of graduated inheritance taxes, but the courts have upheld them. Where a graduated inheritance tax is levied upon the estate as a whole, and not upon the legacy received, it is difficult to understand why a legatee receiving a bequest of $5,000 from a $1,000,000 estate should have to pay a larger inheritance tax than a legatee receiving $5,000 from a $100,000 estate. Of course, where the estate is large enough to pay the tax and leave the face amount of the legacies free, such discrimination does not take place. If, however, it is necessary to reduce the legacies by the amount of the tax, the result is inequitable.1 SELF-TEST QUESTIONS DIFFERENT KINDS OF TAXATION 1. Define property taxes and classify them. How do such taxes affect choice of bond investments? 2. List the kinds of securities taxes. How are securities valued for tax purposes? Are the bases of valuation fair or not? 3. Can securities taxes be passed on by the investor? Why or why not? 4. What are sales taxes? How do they affect one's choice of bond investments? 5. What are income taxes and what is the justification for the adoption of income as a basis for taxation? VARIOUS TAXING BODIES 1. What is meant by the term "tax body"? 2. What are the principal tax bodies and where is the source of the power to tax given to each of these bodies? TAX-EXEMPT SECURITIES 1. What security investments are tax exempt? From what taxes and to what extent are these securities exempt? 2. What is the constitutional basis for tax exemption of securities? Is it economically sound? Socially justifiable? THE FEDERAL INCOME TAX LAW 1. Draw up an outline of the main provisions of the Federal 'This lecture was delivered March 20, 1924. This date should be kept in mind in considering references to legislative acts. income tax law. What parts of the law relate to security investments? 2. Take a concrete illustration with which you are familiar and show how taxation of bond interest affects the investor's choice of investments; the cost of funds to an industrial corporation. 3. At what point under the existing surtax rates does it pay a wealthy investor to purchase tax-exempt securities rather than taxable bonds? 4. Is the purchase of tax-exempt bonds the only means available to a rich man short of fraud, for escape from high surtaxes on income? 5. Is tax exemption of bonds a hindrance to business? How? 6. Why are stock dividends not taxable? Should they be? 7. How does the existing income tax law affect yields on foreign government bonds? Municipal bonds? 8. What is the tax-free covenant clause in a trust indenture securing a bond issue? How does it affect choice of bond investments? The cost of capital to corporations? STATE INCOME AND PERSONAL PROPERTY TAX LAWS 1. How do state income taxes affect yields on various classes of bonds? Cost of funds to corporations? 2. How do personal property taxes affect bond yields? Cost of funds to the corporation? ESTATE AND INHERITANCE TAXES 1. Define estate and inheritance taxes. 2. How do they affect bond yields? 3. How may the investor reduce these tax burdens or avoid them? IX GOVERNMENT BONDS By C. F. CHILDS President, C. F. Childs & Company, Incorporated Essential basis of government. Taxation. National credit. United States Government financing during World War. Maximum war debt of United States Government. Foreign debts to United States Government. Colonial and Revolutionary War period borrowing. United States payment of debt to France. Relations of a nation's debts to its currency. IN the early stages of civilization man sought protection from the forces of nature which he could not understand by petitioning his fetishes and idols to save him from harm. It was his fear and desire for safety that drove him to seek protection. He appealed to the deities and charms which he created and worshipped. Gradually he acquired the belief that protection from danger justified him in holding sacred the material or spiritual objects he thought were able to save him. That was the foundation of religion. This trait of human nature became characterized as faith. Faith means confidence; and when the people of the different nations of the world today unite in their desire to maintain the welfare of their homes and their country and support their government's undertakings, their faith in their country and their devotion to it becomes what we call patriotism. Without that innate spirit of fear, faith, confidence, and patriotism, and all the sacrifices they require, no nation can long exist. People must protect and hold in reverent respect that which safeguards their well-being and destiny. It is exactly upon that theory that a government bond is founded. The bond represents credit and nothing else, and that word "credit," literally translated, means belief, trust, confidence, and faith. We delegate to our constituted government offi cials full power to safeguard our national interests, and when such a government functions in accordance with the dictates of its leaders, it is the duty of every citizen to render that government full support by sacrificing his worldly goods and also his life if need be for the purpose of sustaining the government which protects and represents him. The government's control, with the people's acquiescence, of all the resources, wealth, and productivity of the nation, coupled with the government's unlimited power of taxation, constitutes the economic vitality of the nation. The power of taxation effectively mobilizes the value of all wealth in support of any desired credit. A liberal application of taxation is the only method of financing every great national crisis. Submission to taxation and loyalty to the government justify confidence in any credit or loan which the government may ask for. The soul of a nation that conscientiously supports proper taxation is certainly capable of meeting any duty necessary to honor its debts. Patriotism assures the government that public support will safeguard all moral and financial obligations. financial obligations. Therefore, much depends on the record of past performances and the reputation of a nation for maintaining its credit untarnished. To borrow vast sums on credit requires character as well as reputation and good-will, even more than mere wealth and ability. Some nations have ample wealth but lack essential good-will and moral integrity. THE BASIS OF NATIONAL CREDIT A national loan should not be regarded in the same class with a state, municipal, or corporation bond, since the government debt supersedes all obligations of any minor political body or subdivision. Even the sacrifice of the credit or solvency of any municipality is of small importance when the financial standing and the honor of the sovereign state are at stake. In the case of a government, the faith and credit of the entire nation and all of its units and peo ples are pledged to honor its obligations, and taxes may be levied to support such pledges without regard to the local needs of any subordinate community or corporate body. A national loan is a veritable mortgage on the integrity, good faith, and taxable assets of the people. When a government loan ceases to be safe, then no other known security based upon property or wealth within that nation will have any dependable value. The default of a national obligation would be an absolute calamity to the entire commercial and financial structure of all the people, and the currency of such a nation usually becomes virtually worthless, especially with respect to business relations with other nations. International trade with its neighbors becomes demoralized, and the exchange rates instantly reflect the situation. When a government issues a bond and makes a loan by borrowing money from its people, the people take a receipt from the government in the form of a bond for the money each individual advances. That bond continues to be an obligation which each citizen has a vital interest in helping his or her government meet and redeem at the time the bond falls due and becomes payable. That is the reason why all of us, who as citizens constitute an integral part of this nation, should stand ready to make our pro rata share of contributions in the form of taxes to defray our government's obligations. When the United States entered the war against Germany, it was called upon to raise undreamed of sums with which to defray the cost of its military operations and also to advance credits to its associates abroad until it had equipped its army and navy sufficiently to take an active part in the conflict. It then commenced to marshal its forces and strength for the fulfilment of that purpose by mobilizing all of its available resources and assets so they would be available to meet all financial requirements. At that time the credit rating of the United States ranked foremost among all nations of the world. A conservative appraisal of the economic wealth of the United States was |