that at this time all that it can do is to submit this preliminary report and to request that the committee be continued in charge of the investigation. SAMUEL T. HOWE, C. M. ZANDER. CHAIRMAN BAILEY: We fully realize, particularly we people out in the west, the importance and the amount of the work that this committee has to do. It is readily understood that it will be necessary to retain this committee. The preliminary report will necessarily go into the records and the committee will naturally be continued. I am sorry that there are not more present this afternoon as the next topic is one that is very important indeed. We have secured a man who is well qualified to treat this subject. It is one that is important to all of us-The Tendencies and Results of the Extension of Tax-Exempt Securities by Kingman Nott Robins of Rochester, New York, who will now treat that subject. THE EVILS OF TAX EXEMPTION AS APPLIED TO SECURITIES KINGMAN NOTT ROBINS The scope of this paper is limited, not only by time but by the writer's approach to the subject as a business man without the background of information and study that belong to the tax expert. It is not a new question we have to discuss, for the problem of tax exemptions is as old as taxation itself; but the subject has been brought to the fore in the last two years by the abrupt increase in taxes and the evident necessity for keeping the bases of our taxation as broad as possible and the incidence of our taxes as equitable and economically sound as possible. The evil of tax exemption heretofore has been chiefly recognized in connection with the general property tax. Twelve billions, or 122 per cent of the total real property of the United States, is estimated to be exempt. We have no similar figures for personalty, but it is calculated that the exemptions of personalty in New York state under the general property tax exceed the total assessed value of the realty in the state. It is true, of course that these exemptions of personalty are chiefly due to the practical impossibility and injustice of applying to personalty the same rate as to real estate and in the same proportion. But the fact remains that these exemptions, as we have had them for years, have resulted in gross inequality in tax incidence and in a steadily mounting tax burden on those already bearing more than their share of the load. Even before we encountered the extraordinary expenses of the war period, it was becoming increasingly evident that the mounting cost of government,-federal, state, county and municipal, would compel taxation of personalty by some practical, approximately equitable method; and since, as Professor Bullock has said, "the normal source of taxation is, and always must be, income," the income tax has come to be looked upon as the most equitable and economically sound. method of reaching those who have heretofore not been called on for their just share; at least if we calculate on the basis of "ability to pay." This recognition of the income tax as an increasingly important factor is our scheme of taxation renders essential the preservation of as broad a basis as possible for this tax. To that end it is indispensable that exemptions be minimized from the outset. Without question, as the burden of the income tax becomes more and more felt, and its burden is regarded as a permanent one, there will be attempts to create exemptions not only for the benefit of special interests among the taxpayers, but even more for the benefit of special interests among borrowers on bonds and mortgages, who will hope to lower their interest charges by making their obligations free of tax. Responsibility for protection from this abuse rests alike on national and local governments, but the federal government has been the outstanding offender to date, if we base on constitutional grounds only the enjoyment by state, county and municipal obligations of exemption from the federal income tax. Apart from this constitutional question affecting only this class of obligations, exemption or non-exemption of securities issued by or under the auspices of federal and local governments is purely a matter of policy; and for that policy no argument except expediency-the anxiety to sell the securities -has ever been offered, and even the argument of expediency can be mathematically disproved. As before stated, the federal government has been the great offender. It might have been argued that during the war it was necessary to throw to the winds all considerations of economy and justice in order to float a forced loan, but surely no such excuse exists now, and no present emergency warrants such a policy, condemned by all economists and tax experts. And yet, the federal government is going right on exempting not only its own issues but a growing list of securities for which it acts as sponsor. Roughly speaking, the list of securities issued or sponsored by the federal government includes government bonds, federal farm loan bonds and joint stock land bank bonds, and war finance corporation bonds. If measures now pending in congress become law, there will be added to these, federal home loan bonds, federal personal credit bonds and tax exempt real estate mortgages, as provided by Senator Calder's bill. Possibly, also, tax exemption is one of the arguments in the minds of those who favor government sponsorship of railway securities and the obligations of other utilities. It is hard to say why the manufacturer and merchant should be left out of the consideration of these beneficently minded gentlemen. It is quite true that, apart from the liberty bonds and municipal bonds, there is no great volume of these exempt securities outstanding; but since the pressure of the income tax has just begun to make itself felt, we can safely assume that the menace of tax exemption should be regarded from the standpoint of potential rather than present scope. With this viewpoint in mind, it is truly alarming to sum up the potentialities of existing and proposed partially and wholly exempt issues. The following figures are approximations: Federal farm loan and joint stock land bank bonds, outstanding and to be issued if they supplant present private loans Federal home loan bonds War finance corporation, authorized 4 billions 2 billions 1⁄2 billion In this list no mention is made of the great volume of tax exempt mortgages that the passage of Senator Calder's bill would create, nor of the tax exempt issues proposed for the federal personal credit banks; but the list already includes over 30 billions of partially or wholly non-taxable bonds, and that is equivalent to approximately 40 per cent of the entire national wealth, apart from real estate, in the year 1912. The potentialities of this huge list are accentuated by the progressive increase in federal and local indebtedness, which is growing so much more rapidly than the national wealth and is thus creating tax exempt securities bearing an increasing ratio to the wealth of the country and thus steadily undermining the foundations of the income tax. The debt of the United States government has, of course, inevitably grown disproportionately because of war expenses, the increase being 25 billions in six years. This makes the annual interest burden alone equal to the total revenue of the government in the last pre-war year, and equal to 20 per cent of the estimated annual increase in national wealth. It is obvious that the federal government, with the necessity of not only paying interest on but of amortizing such a debt, and with a vast extension of its governmental powers to provide for, will have to maintain the income tax rates at high levels. The debt of the local governments,-state, county, city and rural, increased 113.2 per cent in the decade 1902-1913, as compared with an increase in national wealth for the same decade of only 75 per cent. In other words, the tax exempt securities of these governments are not only rapidly increasing but are increasing out of all proportion to the increase of national wealth. In contrast to this factor in the undermining of the foundations of the income tax, we find the states rapidly adopting their own income taxes to help carry the burden of annual expenses which increased 105.9 per cent in the decade of 1903 to 1913. Thus we are confronted with a rapidly increasing need for revenue from the income tax, combined with a still more rapid increase in securities, the income on which is non-taxable. Two questions arise: 1. What will happen to the revenue producing capacity of the income tax? 2. What will happen to those who must seek money in the market in competition with these tax exempt securities? The answers seem as obvious as the questions: 1. That the basis of taxation will be continuously and progressively narrowed down by the displacement of taxable securities by non-taxable securities in the hands of investors, and that the rates of taxation will have to be maintained at uneconomic levels to yield the required revenue. 2. That the private corporation or individual seeking accommodation in the investment market will be at an increasing disadvantage, and will quite probably be forced to go out of business. In appraising the probability of these results, it should be borne in mind that we have had only two years of coexistent high income taxation and tax exempt securities, and the effect of the shifting process which must result will be progressive and has been obscured up to this time by the abnormal effect of the war on enterprise and the investment market. This shifting process is now making itself felt, which accounts for the widespread clamor for government relief and the privilege of tax exemption which we have described. If this privilege has been given the farmer under the federal farm loan act, why not to us, is the natural question of every other class in the community. To illustrate the condition already confronting us, as a result of this policy of exemptions, I quote from the testimony before the New York State Reconstruction Commission of Mr. Clarence H. Kelsey, president of the Title Guarantee and |