REPORT

778

SUPPLEMENTARY BOND LEGISLATION.

SEPTEMBER 12, 1918.-Committed to the Committee of the Whole House on the state of the Union and ordered to be printed.

Mr. KITCHIN, from the Committee on Ways and Means, submitted the following

REPORT.

[To accompany H. R. 12923.]

The Committee on Ways and Means, to whom was referred the bill (H. R. 12923) to supplement the second liberty bond act, as amended, and for other purposes, having had the same under consideration, reports it back to the House without amendment and recommends that the bill do pass.

PURPOSE OF THE BILL.

The chief purpose of this legislation is to provide a limited exemption from income surtaxes and war and excess-profits taxes upon income to be derived from the fourth liberty loan bond issue, the flotation of which is to open on September 28, and also to free a larger portion of the income from the first, second, and third liberty loan issues from similar taxation. Your committee believes that this legislation will materially assist in the sale of the next liberty bonds.

THE NEW MEASURE.

INTEREST FROM LIBERTY LOAN BONDS EXEMPг.

Section 1 of the proposed bill provides that interest on fourth liberty loan bonds not in excess of $30,000 owned by any person, partnership, corporation, or association shall be exempt from surtaxes and excess-profits or war-profits taxes.

This section also provides that the interest from the first, second, and third liberty bonds shall be exempt from surtaxes and excessprofits or war-profits taxes to the extent of one and one-half times

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any national bank to lend a borrower, in addition to the aforementioned amount, an additional amount not to exceed 10 per cent of the capital stock and surplus of such bank in case the borrower discounts with such bank a note or notes secured by not less than a like amount of bonds of the United States issued since April 24, 1917, or certificates of indebtedness.

SHORT TITLE OF THIS ACT.

Section 7 provides that the short title of this act shall be "Supplement to second liberty bond act."

The letter of the Secretary of the Treasury with reference to this bill is hereto appended and made a part of this report.

TREASURY Department, Washington, September 5, 1918. DEAR MR. KITCHIN: In connection with the tax bill now before the Congress, and without awaiting its enactment, I feel constrained to bring to your attention a matter affecting the fourth liberty loan. The delay in the enactment of the tax bill, the fact that the rates of income surtaxes, to which the interest on liberty bonds, except the first liberty loan, is subject, will be higher, and the rate of normal income tax on unearned income will be lower, than I had contemplated, materially affect the prospects of the fourth liberty loan.

I do not mention these things critically, for I realize that the Ways and Means Committee have labored faithfully and earnestly during the hot summer months in the consideration and preparation of the tax bill. I have already expressed my acceptance of a normal tax of 12 per cent without a differential against unearned incomes, and in principle I am now agreed with the committee that a substantial increase in surtax rates will be necessary in order to produce the indicated revenue. The market price of liberty bonds, which responded favorably to the suggestion of an increased normal tax, from which the bonds will be exempt by their terms, was depressed by the newspaper reports of a greatly increased surtax, to which the interest on the bonds will be subject. I have been anxious to stabilize the interest rate upon Government bonds, believing that by so doing we should be reducing the cost of the war, not only to-day for ourselves, but, in the future, for ourselves and for our brave men who are fighting in France and who will have little or no opportunity to accumulate and invest in liberty bonds though they must upon their return join the army of taxpayers who must pay this interest. I have sought to avoid the issue of bonds at such a rate and upon such terms as might result ultimately, when the war is won, in the accumulation of great wealth in the hands of a relatively small proportion of our population, carrying interest at a high rate and exempt from taxes.

The magnificent patriotism of our people and the fervor and efficiency of the liberty loan organization have made it possible to place the liberty bonds in the hands of many millions of persons who had never before been investors in securities of any kind. Bonds of the third liberty loan received the widest possible distribution and I feel that we all owe a duty to the millions of subscribers of small means not merely to pay them a fair rate of interest, which we are doing, but to take such measures as may be necessary to insure to them a market for the bonds at approximately par in case their necessities are such as to force them to realize upon the investment which they have made in the Government's obligations. The bond-purchase fund, which was provided in the third liberty bond bill, has been very useful in stabilizing the price of liberty bonds but it has not been, and we could not expect it to be, effective to sustain the price against adverse developments, and in the face of the fact that the Government's recurring demands upon the absorptive power of the investment community are in such proportions and of such frequency as to prevent the development of any important buying power in the investment market between liberty loan campaigns.

I have been much impressed by the success of the plan which has been adopted in Canada for the purpose of maintaining the market value of Canada's victory bonds. A careful study of that plan is being made in the Treasury and by the War Finance Corporation, and I am glad to learn that the bankers of the country have been making a similar study. I am not without hope that some such plan may be made effective in the United States, although conditions here are very different and it will not do to depend too much upon the experience of our neighbor. In any event, it will H R-65-2-vol 2-56

the amount of fourth liberty loan bonds subscribed and held, upon the date of the tax return, by any such taxpayers, but it is provided that such exemption shall not exceed $45,000 of such bonds.

A further provision is added to the effect that if any taxpayer converts first liberty loan bonds by reason of the issuing of the fourth liberty loan bonds, he shall be entitled to similar exemptions to the extent of $30,000 of such bonds. It is provided, however, that in all of the above cases the interest from these bonds shall be only exempt from these taxes until two years after the termination of the present war.

WAR-SAVINGS CERTIFICATES.

