R. H. Montgomery, in reply to a questionnaire submitted by Professor R. M. Haig /9/

"Although I made many attempts to find an answer to this question, my experience led me to believe that no categorical answer would be accurate. Many of my clients refused to sell, ostensibly on account of high tax rates, but on being closely questioned I think without exception they were all holding off for higher prices. As far as I could learn they did sell when they believed that the highest price obtainable had been offered and I think that most of them were satisfied that their profit was big enough to take care of the high tax.

"By the end of 1929 I had reached the conclusion that high tax rates retarded very few males."

Eisner vs. Macomber, 252 U.S. 189, 207

"Income may be defined as the gain from capital, from labor, or from both combined provided it be understood to include profit gained through sale or conversion of capital assets."

Hays vs. Gauley Mountain Coal Company, 247 U.S. 189

"* * * since a conversion of capital often results in gain, the general purpose of the Act of 1909 to measure the tax by the increase from invested property, leads to the inference that portion of the gross proceeds which represents gain or increase acquired after the taking effect of the Act, must be regarded as 'gross income;' * * * "

Seligman, E. R. A., Studies in Public Finance, page 108

"The gain in the form of accretion to capital is income only when it is * * * actually realized."

Haig, R. M., The Concept of Income, in the Federal Income Tax, 1921. page 7 /10/

"Income is the money value of the net accretion to one's economic power between two points of time."

Haig, R. M., The Taxation of Excess Profits in Great Britain, page 72 /10/

"When one asks an Englishman why capital gains are not taxed the first reply is almost invariably a surprised and shocked exclamation to the effect that this would mean the taxation of capital and not of income. If one then asks whether a tax on the increased value of stock-in-trade is a tax on income or a tax on capital he usually forsakes argument on the basis of fundamental principle and pleads the practical necessity for a dividing line. As a matter of fact that dividing line is a thin and tenuous one * * *."

"The fundamental explanation of the British concept is probably to be found in certain facts in the general economic background of England. It is an old, conservative, economic organism where transfers are less frequent than this country, where fortunes are less often made through trafficking in appreciating assets, where values are dealt with more largely in terms of income and less in terms of sale price and where, above all, the general conception of the economic structure is static rather than dynamic. * * *"

Groves, H. M., A Tax Policy for the United States, 1934, pages 32-33

"It would be a grave mistake to abandon the tax on capital gains * * *. Such gains are usually of a fortuitous and unearned character and are highly concentrated in the returns of large taxpayers. From the fiscal point of view, this income has more ability to pay than ordinary income. From the point of view of social control the tax on capital gains is very important. Much of this income is a direct result of speculation. * * * The present system of granting favored treatment to capital gains encourages the reinvestment of corporate earnings, and the latter in turn is responsible for much of the overbuilding of plant capacity which has gone on in this country.

"From this it appears evident that capital gains should be taxed and that they should be taxed at the same rate as other income, without a special top limit."

Hewett, W. W., The Definition of Income and its Application in Federal Taxation, page 31

"If the social group gains in wealth then social income has accrued. If an individual gains in control over part of the social income, income has accrued to that individual. Income value is only an expression of real income in terms of money, and unless real income is received, capital gains are not income."

Report of the Committee of the National Tax Association on Simplification of the Income Tax, Proceedings of the National Tax Association, 1927, page 144

"This committee is not prepared to advocate the abolition of the tax on capital gains. * * * And until our income tax system is more highly developed, the possibilities of evading taxation by masquerading current income in the guise of capital gains will be too numerous to warrant a complete abolition of tax on capital gains. A tax on capital gains reduces the incentive to such evasion."


Fisher, Irving, Income in Theory and Income Taxation in Practice. Econometrica, Volume V, No. 1, January 1937, page 47

" * * * in computing income we must not add or subtract any more changes in capital valuations * * *. * * * capital gain or loss of any kind may be great or small without affecting the income of the year. * * * Capital gain merely symbolizes future income. When that income comes will be the time to tax it.

"And, contrarywise, no allowance should be made for losses for a shrinkage in value of property, * * *. Such loss merely symbolizes lack of future income."

Fisher, Irving, The Income Concept in the Light of Experience (1927) page 19

"The present method of taxing capital gains is illogical and unjust. Under the present practice the mere change of investment, with no true income involved, may cost the taxpayer a huge penalty assessed against gains which are capital, not income, and which relate to transactions of many years past, not the current year. That this is unjust is virtually conceded when exceptions are made permitting the exchange of one stock for another, under certain conditions, thus avoiding specific profit-taking in money form. Evidently if it is permissible to exchange one stock for another, it ought to be equally permissible to sell the one and with the proceeds buy other."

May, George O., The Taxation of Capital Gains, Bulletin of the National Tax Association, Volume VIII, No. 3, December 1922, page 78

" * * * it is believed that the revenues can be increased, tax avoidance greatly diminished, and greater equity secured by the abandonment of the rule of taxing of capital gains, and, conversely, of allowing capital losses as a deduction from taxable income."

Plehn, C. C., Income as Recurrent, Consumable Receipts, American Economic Review, Volume XIV, No. 1, March 1924, pages 5, 10.

