Address at Arthurdale, West Virginia

My friends of Arthurdale:

At last after many attempts dating back through several years, I have succeeded in coming to Arthurdale—and I can greet you as old friends because you are Mrs. Roosevelt's old friends and also because I have heard so much about you.

Much has been written all over the country about you good people, about the conditions of life in certain towns in this part of the world and about what the United States has done here at Arthurdale. The Nation has heard about Scott's Run, with its very poor conditions of life, and the Nation has heard about Arthurdale with its vastly improved conditions of life. But I think I voice the thoughts of you who live here when I say to the country over the radio that about the last thing that you would want would be to be publicized as some rare and special type of Americans. I think you will agree with me if I put history this way: Back in 1933 the whole Nation knew that it faced a crisis in economic conditions but the Nation did not realize that it also faced a crisis in its social conditions. If anyone were to ask me what is the outstanding contribution that has been made to American life in the past five years, I would say without hesitation that it is the awakening of the social conscience of America.

As one part, and only one part, of the effort of your government to improve social conditions, we undertook, as you remember, in dozens of places scattered over almost every part of the country, to set up, with the cooperation of the local people themselves, projects to provide better homes, a better chance to raise foodstuffs, and a better chance to make both ends meet in maintaining a reasonably decent standard of living through the passing years.

Many different types of projects were undertaken—some of them in wholly rural sections, some in cities, some in suburbs, some for industrial workers, some for miners, some, like Arthur dale, a combination of industry and farming. These projects represent something new, and because we in America had little or no experience along these lines, there were some failures—not a complete failure in the case of any given project, but partial failures due to bad guesses on economic subjects like new industries or lack of markets.

On the whole, however, the percentage of good guesses in the average of these projects has been extraordinarily high, and for this success the principal part of the credit properly should go to the individual families who, themselves, have come to live in these new communities, people like you here in Arthurdale.

The lessons that we have all learned are going to save a hundred times their cost in dollars just as fast as government or private capital—or as I hope, both of them—go on with the inevitable task of improving living conditions throughout the country and helping Americans to live as modern science has made it possible for them to live. This extra cost of pioneering ventures, such as this, represents development cost which we justifiably charge off as the inevitable cost of all progress—just as we have in the past charged off the huge government share in the development costs of the railroads, the cables, the airplanes, and the hundreds of millions of dollars in improved highways that have made the automobile possible. But what is equally important to me, the lessons learned from this first bold government venture will save human lives and human happiness as well as dollars in this march of progress that lies ahead of us.

This is a high school graduation and I am speaking just as much to you who graduate today as I am to your parents and your grown-up friends. You are the citizens of tomorrow—not just this graduating class, but thousands of other high school graduating classes in every state of the Union.

Last night a very old and dear friend of mine gave me a little clipping out of a North Carolina paper. He is with me today, my old Chief, former Secretary of the Navy under Woodrow Wilson, Josephus Daniels, now the United States Ambassador to Mexico. This clipping goes back a quarter of a century. It is headed May 26, 1913. It says that Franklin Roosevelt, Assistant Secretary of the Navy, delivered the Commencement Address at A. & M. College in North Carolina. "The economics of a life of a people," he said, "often seem like academic questions when we study them out of textbooks, but they seem like life or death when we try to feed a hungry family. The question of production of food supply was an academic question twenty years ago; today it is becoming a question of bread and butter." So you see, as my old Chief said, the Assistant Secretary of the Navy has not changed very much in twenty-five years.

Now, I will carry you back a shorter distance.

When you, today's graduates, were of grade school age we, your elders in the United States, were asleep at the switch and your government also was asleep at the switch. For many years, other nations of the world were giving serious attention to and taking definite action on many social problems while we in the United States were pushing them aside with the idea that perhaps some day we might get around to meeting them.

