Mr. RAGON. Mr. Mills, you were this morning discussing what would result if we should repeal that section that gives the taxpayer credit of 80 per cent on his Federal estate tax, that have been paid in State taxes, State inheritance taxes. What would be the result of reducing that 80 per cent?

Mr. MILLS. I think it would be very unfair to the States.
Mr. RAGON. Unfair to the State or unfair to the taxpayer?

Mr. MILLS. No, I think it would be unfair to the States. You see, from the standpoint not only of tradition but from the standpoint of legal equity, inheritance taxes are looked upon as taxes belonging to the States-as I say, not only as a matter of tradition, but legal theory.

Now, the States did not develop this source of taxation to the fullest possible extent. Moreover, there was a tendency on the part of some States, by not imposing any inheritance taxes at all, to create isles of safety, in which people could establish residences and escape estate taxes. So, when the Federal Government stepped into the field and applied high rates to the transfer of estates, upon death, providing a credit for such taxes paid to States, it encouraged the States to increase their own rates; and nearly all of them have taken advantage, generally speaking, of the 80 per cent credit. At the same time, it has made it impossible for a State to create an isle of safety.

So that what we have really done through our present estate taxes is not to make available to the Federal Government any considerable revenue we received only some $48,000,000 this year-but we have made it possible for the States to raise very considerable revenue. It is infinitely more important to develop new sources of revenues for the States than it is for the Federal Government; because, if you look at the picture in any State in this Union, you will find that the crushing burden rests on real property; and to the extent that we can get our States to develop other forms of taxation and take off this terrible burden on real property, we have accomplished something very substantial in the way of tax reform. As I view it, I feel it is unsound to deprive the States of any of this revenue. Mr. RAGON. That is the point I wanted to make: How many of the States, since the passage of this 80 per cent clause, have enacted inheritance tax statutes? If you can approximate it, that is all right. Mr. MILLS. Generally speaking, all but three have taken advantage of it.

Mr. RAGON. We have three States then that have no inheritance taxes?

Mr. MILLS. No; two, as a matter of fact: Alabama and Nevada. Mr. PARKER. There is only one left.

Mr. MILLS. There is only one left, Mr. Parker tells me, and that both Alabama and Florida have now enacted inheritance or estate tax laws.

Mr. RAGON..I believe Florida has a constitutional amendment. Have they amended their constitution?

Mr. PARKER. They have amended their constitution, but if I may, I would like to add one point to that question of 80 per cent: Many of the States, about 30, have enacted additional estate tax laws by reference to our 1926 act; and in a considerable number of cases, I believe,

from reading those laws, if we change the 80 per cent credit, these additional estate tax enactments by the States will become null and void.

Mr. MILLS. I know that in New York, for instance, there is a direct reference to the Federal estate tax law and the rates in New York are such that New York enjoys the full benefit of the 80 per cent provision; and if we should deprive them of it, it would automatically reduce their estate and inheritance tax rates.

So that you have got to view our present statute as one more intended to develop a system of estate and inheritance taxes in this country, than one intended primarily to raise revenue for the Federal Government. I think that, if you view it in that light, it has been very successful.

Certain States are getting infinitely more revenue out of it than they were prior to the time when we had the 80 per cent credit.

Mr. RAGON. Less that 80 per cent-that would be to nullify the law of the State?

Mr. MILLS. Yes; and indirectly it would be depriving them of a portion of the revenue at the same time.

Mr. RAGON. There is another line of questions I want to ask you on a matter that you touched on this morning. I was not a member of the committee at the time this was passed. I would like to get clear in my mind-we have a sinking fund that was, approximately, I believe, last year $440,000,000.

Mr. MILLS. $392,000,000 in 1931 and $412,000,000 this year.

Mr. RAGON. Now, you stated this morning that it is contemplated in that sinking fund to take care, as I understood it, of that part of our indebtedness which was foreign.

Mr. MILLS. Domestic. When I say domestic I mean that portion of the debt which was not covered by loans to foreign governments made during the war.

Mr. RAGON. Well, now, over what period of years is it contemplated to handle this domestic indebtedness?

Mr. MILLS. Well, originally the sinking fund act applied 212 per cent to the amount of our public debt not covered by foreign loans.

Mr. RAGON. Let me interrupt you a minute there. half per cent of the Liberty bond issues?

