Tabell’s Market Letter – April 02, 1971

————————— — —– TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON. NEW JERSEY 08540 DIYISION OF MEMBER NEW YORK STOCK EXCHANGE MEMBER AMERICAN STOCK EXCHNGE April 2, 1971 Tax reform is a subject much in the news of late. It has been suggested that a major program for over!2hauling the present tax s,cture. will be poposed th ne!.,;,.ure b the .Nixon AdmistratiO, an .,….. – – there'are'afew observers -who-wIll-not agree– whatever tlielr blases as to the shape reform sliould take — that change is long overdue. This is particularly true, in our own opinion, of the way in which we have chosen to tax corporate profits. The eloquent Dr. Henry Wallich, Yale Professor and Senior Consultant to the Secretary of the Trea9..lry, has made a valuable contribution to tax reform discussion in an article in the April Fortune. In it he dis- cussed VAT, which is not a brand of Scotch, but the value-added tax, a device particularly popular in Western Europe. VAT, quite Simply, consists of a tax levied at a fixed percentage rate on all sales, but with the tax paid by suppliers deductible. Since the tax is effectively imposed only once on a given stream of income, it becomes, in reality, an actual percentage tax on G. N . P. VAT has long been one of our favorite proposals, and Professor Wallich states its case eloquently in his article –which we wholeheartedly recommend. He despairs, however, of being able, in p'actice, to sub- stitute VAT for the corporate income tax entirely. In this connection, we have our own favorite radical pro- posal which, we think, could make for both a more efficient tax structure and better alloci'tion of economic resources. That proposal is quite Simply to raise the corporate income tax to 100, with dividends as a deductible item. The effect of this, naturally, would be to eliminate the current corporate practice of retaining earnings and to force all profits to be paid in the form of dividends to stockholders. To understand the need for this sort of radical surgery, it is necessary to understand what is wrong with the present system. Its central shortcoming, in our opinion, is that, last year, some 45 billion (total after-tax corporate profits) was deployed without being in the least subject to the disciphne of the market place. The net effect of the present system is to create two classes of corporate earnings — one — privileged, and one subject to profftS(rumost -Sti\lollhon last vyieratuaillsytacxoendfisocnacteorayt taxation. -roughlY' a -T5h0eurnadteis. trTihbeuiteedaRinodrteiorl-lg-'e2f!.S.cothrpeorsaatme'e–'–'-1 50 lopped off the top, after which the reCipient of the dividend pays a tax of between 20 and 70 on the dividend income he receives. For investors in the top tax bracket, this involves a total tax of 85 –or a case where, of 6.66 of corporate profits, 1.00 is returned to the owner of the bUSiness, and 5.66 goes to the taxing authorities. This is not even the worst obj ection, for the most pernicious effect of the present system is on resotrce deployment. A manufacturer of, say, buggy whips WIll normally retain some portion of hIS post-tax proht and reinvest it — in most cases in expanded buggy-whip capacity. He will not use the earnings, for example, to enter the computer peripheral bUSiness because he has spent his enhre life in buggy whips, and knows little about computers. And he will be disinclined to pay a higher dividend because the entire system conspires to make a dollar of retained earnmgs worth more than a dollar of distributed earnings. This process tends to go on, until the buggy whip manufacturer goes out of business taking large sums of his stockholder's money down the drain with him. Had our manufacturer been forced to pay h,S earnings in dividends to stockholders, they, at least, would have had the option as to whether investment in buggy whips or computer peripherals was in their own best interests. In practical terms, our proposed system would have less effect than migh't be expected on total tax revenues. Pre-tax corporate profits last year (third quarter-annual rate) were 84.4 billion, of which 38.9 bilhon was paid under the present corporate-profit tax, 25.4 billion was distnbuted as diVidends, and 20.1 billion was retained. Suppose, the entire 84.4 billion, 59 million more than was the case last year, had been distributed and was subject to tax. Assuming an average 40 tax rate, this would pro- duce 23.6 billion in personal income tax revenue to make up for the 38.9 billion lost from the present step'– -'coi'porafetax.-The15'bllnondifferenceis–wherEl'ProfeSsorWallich'S'VajueaddedFtaxmigti'iWell into the picture. The major objection to thIS system, of course, would be that the corporate community would have to find some way of replacing the 20 billion of stockholder's money, which it is now deploying without consulting with those stockholders. The answer, of course, is that they could obtain it quite Simply by the flotation of new secunty issues. We trust we are not overly proud of our own industry, if we state that Wall Street is admIrably equipped to handle the distribution of such lssues at minimal cost — the hnancial community's historic function and something it has always done rather well. And it would then be the free-market, rather than the whim of corporate executives which would determine where newly- generated capItal was employed and at what cost. We think, in summary, that forced distribution of corporate profits, elimination of the corporate income tax, plus a possible value-added tax, would oonstitute not only a meaningful tax reform, but would be a stimulus to more efficient allocation of scarce capital resources. Dow-Jones Ind. (1100 a.m.) 905.35 S&P (1100 a.m.) 100.53 AWT'wn ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL \ No statement or elpreSSlon of opinion or any other motter herein contOlned IS, or I to be deemed to be, directly or indirectly, an oHer or the sollcltotlon of on offer to buy or sell any security referred to or menhoned The motter IS presented merely for the conVCllence of the subscriber While oNe believe the sources of our mformotlon to be reliable, we m no way represent or guorantee the accuracy thereof nor of the stotements mude herem Any action to be token by Ihe subSCriber should be based on hiS own mvestlgallon and Information Janney Montgomery Scott, Inc, os 0 corporotlon, and Its officers or employees, may now have, or may later toke, pOSitions or Irades In respect 10 any secUrities menlloned m thiS or any future Issue, ond such poslhon moy be different from any Views now or hereafter expressed In thiS or ony other Issue Jonney Montgome.y Scali, Inc, which IS registered With the SEC as on mvestment adVisor, moy give adVice 10 lIS mvestment adVisory and alhel customers mdependently of ony stotemenTS made In thiS or m any other Issue further information on ony security mentioned herein IS avoilable on request