"Income is essentially wealth available for recurrent consumption recurrently (or periodically) received. Its three essential characteristics are: Receipt, recurrence, and expendability.

" * * * gains and profit on transactions outside of one's regular vocation or line of business, like the profit from the sale of a home, are of doubtful income character."

/11/ Moorhead, W. S., Statement., Hearings, Committee on Ways and Means, 1923, pages 321-327

"I think that there is no question about it at all, that if capital gains had not been taxed as income, and capital losses had not been allowed as deductions, from the beginning, the Government would have been way ahead in revenue."

/11/ Mitchell, C., National City Bank Bulletin, November 1930, pages 182-183

"It (the capital gains tax) has created artificiality in the security market, in the credit structure and in interest rates. * * * This tax acts as an obstruction to the free transfer of property, whether it be securities, land or what not, retards business and encourages inflation."

/11/ Report of the Tax Simplification Board, December 3, 1923

"The best considered opinions of accountants, actuaries and economists appear to us to indicate that the elimination of.both capital gains and losses, even now, would result in no decrease in revenue to the Government over a period of years."

Chamber of Commerce of the United States of America, Referendum No. 70, Federal Taxes and Expenditures, December 11, 1935, page 22

"The recognition of capital gains and losses for income-tax purposes has always been open to the objection that gains resulting from transactions in capital assets are not income in any true sense, and consequently should not be taxed as such. Similarly, loss of capital is no proper basis for credit against income tax liability."

/11/ New York State Economic Council, Report, New York Times, November 24, 1934

"The income tax on capital gains, which never has existed in England, should be abolished, or, if that be not possible, reduced to a small, uniform and definite percent, as in the case of corporations so that when an individual invests his principal, with all the risks that are involved in any investment, he may have some assurance that he may be able to retain a reasonable portion of any profits made as a result of such investment."

Cole, Seth T., Deputy Commissioner and Counsel, New York State, Department of Taxation and Finance. Treatment of Capital Gains and Losses for Income Tax Purposes in the Tax Magazine, October 1936, page 583

"Without doubt, the most unsatisfactory feature of the American system of income taxation is the treatment of capital gains and losses for income tax purposes, a feature that does not enter into the British system. While at first blush it may appear to accord with equitable conceptions to reason that one who increases his capital through appreciation in value is thereby endowed with as much taxpaying ability as one who is the recipient of ordinary income, a careful study of the problem will show convincingly that it is highly inequitable to measure the income tax by capital gains and losses. Furthermore, the evils attendant upon the taxation of capital gains and the allowance of capital losses as an income tax deduction, and the effect of such practices upon the economy of the Nation, are more than sufficient to outweigh any revenue benefits accruing therefrom. Perhaps capital gains ought not to be wholly exempted from tax liability, but, if they are to be taxed at all, it should be at a rate that is extremely moderate and at the same time certain, so that the extent to which the taxes imposed may affect business transactions may be definitely known and calculated."

Tremaine, Morris S., State Controller of New York, Opinion cited in New York Times, April 26, 1937

"The blighting effect of this tax for years has permeated the whole business fabric of this country, and the sooner the Government gets rid of it -- and for its own immediate benefit -- the sooner we can open the flood-gates of pent-up capital now taking refuge in tax-exempt bonds or taking advantage of unhampered trading opportunities outside the United States.

* * * * * *

"If the tax on capital gains were repealed, or at least placed in a separate column and at a nominal flat percentage that would be calculable, I believe we would soon see unemployment disappear like snow in April." * * *

Chamber of Commerce of the United States, Twenty-fifth Annual Meeting, April 29, 1937, Resolutions Committee

"The present law which taxes capital gains at prevailing income-tax rates, while limiting the right to deduct losses, is both on its face and in application unfair and inequitable. The economic effects are emphasized by the present high tax rates on gains which discourage sales of capital assets, thus creating an artificial and unwholesome situation, with losses in tax revenues."


/1/ The Concept of Income in the Federal Income Tax, 1921, page 7.

/2/ This section is adapted from a series of articles by Robert Murray Haig in the Wall Street Journal, March and April 1937.

/3/ For a general discussion of the effects of capital gains taxation on securities markets, see Section V.

/4/ This rate was retroactively reduced by 25 percent in June 1924.

/5/ In December 1929, normal tax rate was reduced by one percent.

/6/ Breaking points for 1922 and 1923 were somewhat different because of the restriction that if the optional treatment were used, the total tax could in no case be less than 12 1/2 percent of the total net income.

/7/ Statistics of Capital Movements between the United States and Foreign Countries and of Purchases and Sales of Foreign Exchange in the United States; Report No. 3; United States Treasury Department, Division of Research and Statistics; Table E.

/8/ 7 1/2 years raised to 8 years.

/9/ R. M. Haig, "The Treatment of Capital Gains and Losses Under the Federal Income Tax (confidential report to the Secretary, November 1934), pp. 71-72.

/10/ Cited by Dr. Robert Murray Haig in his 1934 memorandum.

/11/ Cited by Dr. Robert Murray Haig in his 1934 memorandum.