THE ECONOMIC EFFECTS OF THE UNDISTRIBUTED PROFITS TAX OF 1936

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Bryson, John Alexander, 1907I l-ilF*-* ...The economic effects of the undistributed profits tax of 1956... New York, 1942. vii, 251 typewritten leaves, tables, diagrs. 29crn. Thesis (Ph.D.) - New York university, Graduate school, 1942. Bibliography: p . c2193 -251. "Corporation income tax forms, 19361941” in envelooe on back cover. A04662

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REV TDBJt UVZVERSITT

THE ECONOMIC EFFECTS OF THI UNDISTRIBUTED PROFITS TAX OF 1956

Xf'V■>* JOiiS A. BRXSON

A dissertation in ths Depertcient of Economics submitted to the faculty of the Graduate School of Arte and Science in partial fulfillment of the requirements for the degree of Doctor of Philosophy

April $ I M S

P L E A S E NO TE :

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Pege i

PREFACE Th* ilx years that here elapsed eiaee the peerage of the undistributed proflte tax here witnessed greet changes in the economic end eoelel relationehipe and erea nore important eheagee in international relationshipe.

Truly change haa foliorod change with such a

degree of error Increasing rapidity that oron "generali­ sations* seen te wear oat faster*

The number end impor­

tance of many qualifying elamenta or factors hem beam growing, and it has become increasingly difficult to analyse clearly these qualifying factors, Needless to say, Public Finance, especially taxa­ tion, has been subjected to these new atresses and strains as a result of first, the depression, second, defense and third, "total all-out war.*

The Federal Government has

felt the ftall impact of these forces.

Federal Expendi­

tures have risen so rapidly that our govwrnnrat spends about as anch in a week as it did in a full year a gen­ eration ago.

Eren the colossal expenditures of |7

billion a year during the depression emergency now ap­ pear to be relatively insignificant to the amount of mon^ sprat or te be sprat during the present war emer­ gency. Any attanpt te raise the necessary amount of money with which to finance cur government during this crisis is bound to iUolmdiboth an expansion of our public debt

1 7 8 3 S TO

tad ca laeraaaa in taxation.

Vhat changes tad lacrosses

In our to* systee «lli result fro* tha war effort only tine will toll*

Vo k&ov that new taxes will be intro­

duced and that tha rates of old established ta*oa *111 ba increased*

Tha Federal Personal Zscone rat os have

already reached no* highs, and exaaptions naw lows, whila tha rates of oorporatlon lnaoaa taxes have also boon greatly increased*

Za thia gigantic attempt to enlarge

revenues, tha aaad far "Justice aad equality* lu taxation becomes greater than ewer before#

In the light of past

experience, ho»sr«r( it la last in m o b tine* that this ala boooaa* aost difficult to achieve# It wae tha hope of tha author that this thesis would shed sow* light on a particular tax, the uadlatrl* butad profits tax, and contribute, although in a nail way, to tha furtherance of the ideala of Justice sad equality la federal Taxation.

The tax wae exaslaed in

the light of conditions «tf 1986 to 1989, the period in which the tax was in operation#

The difficulties,

pvoblane and eventual repeal of the tax were considered in detail*

A few of the wore Important suggestions to

reintroduce a different undistributed earnings ware also treated, Imt so attoapt was aade to evaluate the reeotion of a new general tax on undistributed profits * which conceivably night be made neoeesery by tha war

1tine snerysaejr.

Evan is this ease, however, the writer

is of the opinion that much could be loarnad from a oarafol study of tha difficulties sncountarod fay tha act. It la with a deep

i« h

of gratification that I

acknowledge the assistance that Z hare received fros aany persons interested in this subject* I an especial­ ly indebted to ejr advisor Professor Paul Studandkl of lee Zork university, Mr. Bewy Bredle of lew lork University, Professor J. Casey of Georgetown, and exec­ utive secretary of the Aaerlcan Tax League, Mr. Hancock of Lehean Bros., Mr. 0. A. Taylor of S. B. Kress and Company, and Congressmen B. Caller of Brooklyn.