The bill provides in section 2 that the amount of war-savings certificates available to be issued shall be increased from $2,000,000,000 to $4,000,000,000, and that the amount of war-savings certificates of any one series that may be held by any one person shall not exceed $1,000. In other words, any person may purchase $1,000 of war-savings certificates of the present series and an additional $1,000 for each succeeding series which may be issued.

WAR-PROFITS TAXES TO BE DEPOSITED WITH GOVERNMENT

DEPOSITARIES.

Section 3 of this bill authorizes the Secretary of the Treasury to deposit with designated Government depositaries the proceeds arising from the payment of war-profits taxes as well as from income or excess-profits taxes. The second liberty loan act authorizes the Secretary of the Treasury to deposit in depositaries the proceeds from income and excess-profits taxes. As the pending revenue bill provides for a war-profits tax, this section becomes necessary.

STABILIZATION OF FOREIGN EXCHANGE.

Authority is given in section 4 of this bill to the Secretary of the Treasury to make arrangements in or with foreign countries to stabilize foreign exchange. This provision is deemed necessary in order to give the Secretary of the Treasury greater flexibility in Treasury operations with respect to our dealings in foreign countries.

AMENDMENT TO TRADING-WITH-THE-ENEMY ACT.

Section 5 of this bill amends clause (b), section 5 of the tradingwith-the-enemy act so as to empower the President to investigate, regulate, and prohibit, by means of license or otherwise, transactions in bonds or certificates of indebtedness of the United States and the hoarding or melting of gold or silver, in addition to the powers already granted the President under such section.

LOANS MADE BY NATIONAL BANKS.

Section 6 of the bill incorporates the provisions of H. R. 10691 entitled "An act to amend section 5200 of the Revised Statutes, as amended," which has already passed the House in this session of Congress. Section 5200 of the Revised Statutes limits the amount of loans which national banks can make to any one borrower to onetenth of the capital stock and surplus of such banks. The effect of the amendment to section 5200 of the Revised Statutes is to permit

any national bank to lend a borrower, in addition to the aforementioned amount, an additional amount not to exceed 10 per cent of the capital stock and surplus of such bank in case the borrower discounts with such bank a note or notes secured by not less than a like amount of bonds of the United States issued since April 24, 1917, or certificates of indebtedness.

SHORT TITLE OF THIS ACT.

Section 7 provides that the short title of this act shall be "Supplement to second liberty bond act."

The letter of the Secretary of the Treasury with reference to this bill is hereto appended and made a part of this report.

TREASURY Department,
Washington, September 5, 1918.

DEAR MR. KITCHIN: In connection with the tax bill now before the Congress, and without awaiting its enactment, I feel constrained to bring to your attention a matter affecting the fourth liberty loan. The delay in the enactment of the tax bill, the fact that the rates of income surtaxes, to which the interest on liberty bonds, except the first liberty loan, is subject, will be higher, and the rate of normal income tax on unearned income will be lower, than I had contemplated, materially affect the prospects of the fourth liberty loan."

I do not mention these things critically, for I realize that the Ways and Means Committee have labored faithfully and earnestly during the hot summer months in the consideration and preparation of the tax bill. I have already expressed my acceptance of a normal tax of 12 per cent without a differential against unearned incomes, and in principle I am now agreed with the committee that a substantial increase in surtax rates will be necessary in order to produce the indicated revenue. The market price of liberty bonds, which responded favorably to the suggestion of an increased normal tax, from which the bonds will be exempt by their terms, was depressed by the newspaper reports of a greatly increased surtax, to which the interest on the bonds will be subject. I have been anxious to stabilize the interest rate upon Government bonds, believing that by so doing we should be reducing the cost of the war, not only to-day for ourselves, but, in the future, for ourselves and for our brave men who are fighting in France and who will have little or no opportunity to accumulate and invest in liberty bonds though they must upon their return join the army of taxpayers who must pay this interest. I have sought to avoid the issue of bonds at such a rate and upon such terms as might result ultimately, when the war is won, in the accumulation of great wealth in the hands of a relatively small proportion of our population, carrying interest at a high rate and exempt from taxes.

The magnificent patriotism of our people and the fervor and efficiency of the liberty loan organization have made it possible to place the liberty bonds in the hands of many millions of persons who had never before been investors in securities of any kind. Bonds of the third liberty loan received the widest possible distribution and I feel that we all owe a duty to the millions of subscribers of small means not merely to pay them a fair rate of interest, which we are doing, but to take such measures as may be necessary to insure to them a market for the bonds at approximately par in case their necessities are such as to force them to realize upon the investment which they have made in the Government's obligations. The bond-purchase fund, which was provided in the third liberty bond bill, has been very useful in stabilizing the price of liberty bonds but it has not been, and we could not expect it to be, effective to sustain the price against adverse developments, and in the face of the fact that the Government's recurring demands upon the absorptive power of the investment community are in such proportions and of such frequency as to prevent the development of any important buying power in the investment market between liberty loan campaigns.

I have been much impressed by the success of the plan which has been adopted in Canada for the purpose of maintaining the market value of Canada's victory bonds. A careful study of that plan is being made in the Treasury and by the War Finance Corporation, and I am glad to learn that the bankers of the country have been making a similar study. I am not without hope that some such plan may be made effective in the United States, although conditions here are very different and it will not do to depend too much upon the experience of our neighbor. In any event, it will HR-65-2-vol 2-56