Two and one

Mr. MILLS. Not covered by the foreign loans. That is the general language, which evidently indicates the Congress at that time believed that that portion of our public debt that was covered by the foreign loans would be repaid from the proceeds of the foreign loans. The original 22 per cent was applied to that portion of the domestic debt that was not covered by the foreign loans, and it was provided that an annual appropriation so calculated should be increased each year by the interest that would have been paid on the securities already retired from the sinking fund.

Mr. RAGON. I notice this year the Secretary reports in his report that the debt retirement was practically $1,051,000,000. Now, does that include the $400,000,000 of the sinking fund?

Mr. MILLS. In which particular year?

Mr. RAGON. The fiscal year 1931.

Mr. MILLS. That includes the entire debt service. That includes the interest on the public debt.

Mr. RAGON. That includes the part I was asking about. I assumed it included the interest, but does it also include this amount from the sinking fund?

Mr. MILLS. Yes; it does.

Mr. RAGON. Well, now, what was the increase of our indebtedness last year?

Mr. MILLS. A little over $600,000,000, $616,000,000. The deficit was $903,000,000. You have to diminish that by $392,000,000, the amount of retirements for the sinking fund, and $48,000,000 representing retirements from foreign repayments; or say $440,000,000, which would have made an increase in the public debt of about $463,000,000; but in addition to that, we increased the balance in the general fund by about $153,000,000. So that the actual increase in the public debt was something over $600,000,000.

Mr. RAGON. The point I want to make is this: Whether or not you had to pay this $1,051,000,000, irrespective of what you saw further down the road with reference to decreased revenues?

Mr. MILLS. Yes; your sinking fund is just as much a charge against your current expenditures as any of the other expenditures appropriated for by Congress. In addition, of course, your interest on your public debt has to be paid. So you have a charge of about $1,000,000 that has to be met each year.

Now, to the extent that you have to borrow, let us say, to cover that sinking fund, you do not diminish the public debt by the amount contemplated. If you borrow in excess of sinking fund and other statutory debt retirements, then you automatically increase the public debt by the additional amount of the borrowings. So that your net increase last year in the public debt, exclusive of the increase in the general fund, was about $463,000,000.

Now, you must remember that, whereas we close our books for the fiscal year on June 30, we borrow on June 15 such amounts as may be necessary to cover, at least in part, our requirements until the next income tax payment date. The amount we borrow on June 15 is, therefore, reflected in the public-debt accounts for the fiscal year closed on June 30.

Owing to the decrease in the income taxes, we have to borrow somewhat more at times, as we did last June, which was reflected in the increase in the general fund on June 30, and that accounts for the increase of some $153,000,000. Do I make myself clear?

Mr. RAGON. Yes; I think I understand you. Now is it your purpose or what you have in mind-what are the plans that you have in mind with reference to handling this $903,000,000 deficit?, Do you expect to do that out of the returns that you will get from the taxes that will be brought in by this?

Mr. MILLS. That is water over the dam; we do not expect to do anything about it; that is last year, 1931.

Mr. RAGON. You are just carrying it forward into 1932?

Mr. MILLS. No; we do not carry it forward; we increase the public debt by the amount of the deficit less statutory debt retirements included in the expenditures. That means that we sold more securities to the public and that eventually we shall have to raise that much more in taxes, in order to retire the securities.

Mr. RAGON. Anticipating a deficit for 1932, how much of the public debt retirement did you incorporate in it?

97999-32-4

Mr. MILLS. We incorporated in it $412,000,000, the amount of the sinking fund appropriation.

Mr. RAGON. And the interest item?

Mr. MILLS. Oh, the interest item, of course, is there.

Mr. RAGON. How much is that?

Mr. MILLS. A little over $600,000,000.

Mr. RAGON. In other words, the amount appearing in this year's public debt will be about what it was in 1931, the debt retirementthe public debt.

Mr. MILLS. The total cost of the debt service will be about the

same.

Mr. RAGON. Now, there is one other question. I hardly know enough about the stock market and the exchange markets to ask this question intelligently; but it has been suggested here by two or three. Is there any way that you could reach those sales on the stock exchanges?

Mr. MILLS. In what way do you mean, reach them?

Mr. RAGON. Well, by some kind of tax.