February 1942,

J.A.B.

Page

t

TAi>L& or COMTENTS PACES P n f t e t .......... CHAPTER X.

The Origin

1 of Undistributed Profit* Taxation...

1

Purpose of Undistributed Profit* Taxation - Type* of Undistributed Profit* Taxation - Early History of the Tax Ciril War Taxation - 1917 Levy on Unreasonable Accumulation* of Surplus - 1921 Proposal - Jones Ameminent of 1924 - De­ pression Problems 1932 - Revenue Act of 1934 - Reasons Ad­ vanced For the Heed of the Tax - Event* of 1936. CHAPTER 2. Foreign Undistributed Profit* Taxation.

17

Sweden - Norway - France - Csechoelovakia - Swltserlend • Great Britain - Netherlands - Denmark - Summary of Foreign Countries. CHAPTER $« The Passage of the Undistributed Profit* Tax

31

The President's Proposal - The House bubcommittee Bill The House Way* and Kean* Committee Bill - The donate Bill The Final Revenue Act - The "Haste" in Which the Aot was Passed. CHAPTER 4* The Federal Bystem of Corporate Taxation in 1936..

40

The Normal Corporation Income Tax - The Capital Cain* Tax - History of the Tax - Conflicting Theories - Effect of the 1936 Act - Recoataeoded Method of Taxing Capital Cains Excess Profit* and Capital Stock Taxes - Taxes on Improper Accumulation of Surplus - Special Surtax on Undistributed Income of Personal Holding Companies. CHAPTER 5* The Undistributed Earning* Tax.................

94

Rate* of the Tax - Adjusted Met Income - Undistributed Met Income * Taxable Dividend* - Carry-Over Privilege Specific Credit - Illustration* of Specific Credit - Corpora­ tions Exempted from Tax - Illustration of Computation of the Tax. CHAPTER 6 . The Case For tha

Tax........................ .

Meed For a More Effective Collection of Personal Income Tax - Iield of the Tax - Economic and 8oci*l Argument* For the Tax - Economic Instability - Mature of Corporation Surpluses - Industrial Overcapacity - Proposed Corrective Ac­ tion by the Tax - Individual Investor* - Effect on Business Cycle - Prevention of Tax Avoidanoe - Equalisation of Burden of Taxes as Between Corporate and Mon-Corporate Business Summery of Validity of Claims Advanced For Tax.

69

Pag* vi

F40EB CHAPTER 7. Bhortcoalngs of tha Undistributed Profits Tax of 1936.................. ..................

8«

Effects of Hasty Drafting * Requirement that Dividends ba in Hands of Taxpayer Bafora End of Taar - Hardships Imposad on Corporations - Examples - Effaot on Retailers Effect on corporations Having Impaired Capital Structures Examples * Inconsistency with State Lavs - Aggravation of Harsh Features of Incona Tax Laws - Prohibition of Consoli­ dated Returns - Liaitatlon of Ret Capital losses to 12000 Examples - Ho Adjustment For Inventory Losses - Failure to Provide For Debt Redemption - Admission of Weaknesses* CHAPTER 3. Objections on the Grounds of Discrimination. ....

103

Types of Discriminations - attempt to Ease Burdens on Snoiler Corporation* - Effect of Tax on Growth of Small Cor­ porations - Examples - Relative Effect on Corporations of Varying Sixes - Dividend Policy of Large Corporations Costs of Floating Common iitock - Of Bonds - Heed of Smaller Corporations For Retained Profits - Summary of Efi'eot of Tax on Corporations of Various Sixes - Effect of Tax on Hew Enterprises - Examples - Other Conditions Affecting Hew Enterprises - Effect of Industries with Fluctuating Incomes Effect of "Xeariy Law* - Examples - Bunaary of Objections to Discriminations Inherent in the Act. CHAPTER 9* Effect of to* Tax on Capital Formation Growth. ••

