, thus securing tax exemption. I personally am not so certain that there is any sound or equitable reason why for fifteen or twenty or twenty-five years we should endure this evil, which is just as large an evil now as it will be twenty-five years from now. I believe that in addition to the prompt adoption of this constitutional amendment, very serious thought should be given to the question of whether now, at the present time, by an exercise of legal ingenuity, we may not devise ways and means of overcoming this disadvantage.

A VOICE (interrupting): How about changing the terms of a contract?

PROFESSOR ADAMS: I don't want to change the terms of the contract. A violation of good faith, sir, is just as obnoxious to me as it is to you. I would not want to remove one scintilla of the

exemption which has been given. The holders of state and federal bonds have been exempted from income taxes, but there are methods which are absolutely free from the slightest taint of violation of good faith. I mention one of them merely. Its possibilities grow with me every day, not only from this standpoint, but from other standpoints. That is the substitution for our graduated income tax of a graduated tax on expenditure, taking the place of our federal sur-taxes. Now stop, some of you, and very seriously, from day to day, for the next six months or so, consider the possibilities of that. You would have a tax that would absolutely be exempting, for instance, the saved income; you would be stimulating thrift; you would have a tax indirectly and in essence, but not in any literal sense, that would be applicable to the interest from state and municipal bonds when it was spent. There would not be the slightest violation of good faith. I mention this as simply one expedient. I could mention five or six other expedients by which indirectly we could get some income from the people who hold exempt bonds. For instance, one method is this: you all know that the corporation excise tax, adopted in 1909, and approved by unanimous vote of the supreme court of the United States, applied to and was measured by the entire income of corporations, including all interest from municipal bonds. There is much possibility in the adoption of excise taxes. The point I want to make is this: let us get that amendment; let us protect the next generation from the evil under which we suffer; and then also let us give serious thought to the question of whether by the adoption of taxes on expenditure or by excise taxes, we cannot legitimately because we don't want to even consider anything we cannot do legitimately-whether we cannot, without violation of good faith-because we don't want to consider anything else-levy other kinds of taxes perhaps that will meet this particular evil.

CAPTAIN W. P. WHITE: I should like to ask Mr. Adams a question.

CHAIRMAN ROBERSON: Due to the fact that we are very much pressed for time, the chair is going to be forced to defer for a few moments recognition of those who probably have questions on the tip of the tongue. We all know that whenever you exempt one species of property, in the final analysis the man who owns real estate is going to have to carry that extra burden. It seems particularly fitting that we have with us tonight a man who is in a position to speak with knowledge and authority for the farmers. and the real estate owners of this country. We have with us this evening Mr. H. C. McKenzie of the American Farm Bureau Association, and I am going to ask him to say a few words to us on this matter of tax-exempt securities.

MR. H. C. MCKENZIE: Mr. Chairman and ladies and gentlemen of the convention: After the very careful summary that was given by our president in the matter of tax-free securities and the splendid address that we have had from the official adviser of the government on taxation, it would be utterly foolish for me to undertake to instruct this body on the plain questions that have been discussed here tonight.

There are, however, just two or three things that I want to say to you, and the first one is that the organization which I represent, the American Farm Bureau Federation, is in entire sympathy with the position that has been outlined by President Lord and by Dr. Adams here tonight. We recognize the evils that are involved in this constant flood of tax-free securities. A man whom I consider the best posted senator in Washington made the assertion a year and a half ago that at that time men with incomes of three hundred thousand dollars and up had already two-thirds of their investments in tax-free securities. Dr. Adams has told you that there are at least fifteen billions of dollars of tax-free securities. Dr. Seligman of Columbia University, I understand, figuring in a little different way and figuring government securities that are not taxable by the states, has just about doubled that sum.

If you add to the amount of tax-free securities the amount of intangible property that is escaping taxation, the amount of tangible property that is escaping taxation, and then the amount of real property that is not being taxed, which in the State of New York amounts to twenty-two per cent and a little more of the total real estate, you have piled up an amount of property which is greater, as I figure, than all the taxable farm property in the United States.

Now, that being the case, what is the result? Those of you who are living on farms in the mid-west or any other part of this country know that the tax base has been so narrowed in this country that the tax burden on real property-on farms-has become almost intolerable, and that unless that condition can be remedied, and this issuing of tax-free securities and the exemption of property stopped, we are coming to a place where we are going to be in very serious difficulty.

When I appeared before the ways and means committee in Washington a while ago, one of the questions that was asked me in regard to this tax-free security matter was, how many of the states will ratify an amendment if it is passed by Congress? Of course that was a question that I was not able to answer. The only thing I could say to those gentlemen was this, that if you will pass the amendment, we can assure you that the farm organizations will use all the power at their disposal to see that the amendment is ratified by the states. And that brings me to the chief point

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