THE EFFECT OF THE TAX STRUCTURE ON INVESTMENT
WHILE a recovery may be induced, in part, by net income-creating governmental expenditures, public policy must in a system of private enterprise be directed mainly toward providing the necessary conditions under which private enterprise can go forward. To this end, it is necessary to create the most favorable possible basis for the emergence of new private investment.
In this connection, it is important to consider the tax structure with a view to the elimination or modification of taxes tending to prevent the normal flow of private investment. Among the taxes which, it has been charged, operate in this direction--and this was particularly the case in the upswing of 1936-37--are the undistributed profits tax and the capital gains tax.
The undistributed profits tax operated, it is said, in this direction because corporations are more likely to assume the risks of forward-looking, anticipatory investments by expending corporate surpluses than is the case if they must go to the market and raise capital through new issues. Similarly, the capital gains tax is said to prevent large private investors from undertaking new ventures, if the profits which it may be expected will be made in the first years of new undertakings were, for such individuals (in the event that the enterprise, once it reached stability, were sold to others), taxed at the top bracket. Historically, it is said, venturesome