129

Growth of Capital - Roundabout Production - Income Stream - Importance of Hew Capital Investment, Correlation Between Factory Payrolls, Factory Employment, and Hew Bus­ iness Investment - Hew Capital Investment ana the Depres­ sion - Theories of Recoveries - Reasons For Collapse of 1;37 - Factors Restricting Hew Capital Investment - Importance of Corporation Barings - Adverse Psychological Reaction of Bus­ iness Hen to the Tax - Retarding Effect of the Tax - Examples - Effect of Tax on Dividend Policies - Estimates of Dividends Paid - Effect of Other Federal Taxes - Tax-Exempt Investments - Summery of Combined Effects of Federal Taxes of 1936. CHAPTER 10. The Repeal of the Tax....................... The Interests of Little Business - The Cellar Bills The Effect of the Recession of 1937 - Recommendations of the Brookings Institute - Btatsment of A.F.ofL. - Action of House Ways and Means Committee 193$ - Action of Senate Finance Com­ mittee - Provisions of the Revenue Act of 1933 - Virtual Re­ peal of Undistributed Profits Taxation - Hew Corporation Tax Rates - Corporations Benefitted by Act - Comparison of 1936 and 1933 Acts - Hew Provisions for Corporations Unreasonably Accumulating Surpluses - Treatment of Capital Gains and Losses Taxation 1931 - 1936 and 1933* - Revenue Act of 1939 - Agita­ tion for Complete Repeal of the Tax - Rates of Revenue Act

152

Page Til pages

of 1939 - Treatment of Capital Gains and Losses - Recent At* tempt to Enforce Tax on Unreasonably Accumulated Surpluses. CHAPTER 11. *hat of tha Future...........................

177

Bumasry * Effacta of the Tax * Proposal 6 to Curb Tax Avoidance - Redefinition of Mat Income to Include "Unrealised” an Fell aa "Realised* Income - Collection of Income Tax at tbe ■Source* * Enactment of Federal Corporation Leva - Propoeala of the Rational Tax A&soelation * Strict Enforcement of a "Selective Undistributed Profits Tax" * ImpreetebULity of First Four Propoeala - "Selective Undistributed Profits Tax", ttost Practical Solution - Other Recommendations - Capital Gains Taxation * Advocated Changes in Corporation Income Tax Lav Consolidated Returns - Treatment of Inventory Gains and Losses Carry-Over of Losses - The Personal Income Tax - High Surtaxes - Tax Exempt Bonds - War Reeds - War Taxes. APPERD1X A.

Chronology of the Tax Treatment of Capital Gains and Losses, 1913-1911* .........

205

Part I - Individual Part II - Corporation APPEBDU B.

Tields of Federal Taxes

....

211

Tields of Federal Income Tqxss, Jtaer Direct and Indirect Taxes. (1916-1928) Federal Receipts by Major Sources (1929-1911) Comparison of Direct and Indirect Federal Taxes (1929-1941) APPSiDIX C.

Capital Formation and Indices of Factory Employ­ ment and Factory Payrolls, 1919-1938.••••••••••»

215

Cross Business Capital Formation, Business Cap­ ital Consumption and Bet Business Capital Formation. Indices of Factory Employment and Factory Pay­ rolls. APPENDIX D.

218 (See Envelope on page following the Bibliography)

bibliographx

219

CHATTY I THE ORIQIE OF PHPtCTRIBPTH? PROFIT8 TAXATIOl The undistributed profit* tax 1* commonly conceived to be a special levy on that part of a company's earnings which is not disbursed to its owners, shareholders or stockholders* Due to the fact that proprietors and partners are taxed on the basis of the entire net income of their companies, whether it be distributed or not, no major fiscal problems has arisen in these fields of business endeavor*

These flsoal problens, how­

ever, appear in the ease of corporations as a result of our in­ cone tax and corporation laws which distinguish between the corporation per se, and its stockholders.