We had heard ten years ago of the ideals of ending child labor, of initiating a five-day week, of shortening working hours, of putting a floor under wages, of clearing slums, of bringing electricity into the homes, and of giving families the chance to build or buy a home on easy terms, of starting old-age pensions and unemployment insurance. But, my friends, all those things were in the greater part just a beautiful dream—a dream until your government, five years ago, got tired of waiting, stepped in and started to make the dreams come true.

Government has done little more than to start the ball rolling. Government knows how much more remains to be done. But Government hopes, now that it has taken the first risks and shown the way, that private capital and business men will see how much it is to their own advantage—and profit—to keep the ball roiling, and keep it rolling so well that the inevitable wider improvement in American social conditions will come about in normal course of private enterprise without compelling the Government to use large amounts of taxpayers' money to keep America up to date.

A great many sincere people—good citizens with influence and money—have been coming to West Virginia mining towns in the past two or three years, to see the conditions under which American families lived, conditions under which, unfortunately, many American families still live. Many of these people have come to see me after their visit to Scott's Run or similar places, and have expressed to me their surprise and their horror at things they have seen. They have said to me: "I did not imagine that such conditions could exist in the United States."

They have wanted to help at the particular spot they have seen, but the lesson that I have found it difficult to get across to them has been the fact that they have seen only one spot or two spots—tiny, single spots on the great map of the United States, a map that is covered over with hundreds and even thousands of similar spots. Un-American standards exist by no means in a few coal towns only. They exist in almost every industrial community and they exist in very many of the farming counties of the country.

Now, of course, pending the time that private capital and private enterprise will take up the burden, the money your Government is spending to encourage the Nation to live better-especially that part of the Nation which most needs it—is taxpayers' money.

Two questions therefore, arise: "Is that spending of taxpayers' money justified from the point of view of the individual taxpayer?" and "How should the money be raised?"

So far as the taxpayer's individual interest is concerned, I always look at it this way:

Taxes—and I am talking about taxes to you who are graduating today just as much as your parents for the very good reason that very soon you will be taxpayers yourselves—taxes, local and state and federal combined, are nowhere near as high in this country as they are in any other great nation that pretends to be up-to-date. If I were a business man making and hoping to continue to make good profits, I would remind myself as I paid my income tax, moderate by the standards of other nations, that the most important factor in the kind of an active economic life in which profits can be made is people- able, alert, competent, up-to-date people—people to produce and people with ability to consume. Money invested to make and keep the people of this Nation that kind of people is therefore a good business investment.

And if I were the same man thinking about inheritance taxes, of what I was going to leave, of what I could leave to my children, I would say to myself that to leave them a living in a nation of strong and able men and women is to leave them a better heritage of security than a few thousand dollars saved on an inheritance tax.

Now, how should taxes be paid?

For a great many years the Nation as a whole has accepted the principle that taxes ought to be paid by individuals and families in accordance with their capacity to pay. To put it another way, it has meant a graduated tax on a man's increase in wealth. For instance, a poor man or poor family whose increase in wealth in a given year is below a certain figure pays no direct Federal taxes at all; he pays some indirect taxes but no direct taxes; when the family gains more than $2,500 in a year, he gets into the income tax group, and that type of family starts in by paying a small percentage on the year's gains.

As the gains get still larger, the percentage of the tax goes up so that, for example, when a family's wealth increases to let us say a gain of $100,000 a year, they have to pay a third of it to the Federal Government. In the case of still richer people, with half a million dollars a year income or a million dollars a year income, they may have to pay more than half of their large incomes to the State and Federal governments.

Last week, the Congress passed a new tax bill. It contained many good features—improvements in tax administration, the elimination of a number of nuisance taxes on articles in common use, the lightening of the tax burden on small corporations in accordance with what I recommended to the Congress last fall. I hope that these changes made by this tax bill may be helpful to business and that this belief may, in itself, be a factor in the revival of business enterprise.

But, when the President of the United States has a bill sent to him from Congress, he has to read the whole bill; and on the other side of the ledger, I cannot help but regret that two very fundamental principles of government must once more be called to the attention of the American public.

