7
MAY 1C, 1913
The Commoner.
the world except the $5,000. Would the com
pany that Issued the bonds that ho had his
money invested in be alloWod to deduct the tax
from the interest duo on the coupons on these
bonds? ,
Mr. Hull. The taxpayer, if he desired his
$4,000 exemption in that case
Mr. Madden. But here is a caso where thero
is only $250 income.
Mr. Hull. I beg the gentleman's pardon. I
thought he said $5,000.
Mr. Madden. He has an investment of $5,000
with an income of $250, and that is all the in
vestment he has in the world. How does the
gentleman provide for the payment of tax on
theso coupons?
Mr. Hull. The corporation would withhold
the tax, unless the bondholder should file his
aflldavit claiming his exemption, and if ho
should, unless the amount of interest exceed
$4,000, no tax would be withheld.
Mr. Madden. But suppose the gentleman did
not have business knowledge that would enable
him to understand all these things. Lots of
poor widows and orphans already have such in
vestments as I have described, and they do not
understand the situation, and will not under
stand it, no matter what happens. What pro
tection have they?
Mr. Hull. Well, I would say in reply to that
that under existing conditions most of the
present corporate bonds draw interest, which is
represented by coupons. Those coupons are
payable to bearer. They circulate promiscu
ously and pass currently all over the country
in all kinds of trade and business. It is a ques
tion of whether the gbvernment will adopt the
only possible way to reach the income derived
from the interest on these bonds by providing
that the tax shall be withheld at the source of
payment, or whether it will abandon any pur
pose effectively to tax the income derived from
the $28,000,000,000 of corporate bonds on
account of the fact that there may be a limited
number who may not, as the gentleman from
Illinois (Mr. Madden) suggests, understand, at
least at the very beginning of the operation of
this law, that they would be exempt entirely
under $4,000, provided they filed notice to that
effect.
Mr. Mann. Does the gentleman yield for a
question thero?
Mr. Hull. Yes.
Mr. Mann. Suppose, for example, that a man
has coupons in the course of a year to the
amount of $500 and that is his total income.
At present, if he collects those coupons, payable
to the bearer, he deposits them in a bank and
gets credit for the amount. ' Now, under the
scheme that is proposed, how would that
operate?
Mr. Hull. It would operate this way, that
the holder of corporate bonds can always have
the benefit of his exemption of $4,000 and his
deduction; that is, the owner of the bonds can,
provided he presents them or has them pre
sented for collection himself. But if he trades
them to other people and parts with titl6 to the
coupons, then that 'privilege would not lodge
in the other persons, because' such coupons
would be capital and not income in the hands
of other taxable owners.
Mr. Mann. Practically, then I ask for in
formation under this proposition the owner of
these coupons of small amounts could no longer
deposit them in banks, but would have to send
them by registered mail or by express to the
headquarters of the company, with an affidavit
stating that that was the amount of his income
or that the income was less than $4,000.
Mr. Hull. They could mail them directly to
the headquarters of the company, and claim ex
emption, and receive full payment of the in
terest. Mr. Mann. Would it be practicable under the
bill to deposit them in a bank, -with an aflldavit
as to the amount of Income?
Mr. Hull. It would be practicable if the.
holder of the bonds retained ownership and did
not paTt with them, as he would with any other
negotiable instruent.
Mr. Mann. Of co'urse he could not put them
through the bank unless he parted with title to
them.
Mr. Hull. He could for purposes of collection.
Mr. Mann. Even then he would have to as
sign his title to the bank, as a negotiable in
strument. That was not worked out before
under our law, but how does that work out
under the English law?
Mr. Hull. Under the English law the corpora
tions retain the tax on the interest and pay it
to the government, and the taxpayer presents to
the government any claim, either for deductions.
abatements, or for tho $800 exemption which
exists over there, instead of the $4,000 exemp
tion hero.
Mr. Mann. Of course there aro a largo num
ber of people either holding a small amount of
bonds or a small number of shares. Of courso
tho shares would not make so much difference.
But there are a large number of people who
hold a small amount of coupon bonds now.' I
think the universal custom is that those aro
collected through the banks by deposit. Is
there any way of making an arrangement by
which that could still continue? It is a matter
, of yery great convenience
Mr. Hull. I would suggest to tho gentleman
that coupon bonds, issued by woll-cstabllshed
business concerns, are exchanged generally in
trade, and, of course, as the gentleman well
knows, they pass current like any other negoti
able instruments.
Mr. Mann. Certainly; but they could not
under this plan where anybody desires to liavo
an exemption.
Mr. Hull. Well, this plan, I will say to tho
gentleman, gives the. taxpayer two or threo op
portunities to claim his exemption. In the first
place, if the taxpayer receives the principal part
of his income from a source at which it is proper
to withhold tho tax, ho may present his claim
for exemption he would bo required to pre
sent his claim for $4,000 exemption thero in
order that it might accompany tho bulk of his
income, which would be large enough to permil
tho deduction of the $4,000. Otherwise he can
claim his exemption In his personal return of
other income than that on which the tax is with
held. But if he desires several hundred dollars
of deductions, for expenses, or indebtedness, or
taxes paid, and has an amount of income from
other sources which is larger than tho amount
of his deduction, he can make return to tho col
lector of the district in which ho resides. But
if his income from sources other than that at
which the tax is being withheld Is smaller than
the amount of his deductions, then ho would
naturally find it necessary to consolidate both
his taxable income and his deductions so that
they could go through ono channel up to tho
office of the internal revenue commissioner as a
whole. To that end he would file claim for de
ductions and return of his additional Income,
either with the district collector in tho district
In which his chief income was being returned,
or, if he preferred ho could file it with the
person whose duty it is to make the. return for
him as to the bulk of his income.