The fact that corpora­

tion profits are not taxable in the hands of stockholders until such profits are paid in the form of dividends constitutes ths reason why the question of taxing undistributed profits of corporations has received particular attention*

For these reasons

undistributed profits taxations has been limited in its appli­ cation to the corporation fora of business organisation.

In

contrast with the income tax which treats the totality of the corporation's net lncoae as a homogeneous taxable money stream, the undistributed profits tax breaks down this stream into its two component elements, earnings retained and earnings disbursed as dividends.

It is this former part of the corporation's net

income whleh is made the particular basis of undistributed profits taxation* Undistributed profits taxes mqy assume three forms*

The

tax nay be based on the entire amount of retained earnings or

corporation surplus cumulated over a period of years, on the annual net corporate Income retained and carried to surnluc, or finally It nay be levied on the Individual shareholder of the corporation itself.

In the latter case the undistributed

profits are considered as a part of the Individual's personal taxable Income.

The first type represents in reality *>n un­

divided surplus tax, and had Its counterpart in the early propo­ sals to tax the East India Company and the Second United States Bank.

Type two represents the purest form of undistributed

profits tax, that is one devised to prevent personal income tax avoidance, and was represented by the Federal Undistributed Profits tax of 19S8-S9,

The third type is essentially a form of

Imputed personal income taxation under which the individual shareholder Is taxed on his pro-rata share of the corporation's net income, regardless of what proportion of such Income may be distributed as dividends.

This form of undistributed profits

taxation was temporarily applied in this country during the latter part of the Civil War. The idea of Imposing a tax on the undistributed profits of corporations is by no means new.

As early as the 17th

century, as has already bean mentioned, it was proposed in the British Bouse of Commons that such a tax be levied on the ac­ cumulated retained earnings of the East India Company.

This

proposal was not motivated, however, by fiscal considerations but rather was designed primarily as a device to break the powerful monopoly of this great trading corporation.

More than

a century later Andrew Jackson resurrected the Idea of an

undistributed surplus tax for a similar purpose, naaaly, to tax out of sxlstanes the Second Sationsl Bank of the United States.

However, neither of these contemplated confiscatory

taxes was actually invoked. As has already been pointed out, a nodifled form of an undistributed profits tax actually existed in this country during the Civil War.

According to the Revenue Act of 1884

taxable personal income Included the annual gains sad profits of corporation to which the shareholders were entitled regard­ less of whether or not these gains or profits were distributed as dlvidsods.

(1)

In effect, therefore, the Civil War personal

income tax insofar as it was applied to the retained earnings of corporations assumed some of the characteristics of an undis­ tributed profits tax.

This measure, taxing the retained earn­

ings of corporations proved short lived, however, and as a part of the temporary Civil War eaergoncy revenue acts, was repealed shortly after the termination of the war.

Today, ac­

cording to our present interpretation of the Constitution, this particular form of taxation would probably be declared unconsti­ tutional since it Is now an established principle that only realised income is taxable under the personal income tax.

In­

come earned by a corporation but not disbursed to its stock­ holders cannot be considered as realised income as far as the .124.

CH 1

-15—

pay out their entire net earnings, they were said to possess a distinct tax advantage ov«*r unincorporated business.

This

in turn, It vas claimed, placed unincorporated enterprises at a serious disadvantage in the financing of their capital ex­ pansion programs through the ploughing back of earnings. In addition to promoting the achlevmant of desirable fis­ cal ends, it was held that a tax on undistributed profits would also aid in the smoothing out of business fluctuations. This contention vas b^aed on the belief that the practice of with­ holding corporate earnings tanded to restrict consumer purchas­ ing power and In this way made for maladjustments between capi( 1?) tel goods end consumption goods industries. Finally It was held that tbe withholding of corporate earn­ ings, even when utilised for business expansion ;urposes, was (14) not necessarily socially desirable and should ba restricted. The retention of such earnings, it was stated, had lod In the past to the overdevelopment of specific industries and to resultant ua3adjustmenta in our economic system.