Both of these matters of principle, stripped of every attempt to confuse, are extraordinarily simple and can be understood by every citizen.

In 1936, many large corporations, and especially those big corporations that were owned or controlled by a comparatively small number of very rich stockholders, were in the habit of failing to declare the dividends, the profits that they had earned. In that way these stockholders, small in number, large stockholders, were in a position to leave the profits their money had made in the controlled corporation—paying the Government on these profits only the normal corporation tax of from ten to fifteen per cent. By this method, these stockholders were able to avoid paying a personal income tax at a much higher rate, at a rate which in many cases would have involved a tax payment of fifty per cent, or sixty per cent, or even higher because the stockholders were in what are known as the upper brackets of the personal income tax.

The Treasury Department found many instances of closely held corporations which, starting with the comparatively modest capital of several million dollars- and that is considered modest capital by a lot of people—had, over a period of years, grown into corporations worth several hundreds of millions of dollars without ever declaring a dividend to their stockholders. That meant a definite, though of course a strictly legal, device by which these stockholders greatly increased their wealth year after year without having to pay to the Government more than a normal corporation tax, thus escaping very large sums of personal income tax payments.

The Revenue Act of 1936 sought to end this serious loophole. In principle our objective was right, but in practice, probably because it was a new thing, the Act as finally worked out in the Senate undoubtedly did prevent many small corporations from normal and reasonable business expansion, from building up adequate surpluses, or from paying off old debts.

The tax bill this year sought to get rid of these inequitable features, quite properly, but to retain at the same time the principle of stopping the tax avoidance that I have described. As finally passed, the bill retains the principle but the penalty for these large corporations for withholding dividends to their stockholders has been made so small—only two and a half per cent at the most—that it is doubtful, very doubtful, whether it will wholly eliminate the old tax avoidance practices of the past.

It is true that the bill seeks to strengthen the authority of the Government to act against companies that clearly seek to avoid these surtaxes for their stockholders by failing to declare dividends out of their profits; and I hope that this new provision, together with the recent favorable decision by the Supreme Court in interpreting the prior law, will retard the revival of the old evil. It seems to me that it is the definite duty and interest of the public—and you are the public—the interest of the Legislative and Executive branches of the Government, to watch very closely to see what happens during the coming year, as a result of these new provisions.

We must always remember that this old method of greatly increasing private fortunes through the withholding of corporate dividends was open and useful only to those citizens who already had wealth large enough to control these large corporations-people whose personal income was already large enough to put them in the higher surtax brackets.

The position of this Administration is this:

We are delighted to remove any existing barriers against every little business in the Nation which is seeking to set itself squarely on its own feet, seeking to pay off its debts and seeking to make a reasonable profit; but the Administration does not want large closely-held corporations making large profits to be used as a vehicle by the small number of their owners to avoid legitimate income taxes. And I think the people of this country are squarely behind the Administration in this belief.

It is also true that for a number of years it has been recognized that this progressive taxation of wealth realistically ought to apply not only to salaries and to dividends and to bond coupons but also to other forms of wealth, such as increases in one's capital by selling any form of property at a profit, that are known as capital gains.

This new bill, that is still before me at this moment, wholly eliminates the progressive tax principle with respect to these capital gains: it taxes small capital profits and large capital profits at exactly the same tax rate. That, my friends, is not right.

In other words, if you or I were to sell stocks that we have held for a few years, at a profit of, let us say, five thousand dollars, we would have to pay a tax of fifteen per cent on that profit under this new bill; whereas the man who has made a profit of five hundred thousand dollars on stocks that he has owned is required, under this new bill, to pay a tax of only fifteen per cent, just as you and I would. Nobody, by any stretch of the imagination, can say that this new provision maintains the principle of payment in proportion to ability to pay.

Some people who have favored this abandonment of principle have justified their position on the ground that one has to abandon principles once in a while when there is an emergency, and that the abandonment of this particular principle will encourage many rich men to take a new risk with their capital and invest it in new enterprises.