Mr. Madden. If his income was leas than
$3,500 he would not have to make any eturn
at all, would he?
Mr. Hull. He would not.
Mr. Madden. But if he wanted to place him
self within the deduction on the interest from
his coupons, he would be required to make a
statement under oath to the. company whose
bonds ho hold, would ho not?
Mr. Hull. Ho would bo required to file his
application for the $4,000 exemption. And I
want to say to the gentleman and to the house
that this is simplicity itself, compared to tho
English system on the same subject. They
have thousands of applications for deductions
and abatements and other modifications, either
of the assessment or refund of the tax, that nro
constantly being shifted back and forth between
the government and the -taxpayer. This method,
in my judgment, places the collection of the tax
in the most expeditious form, and one that will
do no injustice either to the taxpayer or to the
issuer of the bonds.
Mr. Samuel W. Smith. Will the gentleman
yield for a question?
Mr. Hull. Certainly.
Mr. Samuel W. Smith. While the bill pro
vides that it shall apply to all citizens at homo
and abroad, It Is true, is it not, that this bill
does not apply to tho president of tho United
States or to federal judges?
Mr. Hull. I will reach that in a very few
minutes.
Mr. Burke of South Dakota. Before the gentle
man proceeds with that, will he yield for ono
question?
Mr. Hull. Yes.
Mr. Burke of South Dakota. Taking the caso
cited by the gentleman from Illinois (Mr.
Madden), where a person might own bonds to
the amount of $5,000, paying 5 per cent interest,
which would be $250, and suppose tho interest
13 payable semi-annually, and that is the entire
income of the person holding tho bonds, would
he have to claim tho exemption each time that
he presented the coupons for payment as they
matured that is, every six months or is thero
a way provided by which, so far as such a per
son is concerned, ono exemption would be suffi
cient? Mr. Hull. Tho $4,000 oxomptlon would cover
both payments.
Mr. Mooro. Will tho gentleman consider my
question now?
Mr. Hull. If tho gontloman will pardon mo
ono moment
Mr. Mooro. It boars on this question.
Mr, Hull. Just in that connection, first, in
order to roach tho incomo derived from our im
mense amount of corporate bonds, three methods
might bo adoptod. In the first place, wo could
allow tho corporation to pay tho Interost to tho
Individual taxpayer ontltlod to It, and thon de
pend upon him to make tho personal roturns,
just as wo dopend upon taxpayers to rnako per
sonal returns of tholr property In tho states now
under tho stato tax system. The result of that
would be, as I havo pointed out hero, that they
would return probably $1 out of $10, judging
by tho experienco of the states; so that that
method is as faulty as the stato tax systems to
which I have directed attontlon.
Another alternative would be to allow tho
corporation to withhold tho intorest only in
cases whoro it exceeds $4,000 that Is, with
hold the amount of the tax upon It; but whon
we undertake to carry this rule entirely through
tho bill in that respect and wo do that, excopt
in this caso and that of United States bonds
wo aro confronted with the fact that all or most
of this Interest Is represented by coupons pay
able to bearer; bo that tho holder of $100,000
of theso coupons, when tax-paying time came
around, could distribute them, if ho desired, into
sums of less than $4,000 and send them through
25 different channels for collection; and by dis
tributing and scattering them ho could always
measurably evade tho tax. So that tho only
method of really getting at the tax with a mini
mum of inconveionco both to tho government
and tho taxpayer is that proposed in tho bill.
Now, I will yield to tho gentleman from Pennsyl
vania (Mr. Mooro.)
Mr. Moore. Under the exemptions provided
for in paragraphs B and C, is It not possible for
a rich holder of bonds or stocks of an industrial
nature to sell out and transfer his holdings to
municipal or stato or federal bonds, and thus
escape tho very object of tho bill? I want to
explain that that question has been brought up
to me by some who havo said this bill was easy,
that it was full of loopholes, and that so far
as some of tho Idle rich, so called, were con
cerned they could simply transfer their holdings
from Industrial stocks and bonds to municipal,
stato and national bonds.
Mr. Hull. In the first place, tho whole
amount of state and municipal bonds Is two
to three billion dollars, and $750,000,000 of the
municipal and stato bonds aro owned by small
mutual savings banks. There aro $28,000,000,-
000 of corporate bonds.
Mr. Moore. I only called the gentleman's
attention to the fact that a shrewd man might
In that way evade the law, and If tho test camo
they would simply transfer tholr holdings from
industrials and other taxable stocks to munici
pal, federal and state bonds that would bo
exempt.
Mr. Hull. I thank tho gentleman for his sug
gestion. Mr. Tribble. Will the gentleman yield for a
suggestion?
Mr. Hull. Yes.
Mr. Tribble. As an illustration, suppose ap
plication is mado In a mutual insurance company
for a prospective dividend which is paid after
wards. Suppose tho applicant pays $20 and at
tho end of the fiscal year $12 is returned to him
as a dividend. That assessment is made on tho
estimato as to tho earnings of tho company in
the past years, and tho company collects this
$12 out of the individual. It does not belong
to tho company but belongs to tho individual.
1 would like for the gentleman to explain fully
if that $12 is taxed In this bill. It Is claimed
by tho Southern Mutual Fire Insurance Co.,
which does business In my state, one of the most
prosperous in the country, and which does that
kind of business, that you tax them for tho
assessments they have collected out of the ap
plicants. Mr. Hull. There Is no tax imposed on tho
policyholder. It Is proposed to place a tax of 1
per cent on tho net earnings of all insurance
companies. But I will discuss that later on.
Mr. Tribblo. I am not claiming that there I
a tax Imposed on the policyholder. There is a
tax imposed on the company which collects an
advanced payment out of the policyholder and
returns to htm at the end of the fiscal year that
(Continued on Pago 10.)