As previously

pointed out thir belief vac In sharp contrast with that held by the framers of the 1917 act, who were of the opinion that the retention of esrnlnga was socially desirable provided such earnirnswere utilised by the corporation to expend its prod­ uctive fKilities,

This now philosophy regarding the investment

of corporate earnings, refloated the belief that our economic system was rapidly approaching maturity, so that the possibility (1?)David Cuahnan Coyle Braes T&ckafRational Borne Llbrarg 19?5) po86, end pp. 140-155. (14) Rex 0. Tuawell.The Industrial PlaclPllgg(Colunbla University Pr se.Bew Xor^l955]LBee Chapters T to T U inclusive. This book is vAry significant in as much as it represents one of the early expremalond or "lew Deal* Philosophy by a prosInaot adviser to President Roosevelt. See also David Cushman Covie, op.clt,.pnl7-19 and pp.48-55.

CH 1

of overinvestment Id specific industries was no longer merely a theoretical one.

On the contrary, It was argued, that In

the present stage of our economic development, the practice of corporations applying substantial proportions of their earn­ ings to new capital Investments in their own fields tended to overdevelop these particular industries and thus to jeopardise the stability of our entire economy.

If, however, these earn­

ings were disbursed as dividends, it was contended, they would tend to flow into a number of Industries rather then into a selected few and would thus make for a more balanced economic system. It would appear from the foregoing discussion that the government's desire to levy a general undistributed profits tax on the retained earnings of corporations was baaed upon both fiscal and general economic considerations.

As is us­

ually the oase with all new tax measures, however, purely fiscal developments were more immediately responsible for the actual Introduction of the proposal to levy such a tax.

These devel­

opments, In so far as thqy bear upon the passage of the Undis­ tributed Profits Tax, will be examined briefly. Early in 1956, after five years of deficit financing, the President stated that on the basis of existing indications he would be able to present for the coming fiscal year a (16) ■balanced laymans* budget.” A short time later, however, the ocmurenee of two unanticipated events seriously threatened to upset the President1s budget predictions.

The first of these

vas the invalidation of the so-called processing taxes of the Agricultural Adjustment Act which had yielded in 1986 slightly (lf)By a "balanced Laymans' Budget” is meant one in which tha revenues of the government equal the current operating ordinary (not emergency) expanses of the government.

CH 1

PAQB -16-

lass than half a billion dollars.

The second was the over­

riding of the Presidential veto of the soldiers boons bill providing for settlement of the adjusted service certificates of World War Veterans.

It was estimated that this action by

Congress, which entailed am imnsdiate outlay of more than one billion dollars, would Increase the annual expenditures of the government over the next nine years by approximately

$120 million, the aaount necessary to amortise the bond issue (16) floated to provide this fund. The result was that the President found his budget estimates for the fiscal year 1957 more than |600 million out of balance, so that new revenues equal to this sum would have to be found if budgetary equilib­ rium were to be restored. To meet the fiscal emergency created by the foregoing events the President proposed to Congress on March 5, 19"6, that it levy an undistributed profits tex on corporations.

In making

this recommendation tha President stressed that the inposition of such a tax, constituted a necessary and desirable fiscal reform, in that it would make for greater emphasis upon pro­ gressive taxation based on"abillty to pay," and act to make the federal tax system more direct.

He pointed out how wealthy

individuals were able to control the dividend p llcies of cor­ porations in such a way so as to negate effectively the prin­ ciple of progressive taxation which is conceived to be an Inherent feature of the personal incoae tax.

Elaborating on

this point the President spoke as follows! (I6)line years represented the difference in time between the date whom the service certificates were actually redeemed as a result of congressional action, and the proper date of these certificates, 1946.

