NUARY 1, 1949. Letters to The Ti the anti-inflation fight and the healthier Higher Corporate Taxes economic situation which would prevail today had the Government not relin- S Harvard Economics Professor Explains quished about $10 billion of annual tax Stand in Reply to Editorial revenues in the unfortunate tax bills of 1945 and 1948. SEYMOUR E. HARRIS. To THE EDITOR OF THE NEW YORK TIMES: This letter is a reply to criticisms by Cambridge, Mass., Dec. 18, 1948. THE NEW YORK TIMES of my views on profits as presented to a Joint Congres- sional Committee on the Economic Report (THE TIMES, Dec. 9, 1948). The main issues revolve around the ade- quacy of profits. First I deal with a suggestion in the editorial that although I had concluded profits were too high, I did not tie them to appropriate measures. In my prepared statement, I suggested that it made a substantial difference whether Furthermore, tut f stimulate and pro- profits were related to income on the vide part of the funds for an invest- one hand, or net worth and sales on I ment boom of dangerous proportions. the other; and in my oral evidence, With investments at about $100 billion presented for the record the relation in the last three years as compared of profits to (1) income and (2) sales. with $16 billion in 1929-and I would Even on the basis of a comparison with hazard a guess that despite the rise of income, the index generally used by Let us move from a 5 prices a dollar of investment is at least those disposed to show that profits are these relationships to another vital as effective today as in 1929-we are not excessive, profits seem too high. issue raised in THE TIMES editorial. in the midst of a dangerous investment The comparison usually made is be- THE TIMES and those whose views it boom. I am not, therefore, impressed tween corporate profits after taxation supports make much of the fact that by the argument that high profits are the one hand, and sales, net worth profits are overstated because replace- required in order to finance new vest- on income on the other. I hold to the ment costs of capital exceed acquisi- ment. or view that all profits and corporate prof- tion or book value. Should prices re- Authorities quoted in THE TIMES its before taxes are also relevant. Hence main at their present level, then indeed make much of the point that business their inclusion above. Should all prof- there may be some substance in this is dependent aimost exclusively on their its-inclusive of non-corporate incomes argument; for if allowance is made for profits to finance their capital needs. -be considered. then the rise in profits the high replacement value of inven- But this does not take into account the would seem greater than if the usual tories and other capital, then book in- fact that they still have used up only comparisons were made; for non-cor- than ventory profits would have to be whit- about one-half of the funds accumu- porate incomes have risen more tled down and depreciation allowances lated and not used during the war; that corporate profits. (Profits of non-cor- risen increased-with a resulting reduction the security markets yielded corpora- porate business have undoubtedly of profits. tions the substantial sum of $5 billion more than their incomes.) But too much is made of this point, or more of new money in 1948 (com- Profits After Taxation first, because, as accountants will tell pared with $8 billion in 1929) and that Nor is it entirely clear that the ap- you, business generally covers itself in two and three-fourths years ending propriate index of corporate profits and is against a higher replacement cost of September, 1948, bank loans rose by profits after taxation. THE TIMES inventories. Second, it is well to allow $17 billion, or almost 60 per cent. This for the fact that over our entire history compares with a rise of but $5 billion, economists and accountants supported there has been little net change in or but 14 ,per cent, in the spectacular by it seem to assume without argument in that the relevant corporate profits prices: rises have been offset by de- years 1927-29, inclusive. 1948 are the $21 billion after taxes, clines. We, therefore, would be wrong Surely, it is not asking too much to not the $33 billion before taxes. But to assume replacement at present high suggest that taxes on corporate profits prices. And we should not leave out be raised from the current 40 per cent it is well to point out that it is corpo- to the 60 per cent of the war period, rate profits before taxes that are of account that in an advancing eco- related to the wages paid and the prices nomic society it is generally possible to when profits were much lower than replace worn-out plant and equipment they are today. In view of the busi- set. And the profits before taxes are the also relevant in an examination of with capital costing less in dollars of ness prospects for 1949, a reasonable stable value. This will be an important compromise might be 50 per cent. It is relation of profits and income. Let us turn now to the relation of offset to any rise of prices of capital well to speculate on the vast gains in profits and sales. Despite a vast taxes rise over book value. in sales, corporate profits after 1929 My main argument in support of the in relation to sales are roughly at 8.4 thesis that profits are too high is, how- levels (the decline is from 9.1 to ever, not based on comparison of prof- its and income or sales but on the cent), and the ratio of non-corpo- be- per rate income and corporate profits thesis that the current high profits fore taxes to sales substantially above. jeopardize any stabilization program. The rise for corporate profits before For example, they offer a potent excuse taxation and incomes of unincorporated of for labor leaders to demand and receive businesses was from 19.4 per cent inflationary wage increases. consolidated sales in 1929 to 26.1 per Investment Boc cent in 1947. of