How Not to Write a Tax Bill

Last week the most mismanaged bill of the 76th Congress passed the Senate. Few Senators understood it; none liked it. Neither did anybody else. The bill was an important one--an Excess Profits Tax Act. Last month Senator Pat Harrison, chairman of the Senate Finance Committee and the nearest thing to a friend the bill has, called it the "most intricate tax bill ever presented to Congress." At that time it was 96 pages long. By last week it had grown to 489 pages, weighed 1 Ib. 7 oz. without binding, and had progressed from intricacy to metaphysics. Senator La Follette called it "a complicated hodgepodge." Senator Vandenberg called it "an imponderable mess." Said Senator Hiram Johnson of certain sections: "I do not think a Philadelphia lawyer could understand them." Even Pat Harrison made fun of it. As he dragged it off to a joint conference committee, he also indicated that it would pass both Houses in final form this week.

The same prophecy has been made weekly for six weeks. For the Excess Profits Tax, though nobody likes its present shape, is a defense "must." Franklin Roosevelt has declared that U. S. rearmament must make no new "war millionaires." He therefore attached an excess-profits tax, like a price tag, to two other pieces of defense legislation that businessmen, the Defense Advisory Commission, the Treasury, the Army & Navy all wanted: 1) repeal of the Vinson-Trammell Act's profit limitation on plane and warship orders; 2) permission for defense manufacturers to amortize new plants (for tax purposes) in the short space of five years (TIME, Aug. 19). These two laws were still wrapped up in the Excess Profits Tax Act this week. For their sake, it had to pass.

The bill was in trouble from the day it was written. To the Treasury, taxable excess profits meant any & all profits above a certain return (say, 4% to 8%) on invested capital. The House subcommittee which drafted the original bill softened this concept (which is hard on small corporations that use little capital in proportion to their earnings) and confused it. As an alternative, the subcommittee added what was in effect a war-profits tax--a tax on profits above the average of three or four pre-tax years, the increment being supposedly attributable to the defense boom. For the sake of speed, the Treasury raised no objection to this hybridization, and the House passed it like a hot potato.

The Senate held public hearings on the bill. For five days, nearly 60 businessmen were hustled in & out of the committee room, managed to spill more than 200,000 words of criticism. From their objections the Senators concluded that the average-earnings base of computation should be liberalized. Since the liberalization cut the probable yield this year from $225,000,000 (House version) to about $115,000,000, they raised it to $400,000,000 by the simple expedient of upping the normal corporate income-tax rate by 3.1%. During this rewriting, the Treasury took a belatedly renewed interest. Into a committee room full of Senators, dizzied by mental arithmetic and preparing to take a final vote, strode Assistant Secretary of the Treasury John Lawrence Sullivan. He told the Senators that the Treasury would have to disown their bill, suggested they start all over again. Sore, the Senators sent for Henry Morgenthau, who con firmed his assistant's verdict. Sorer, the Senators defiantly reported their version anyhow.

Last week the whole Senate had a whack at it. Senator La Follette offered a carefully simple substitute bill (along Treasury lines), was turned down. Senator Josh Lee offered an amendment to "draft wealth" through forced loans, was turned down. But most of the debate centred on an irrelevant amendment by Senator Prentiss M. Brown of Michigan. His proposal: to end tax exemption on interest from all future issues of Federal, State and municipal bonds. Senator Brown, a liberal Democrat who is not always a New Dealer, headed a special Senate committee which has been studying the question of tax-exempt bonds all year. Fortnight ago his committee reported, and Brown seized the Excess Profits Tax debate as a good time to bring its conclusions to the Senate's attention. A long-needed tax reform, which was promised in the Democratic Chicago platform, the ending of tax-exempts was strongly opposed by Senators Austin, Burke and 42 others, who managed to defeat the Brown amendment. Many a Senator who really favored the Brown proposal voted with the nays. Their reason: it would delay and further complicate the Excess Profits Tax Act.

Having beaten Brown, the Senators abandoned further attempts to keep the bill clean. As the final vote approached, Pat Harrison accepted amendments right & left. Key Pittman of Nevada got blanket exemption for all his friends who are en gaged in mining various "strategic" war materials. Texas' Tom Connally swelled the bill by more than 100 pages with a steeply graduated income tax, to be imposed in case the U. S. declares war. Senator George introduced a subtle liberalization which would reduce the yield still further, and which nobody quite under stood.

By the time the hard-breathing Senate was through with the bill, it was scarcely entitled to be called a tax on excess profits. It looked capable of forestalling any "war millionaires" mainly by immobilizing their accountants. What conferees might do to it this week, none of them knew or much cared. Most of Washington conceded that, whatever passes now, an entirely new tax bill will have to be written next session.

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