CH 1

PAGE -16-

"The accumulation of surplus in corporations controlled by taxpeyerB with large Income* is encouraged by the present free­ dom of undistributed corporate income from surtaxes. Since stockholders are the beneficial owners of both distributed and undistributed corporate income, the aim, as a matter of fundamen­ tal equity, should be to meek equality of tax burden on all cor­ porate income whether distributed or withheld from the benefi­ cial owners. As the law now stands, our corporate taxes dip too deeply into the shares of corporate earnings going to stock­ holders who need the disbarscant of dividends, while the shares of stockholders who can afford to leave earnings undis­ tributed escape current surtaxes altogether. ."The levying of an undistributed profits tax," said the President, "would do much to stop these leaks in the existing surtaxes."(17)

(17)74th Congress &nd Session— Senate Report ^gl50fpp.2 and f.

CHAPTER - 2EQREIGB PSDISTRIBUTED PROFITS TA1ATIOB The use of the undistributed profits tax both &s « re­ venue device end as means of preventing personal income tax evasion is not original with the United States.

As already

stated the imposition of this type of tax wee earnestly con­ sidered by the revenue officials of a number of European coun­ tries soon after the termination of the World War.

Of these

countries, however, only four national governments, Sweden, Borway, Prance and CsechoSlovakia, and certain Swiss Cantons eventually adopted s general undistributed profits tax while one, England, imposed special surtaxes on improperly accumula­ ted corporate surpluses.

Although the tax did not assume a

position of importance In the fiscal structures of any of these countries, their experiences therewith do cast some light on the principle of undistributed profits taxation and, therefore, are worthy of at least a brief examination. The first foreign country to resort to a tax on the re­ tained earnings of corporations appears to have been Sweden. Though the Swedish parliament had considered the imposition of such a tax as early as 1917 as a device to make it more dif­ ficult for wealthy investors in corporate stock to avoid the personal income tax, the measure was not enacted into the law until 1919.

The rates of this tax were extremely moderate

amounting at their maximaim to 10 per cent of the total retained earnings of a corporation.

Despite the moderate character of

PAGE -18-

CH £

the tax, business men were almost unanimous In their opposition thereto.

Particularly critical of the tax were the directors

of those corporations which usually experienced rather wide fluctuations In their earnings such as those engaged In the extractive industries and foreign trade.

These corporations,

it was pointed out, were penalised by the tax for pursuing the sound business policy of retaining earnings in prosperous times so as to tide them over periods of depression.

At the same

time It was argued that the tax had the further undesirable effect of making it more difficult for such corporations to attract new capital. In order to meet the aforementioned criticisms of business men, numerous modifications were made in the Swedish undistribu­ ted profits tax during the first five years of its operation. Despite these changes in the law, criticisms against the tax continued,

finally in 1926, parliament decided that the general

tax on the undistributed profits of corporations was an inflexible and arbitrary method of preventing personal Income tax evasion, and repealed the measure. Recognising that a general undistributed profits tax tend­ ed to peneliae all corporations for the malpractices of a few, Sweden now substituted a selective tax to be applied only to corporations which deliberately retained a large proportion of their earnings for purposes of income tax avoidance rather than for legitimate business purposes.

Though the types of

corporations affected by the law have smrled considerably since the inception of the tax, at present only corporations m g aged

PAGE -19-

CR E

ln the buying, selling and managing of real estate or securities fall within the purview of the law.

Moreover, the tax is applied

to such corporation only where the obvious intent to avdd the income tax is present*

The rate of the tax in such cases is

fixed at E5 per cent of the retained earnings of the guilty corporation*

Actually this measure is of little fiscal impor­

tance, its chief purpose being to prevant wealthy individuals froa following a practice* similar to that which developed in this country during the 1330's, of forming personal holding (1 )

companies to avoid the high surtaxes of the personal income tax. In 1938, the Swedish parliament enacted a tax measure which aimed at the establishment of a more elastic investment policy by encouraging corporations to reinvest, under certain conditiona, a portion of their profits.

