Dec 7, 1948 Dec 7, 1948 NCIAL 49 IONS THE L+ ECONOMISTS DIFFER ECONOMISTS DIFFER ON BUSINESS GAINS Discusses Inventories 1 He illustrated his point on in- ventories as follows: "Let us as- ON BUSINESS GAINS Continued From Page 49 sume that an enterprise makes no operating profit at all. Let us pride) in showing large earnings. assume, however, that there is an r Especially when earnings in gen- advance in the price if raw ma- 1 terials so that there is a rise of Slichter Tells Congress Group eral are rising, no management likes to show less favorable results $100,000 in the cost of replacing That Profits Have Been than other managements." 1 the inventories consumed during Mr. Harris said he could not the period. Heavily 'Overstated enter into the merits of a debate "This increase in the cost of , on what are profits, but said it is replacing inventories does not, of well to remember that if, with de- 8 course, mean that the enterprise preciation based on "replacement" will be able to raise its selling HIS COLLEAGUE DISAGREES value and with inventories carried s price sufficientl_ to recover this at replacement value, profits would e additional cost. Perhaps it can, be lower in periods of rising prices, perhaps it cannot. they would be higher in periods of f "Let us assume that the enter- Harris, Also of Harvard, Holds depression and falling prices. What prise is able to raise its selling business would gain now, they g prices by exactly enough to offset They Are Too High, Urges would lose in periods of depres- i- the rise in the cost of replacing it its inventories. As most corpora- i- sion, he added. Taxes Be Increased if d tions report profits today (al- 1- Mr. Slichter said 1946 was not really a profitable year, reported though the corporate income law n does not require it), this firm 1- profits having been nearly twice would not charge the rise in the 1- By JOSEPH A. LOFTUS what they actually were. On the cost of replacing inventories d Special to THE NEW YORK TIMES. other hand, the corrected profit WASHINGTON, Dec. 6-Pro- figures show that the increase in operating efficiency in the last two S against the gain of $100,000 from the rise in its selling prices. The d fessor Sumner H. Slichter of Har- management would report a profit il years has been considerably greater vard University told a Congres- of $100,000. i- than is indicated by reported sional committee today that cor- profits. i- porate profits have been substan- The reported profits of $18,100,- Data in Report "Misleading" d 4, tially overstated and he found no 000,000 in 1947 and $19,800,000,000 y "It is obvious that this report fault with their true level, while (indicated) for 1948 show little would be misleading to its stock- Professor Seymour E. Harris, also y rise and seem to indicate that in- holders, its employes and its cus- its too high and advocated a rise a Harvard economist, found prof- dustry has thus far obtained little tomers, because the $100,000 is not .0 = 0 available to pay dividends, to in- in taxes on them. benefit from its large expenditures on plant and equipment in 1946, 1, crease wages, or to reduce prices. The economists disagreed on and especially in 1947, The "cor- It is needed in order to enable the number of importan4 points in a d rected' figures $12,000,000,000 in enterprise to maintain the same their testimony opening two weeks d 1947 and $14,900,000,000 in 1948- j- physical volume of inventories of hearings by a subcommittee on "show a large gain in profits be- e that is, to the volume required by the Economic Report. Mr. Slichter tween 1947 and 1948, indicative its current rate of operations. If said industry needs more than ever that the expenditure of last year I the enterprise were to distribute and the year before on new equip- 5. all or part of the $100,000 in divi- but said the tax structure dis- to expand plant and equipment ment and plans are paying off." e dends, for example, it would really courages investment by individuals He said the corrected figures be making a distribution of capi- in stocks. Mr. Harris viewed plant show that a high fraction of real tal because it would be reducing investment as excessive, except profits was paid out in dividends its capacity to produce. Hence it possibly in the case of steel. With -86.1 per cent in 1946, 57.5 per d would be compelled either to cur- reference to high profits, he said cent in 1947, and 40 per cent in the tail operations or to borrow in or- he was not criticizing business first half of 1948. der to maintain its inventories and men, because that was their busi- ness. Mr. Harris's chief point was that its capacity to produce. fiscal policy (Government expendi- "Why the overstatement? The Sees Profits "Overstated" tures and taxes) should be the principal reason," said Mr. Slich- Mr. Slichter said that in the last chief weapon against inflation. He ter, "probably is that accounting i three years American corporations would return to the average tax is a conservative and conventional of 60 per cent on corporations in- art, and accountants are slow to 1 about $16,400,000,000. "This is the have overstated their profits by stead of the present 40 per cent, adapt their methods to new con- t amount," he said, "by which the or perhaps "compromise" on 50 ditions and new problems. Ac- reported statements of profits ex- per cent. countants are not used to taking aggerated the amount of income He found investment has been account of permanent changes in available to pay dividends, to ex- too high and the moderation of the the price level. pand plant, to increase wages, or rate of profits would kep invest- "An additional and important to reduce prices." ment down "and thus reduce the reason is the fact that business The gap between real profits weight of one of the greatest in- managements take a pardonable and reported profits, he said, is flationary factors." However, he traceable to two principal inaccu- thought a case might be made out Continued on Page 51, Column s racies. "One arises from the fact for larger stell capacity. If the that most corporations still insist stel industry declined to expand on counting d rise in the cost of because it believed that imprudent, replacing inventories as profits. Mr. Harris would not criticize it. The other is that most corporations count the rise in the cost or re- placing plant and equipment as profits. It is obviously ridiculous to count a rise in costs as profits and yet most corporations do it, and pay still taxes on the amount so reported."