Mr. MILLS. We tax them now. We tax every sale made.

Mr. RAGON. Every sale? Well, what is the rate of that tax?

Mr. MILLS. Two cents.

Mr. RAGON. What would be the practical effect of an increase of that?

Mr. MILLS. We have suggested an increase of 1 cent.

Mr. RAGON. One cent?

Mr. MILLS. Yes; but you must remember that the State of New York also taxes transactions on the New York Stock Exchange, and I think that the governor of the State has suggested that they double the rate.

Mr. RAGON. Does that cover margin sales as well?
Mr. MILLS. Covers every transaction on the exchange.
Mr. RAGON. What is the New York rate, Mr. Mills?
Mr. MILLS. Two cents; the same as ours.

Mr. RAGON. And at the present time, they are taxed by the State?
Mr. MILLS. Two cents.

Mr. RAGON. Two cents?
Mr. MILLS. Yes.

Mr. RAGON. And it is proposed in this bill to increase it 1 cent? Mr. MILLS. One cent, which would make the total Federal tax 3 cents, and I see Governor Roosevelt has recommended a State tax of 4, so that would make the total 7 cents.

Mr. RAGON. What would 2 cents yield?

Mr. MILLS. It will yield approximately, this year. $22,000,000. Collections of this tax have been as high as $47,000,000.

Mr. RAGON. As high as $47,000,000?

Mr. MILLS. Yes.

Mr. RAGON. What year was that?

Mr. MILLS. I should say it must have been 1930.

Mr. RAGON. This year it was $26,000,000?

Mr. MILLS. Yes.

Mr. RAGON. And you think that is as much as the traffic could stand at this time-a 1-cent increase?

Mr. MILLS. I am inclined to think so. And you will probably hear some argument against even a 1-cent tax.

Mr. RAGON. I believe that is all, Mr. Chairman.

Mr. HILL. I would like to have some information about the capital gain with relation to the other forms of profit. Is a capital net gain identical with undistributed net income on invested capital?

Mr. MILLS. I did not get that.

Mr. HILL. Is a capital gain identical with an undistributed net profit on invested capital?

Mr. MILLS. Oh, no; it is not. I do not think it bears any relation to it. A capital gain is a realized gain on the sale of capital assets. Mr. HILL. Is it the difference between the price paid and the price received for a particular asset?

Mr. MILLS. Yes; generally speaking. Of course, in the case of assets held prior to 1913, we have got to take the 1913 value.

Mr. HILL. In the case of real estate, for instance, if it was bought prior to 1913 or in 1913 and sold at a subsequent time, you take the difference between the two prices?

Mr. MILLS. You take the appraised price in 1913.

Mr. HILL. Well, now, suppose we take a case of this kind: A man holds stock in a corporation and the corporation does a profitable business but does not distribute its profits, and the stock enhances in value, based upon the accumulated profits in the corporation. Now, is that increase in the value of the capital stock a capital gain? Mr. MILLS. No; not until he sells the stock.

Mr. HILL. There is no way of reaching, under the present revenue law, then, this accumulated gain known as capital-which might result in a capital gain?

Mr. MILLS. Except that we tax the net profits of the corporation, irrespective of whether they are distributed or not.

Mr. HILL. Some few years ago we heard quite a little about distribution of corporation profits through the issuance of stock dividends, and I believe at that time-I am not sure now what the situation is the stock dividends were not taxable.

Mr. MILLS. The Supreme Court has held that they are not taxable. Mr. HILL. There would be no relationship then between the source of tax on capital gain and the source of tax which might be intended to undistributed corporate profits.

Mr. MILLS. The tax on undistributed profits, no; there is no relationship.

Mr. HILL. That is all.

Mr. VINSON. Has the Treasury given any consideration to the matter of the yield from foreign investments?

Mr. MILLS. On what?

Mr. VINSON. The yield on foreign investments?

Mr. MILLS. No; it does not look to me as if they would be very profitable to the Treasury right now.

Mr. VINSON. Well, I do not know whether you get my inquiry. Take an American taxpayer who has foreign investments and who has profitable foreign investments and, say, it is a plant erected in Canada. The American citizen pays income taxes here, and he is making money on his Canadian plant. Does he pay income tax on that money?

Mr. MILLS. Yes.