This constituted

virtually a complete reversal of the principle of the undis­ tributed profits tax.

According to this law both corporations

and unincorporated enterprises in computing their net income for income tax purposes during the years 1939-41 inclusive, are permitted to deduct from their net earnings in each of these years such reserves as are set aside for the purchase of new buildings, equipment or goods in stock.

The law, however, limits

the amount which a business may deduct from Its net income in any one year for this purpose.

In the case of investment funds

set up to provide for new buildings, the defection is limited (l)For the facts about the Swedish experiment I am indebted to the Bureau Central de 8tat1at1qua de Suede, Miniatere des Finances, Stockholm, Sweden. See also English Trade Reports on Sweden published at various times by the British Consul, end Alfred 0. Buehler, |he Undistributed Profits TextMe Crew ■ill Book Company,N0w Xork, 1957)> p?58.

ij

PAGF -20-

CB 2

to 10 per cent of the net profits of unincorporated enterprises or In the case of corporations to £ per cent of its share capi­ tal.

Deductions for investmmt funds to purchase new equipment

and stocks of goods is United to £0 per cent of the net profits or 4 per cent of the share capital for unincorporated end incor­ porated enterprises respectively.

The law also stipulates that

the discretion as to when these funds shall be utilised shall be vested in the government.

This control over the expending

of business fttnds is designed to sake for concerted effort in combatting the depression phase of the business cycle, and, as mentioned above, to enable the country to enjoy a more elastic investment policy. Though the use of tax credits to encourage new capital investment is a device which has cone into considerable promin­ ence in a number of countrios since the great depression, the Swedish nethod is to a certain extent somewhat novel.

Whereas

the crediting device es used in other countries was instituted primarily for the purpose of Immediately stimulating netr capi­ tal investments, the,Swedish scheme is such broader In its perspective in that it seeks to promote long run economic stability.

On the one haad It will tend to prevent excessive

capital investment in the period of boom, while on the other hand it Till provide a fillip for business recovery In the way

(2) of new capital Inveetmwt* in times of depression.

The

(2)F.A.l.Afsen, "Deduction of Reserve Rinds from Taxable Incomes in Sweden", go»paritlvo Jbew 8erlee(6ep»t. 1938) Vol 1, pp.381-502.

\ C» *

ft

effectiveness of this scheme to promote greater business sta­ bility has of course yet to bo determined despite ite theoret­ ical potentialities.

Whet la significant, however, is the

fact that it constitutes a recognition by the Swedish govern­ ment that at certain times it is necessary to snbserre purely revenue considerations to broader economic considerations. In 1 9 Pi, Norway, following ths lead of Sweden, also re­ sorted to the imposition of an undistributed profits taw both as a means of bolstering its declining revenues and of circusventing evasion of the surtaxes on personal income*

The tax,

which supplemented the corporation incone tax of 6 per cant, was applied at a flat rate of 10 per cent to all retained earnings.

Norwegian tasiness men, however, were not particularly

wall disposed towards the new tax, despite its apparent modera­ te tlon, and subjected it to bitter criticisms. Thus the Chair' man of the Norweigan Bank Association, Mr. B. Virtb stated*one effect of the tax when he said that "The Norweigan Industry relied too much on banks for long term credit."

He also ex­

pressed the opinion that "such credit should be advanced by special corporations rattier than by the banks" whose resources were being forced nore and more into government obligations. Be expressed the fear that neither corporations nor the banks would be able to finance, should the occasion warrant it, an

(4) Increase in the volume of trade. (E) H. Oran, "Norway Watches Our Taxes, *»«■ Xoric 7.1936), p.0 . £«• alio A. Buahlar. op.dt.. p.50. (4) C. L, Paus, "Eenort on Economic and Commercial Conditions in Norway". Crown Paper #667. (Commercial Secretary to His Maj­ esty's Legation at Oslo, Psp't. of Overseas Trade, Published in London, June, 1956), p,16,