But this school of thought finds it very difficult to answer the fact that almost all—over eighty per cent of all capital gains that are reported—are profits made in the stock market—profits made not by developing new companies, not by starting new industries the way they are being started at Arthurdale, oh, no, but profits made by buying stocks of old companies, buying them low and selling them high, or by the still possible method of selling stocks short—selling stocks you do not own—and then buying them in at a lower price.

The abandonment of the principle of progressive tax payments in accordance with capacity to pay may encourage a small amount of capital to go into new productive enterprises, but, chiefly, it will help those who make large profits in buying and selling existing stocks.

New productive enterprise, and you here in this community know what that term means, is not created by the buying of stocks of established companies when they are low and selling them when they are high. I should like to see a revision of our tax laws which would really encourage new enterprise and new investment and the undertaking by private capital of projects like this, that the Government has undertaken here in Arthurdale. But there is no assurance that untaxed savings will go into such new investment or new enterprise. They may be hoarded or they may be lost in the inflation or the deflation that occurs in the shuffling about of existing investments.

We, as a nation, ought to adopt tax policies that will encourage men to venture, and to build new productive wealth. Unless something is added to the combined wealth of the nation, one man's capital gain may be nothing more than another man's capital loss.

In this analysis of this abandonment of what I believe is a basic principle, I have attacked no person. I have merely called the attention of the country to certain clear-cut inescapable facts—and especially to the fact that this tax bill which, in many respects, is a good one, actually abandons the accepted principle of progressive taxation at a point which is very important in our economic life.

Here again is an example of a provision of law which actually, and in plain English, gives an infinitely greater tax concession to the man who makes a very great profit than to the man who makes a comparatively small profit. It helps the very few, therefore, at the expense of the many. To carry on government, you and I know that some definite total sum has to be raised, whether it is county government or a state government or a federal government. If the many who make small capital gains have to pay the same rate as the few who make large capital gains, it means that the tax rate for the little fellow must be higher than if we had stuck to the accepted principle of a graduated tax.

In accordance with recommendations that I have made during several years past, I hope that the Congress, when the new Congress comes back next January, will undertake a broader program of improving the Federal tax system as a whole, in the light of accepted principles of fairness in American taxation, and of the necessary incentives in our economic life.

You will see the difficulty in which your President has been placed. This tax bill contains features that ought to become law, but it contains several undesirable features, especially the ones I have just been talking about.

Here is the problem: If I sign the bill—and I have until midnight tonight to sign it—many people, with some justification, will think that I approve the abandonment of an important principle of American taxation. If I veto the bill, it will prevent many of the desirable features of it from going into effect.

I am choosing this occasion, when old and young are gathered together, when people are listening in every state of the Union-I am taking this occasion to make an announcement: For the first time since I have been President, I am going to take the third course which is open to me under the Constitution.

At midnight tonight, this new tax bill automatically will become law; but it will become law without my signature or my approval. By taking that course, I am calling the definite attention of the American people to those unwise parts of the bill that I have been talking to you about today—one of them which may restore in the future certain forms of tax avoidance of the past, and of continued concentrated investment power, which we in Washington had begun to end; and the other feature, a definite abandonment of a principle of tax policy long ago accepted as part of our American system.

Two things we can well remember.

The first is that our whole tax system, state, local and federal, can and must be greatly improved in the coming year.

The second is that we in this country are getting more practical results in the way of bettering the social conditions of the nation out of our taxes than ever before in our history. That is why it is a pretty good idea to talk taxes not only to parents of America but also to the younger generation of America.

I have been thrilled today by all I have seen. I have been made happy in meeting so many people that I have heard a lot about, by seeing them in their own homes, by seeing the splendid work that has been going on. I want to tell you, my friends of Arthurdale, that I am proud of what I have seen today and I am proud of all of you, old and young alike, who are helping so greatly to make this community an American success.