Providing Certain Exemptions from Taxation for Treasury Bills A BILL TO PROVIDE CERTAIN EXEMPTIONS FROM PROVIDING CERTAIN EXEMPTIONS FROM TAXATION FOR TREASURY BILLS WEDNESDAY, MAY 21, 1930 HOUSE OF REPRESENTATIVES, Washington, D. C. The committee met at 11 o'clock a. m., Hon. Lindley H. Hadley presiding. There were present before the committee: Mr. Ogden L. Mills, Undersecretary of the Treasury; Mr. Walter E. Hope, Assistant Secretary of the Treasury; Mr. B. H. Bartholow, general assistant to the general counsellor, Internal Revenue Bureau; and Mr. William T. Sherwood, Assistant Deputy Commissioner, Internal Revenue Bureau. Mr. HADLEY. The next bill which we have before us for consideration is H. R. 12440, introduced by Mr. Hawley on the 19th instant, providing certain exemptions from taxation for Treasury bills. This bill will be included in the record at this point, and the committee will be glad to hear Mr. Secretary Mills on this matter. (The bill is as follows:) [H. R. 12440, Seventy-first Congress, second session] A BILL Providing certain exemptions from taxation for Treasury bills Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 5 of the second Liberty bond act, as amended (Public, Number 11, Seventy-first Congress, June 17, 1929), is amended by adding at the end thereof a new subdivision to read as follows: "(d) Any gain from the sale or other disposition of Treasury bills issued hereunder (after the date upon which this subdivision becomes law) shall be exempt from all taxation (except estate or inheritance taxes) now or hereafter imposed by the United States, any State, or any of the possessions of the United States, or by any local taxing authority; and no loss from the sale or other disposition of such Treasury bills shall be allowed as a deduction, or otherwise recognized, for the purposes of any tax now or hereafter imposed by the United States or any of its possessions.' STATEMENT OF OGDEN L. MILLS, UNDERSECRETARY OF THE TREASURY Mr. MILLS. Mr. Chairman, I would like to state at the outset, though I do no know that it is necessary, that both in the case of the community property bill and of this bill, it is rather essential that we should get action at this session of Congress. It is very obvious in the case of the community property bill, perhaps not quite so obvious in the case of the bill which I am about to discuss, but from the standpoint of the Treasury it is highly desirable that this bill, H. R. 12440, should be enacted at this session of Congress. The situation briefly is this: A year or so ago the Congress authorized the Treasury Department to issue a new form of short term Government security to be known as a Treasury bill, and to be sold at a discount. Since we received the authorization we have had four 1 issues of Treasury bills. I should say that these issues have been successful in the sense that we obtained our money at reasonably low rates, and the Treasury bill enabled us to borrow the money when we actually needed it, instead of, as we had been accustomed to do before we had this new instrument, on the quarterly tax payment dates. Now, as the bill passed the House it provided that the Treasury bills should be completely tax exempt. That is to say, that not only should the discount be exempt from income tax but that they should not be subject to any tax on capital gain, and that there should be no deduction for loss. The bill was amended in the Senate so as to provide that while the discount should be exempt from income tax, the capital gain or loss provision should apply to Treasury bills as they do to other securities. As a matter of fact, there is no revenue question involved in this problem, because unless the Treasury bill during its brief existence should happen to pass through the hands of men whose income is taxed at different rates, the gains and losses during the course of the 90 days will offset each other, so that as far as the government is concerned there is no capital gain or loss. Nor is there any likelihood, except on very rare occasions, of this exceptional case which I mentioned arising, because Tresasury bills are bought mostly by corporations. Very few individuals, I fancy, acquire them. They are largely bought by banks and large insurance companies and other corporations with funds that they desire to invest temporarily. Now, the fact that the capital gain and loss provision applies to Treasury bills has given rise to qute a serious situation. It necessitates stamping each bill when issued with the original rate of discount at which it is issued. These bills are sold by competitive bidding, and if you take the hundred million which were sold lalt Monday, they were sold at no less than 17 different rates of discount, representing the different competitive bids. So that of the one hundred million 90-day Treasury bills issued last Monday, this one issue will have 17 different discount rates, and they will be stamped on the bills. Now, the dealer who acquires those bills can not treat them as one issue. He has to take practically every lot of Treasury bills sold at a particular discount rate and open an account for each particular lot to determine over the period which he holds it as to what is the discount, and what represents the capital gain or loss at the time he sells it. The result is that it necessitates such a complicated system of bookkeeping that it did not take very long after these Treasury bills were issued for the market to get wise to them, and because of their "nuisance value," if I may so describe it, in the course of the last few weeks a very real sales resistance has developed. So that whereas a 90-day United States Government Treasury bill should be one of the most popular and readily salable securities in the world, as a matter of fact it is being dealt with in a very limited market. In that connection I would like to read in part a letter which I received from the chairman of the board of directors of the New York Federal Reserve Bank, who in the course of the last 13 or 14 years has had as much experience with the Government-security market as any man in the United States. Mr. Case became seriously concerned over this situation, and he wrote me under date of April 21, in part, as follows: |