of 60 per cent. This high rate of tax became applicable if during the earlier part of the year, before September 10, its profits had been over 33 per cent upon its invested capital; since under the provision of the Act of October 3, 1917, all earnings in excess of 33 per cent on capital became subject to a tax of 60 per cent. Many mills had made such large profits during the earlier part of the year that their ensuing profits became taxable at this high rate. At the same time, during the period after September 10, 1917, the profits of the mill(s) were restricted, being subject to the regulation by which they were not to exceed twenty-five cents per barrel, and it was these "restricted" profits that became taxable at the 60 per cent rate. As compared with a mill in this position, another whose taxable year was not the calendar year, but ended on June 30, 1918, or August 31, 1918, might be taxed lightly upon its profits earned during the period of regulation. Such a mill would pay a rate of tax based upon its earnings for the taxable year 1917-18, presumably kept within moderate bounds by the regulations of the Food Administration, and therefore presumably taxed at a low rate.

Other unexpected and apparently inequitable results ensued from the operation of the excess profits tax law. Some were connected with the different rate of capitalization of different mills, due to their varied history (in the past). These brought it about that mills with low capitalization were generally more heavily taxed than mills with high capitalization. Certain mills again, unlike the majority (?), had made small profits during the first half of 1917 and, having been assigned a heavy grind in the autumn of that year, made larger profits during the food regulation period, with a consequent tax rate different from that of their competitors.

This whole problem of the incidence of the excess profits tax and income tax was referred by Mr. Hoover to a commission headed by Professor F. W. Taussig, appointed in March, 1918, to consider some of the problems of regulation of the milling industry and to make suggestions for improvements in the regulations already issued and for the recasting of the whole method of regulation for the crop year beginning July 1, 1918. This commission gave much attention to the question raised by the interposition of the excess profits tax upon the milling regulations issued by the Food Administration. It was impressed by the inequalities resulting from the rigid application of the Food Administration's announced intention not to recognize excess profits tax payments as items properly chargeable against costs of production by the mills in their accounts with the government, but it felt itself unable to attempt to readjust these conditions or to bring about identity of treatment for the different mills. It therefore reported that excess profits taxes, and income taxes also, should not be regarded as items of expense but as public levies which must come out of the profits of producers, as had been the normal case with all such taxes. The Food Administration acted promptly upon this recommendation and on May 15, 1918, announced to the trade that these taxes must be borne by the producers and not charged to the public. In one respect, however, the discussions before this commission of inquiry brought about a modification and readjustment in the operation of the excess profits tax. As has already been explained, many mills made profits larger than the allowable maximum during the closing months of 1917 because of the rush of grinding operations at that time. These large profits, in excess of twenty-five cents per barrel, were necessarily treated by the Food Administration

as

paper profits"; since, if maintained through the season, i. e., until June 30, 1918, they became subject to refund in one of the forms already indicated. It was possible, however, that the Treasury Department would consider the profits made during this period as taxable to their full extent, irrespective of the circumstance that the Food Administration would compel mills to cut them down sooner or later. As a result, however, of conferences between legal representatives of the Food Administration and of the Treasury Department, an arrangement was made by which these " paper profits (in excess of twenty-five cents per barrel) were considered as not necessarily part of the taxable income of the mills, but as subject to readjustment and abatement after proper verification and certification by the Food Administration, subject to suitable regulations by the Treasury Department.

XXI

The results of the year's milling operations under the cost plus method of regulation, while as satisfactory, perhaps, as could have been expected, indicated abundant opportunity for improvement. It was possible to formulate new plans of regulation with greater confidence because of the circumstance that the minimum price to the producers for wheat of the 1918 crop was a matter of formal government guaranty - a feature entirely lacking in the 1917-18 program. To this fundamental measure the entire food program, so far as wheat and flour were concerned, could be adjusted.

The probability of a continuance of the war for at least another twelve months made it prudent to enforce a continuing measure of conservation of wheat flour in the United States during the crop year 1918-19, in spite

of the increasing stocks of wheat in Australia and the Argentine and the very large prospective crop in this country in 1918. This implied a continuing limitation upon competition in the manufacture and sale of flour. The large and fairly evenly distributed wheat crop, taken in conjunction with the fact that the functions of the Grain Corporation became somewhat different under the price guaranty arrangement, made it practicable to relax somewhat the restrictions upon the grain trade and to allow a wider range of competition there than had been possible with the short crop of 1917.

It is beyond the scope of this paper to enter upon a detailed exposition of the new arrangements which became effective in July, 1918. Suffice it to say that the Grain Corporation announced a schedule of wheat prices which it was prepared to pay at the principal terminal markets, based upon the minimum government guaranty of $2.00 to the farmer,1 so arranged that the producers in the least advantageously situated districts could realize approximately $2.00 per bushel for their wheat at country shipping points. The control by the Grain Corporation of country elevators, as to retention and diversion of shipments,2 was relinquished and shippers were permitted to sell to whom they would. The mills were also allowed to buy from whom they pleased and to pay any price they pleased; of course, the lower range of competitive bidding was established by the offer of the Grain Corporation to pay at least the government guaranteed minimum. As a matter of fact, removing the fetters from the free play of commercial initiative led to a premium of several cents per bushel over the government minimum being paid for wheat during the early weeks of the new crop movement, in

1 The government guarantee then was $2.00; the President by proclamation subsequently made the figure $2.20.

2 See page 18.

spite of a movement the size and rapidity of which broke all records.

The principal limitations placed upon the mills affected the prices which they might charge for their products, the quantity of wheat which might be used in making a given quantity of flour, and the kind of flour which might be made. The Food Administration had got over its scruples concerning its own powers as to price-fixing and imposed upon the mills a fixed operating differential or margin -a figure by which the combined prices of flour and feed might not exceed the price (reckoned on the government purchasing basis) of an equivalent amount of wheat. The ratio of extraction was continued at 74 per cent (i. e., 4.4 bushels of wheat per barrel of flour), and the differential for the combined prices of a barrel of flour and the corresponding amount of offal (about 68 pounds) above the price of 4.4 bushels of wheat was set at $1.10. In other words the differential of $1.10 per barrel of flour included costs and profits. Thus, if the government price for No. 1 Northern wheat at Minneapolis were set at $2.20 per bushel, the price of 4.4 bushels would be $9.68, and the combined prices of flour and feed at the mill door might not exceed $10.78; further, if the government named price for mill feed (at say 41 per cent of the price of wheat) averaged $30.00 per ton, or one and one-half cents per pound, at that point, the maximum price for flour at the mill door would be $9.76. These regulations were easy to police since prices could be readily checked by the reports required from flour jobbers and buyers. Furthermore, they were compulsory; there was no element of voluntary agreement in them, as with the arrangements of 1917-18. Hence it became possible to dispense with the elaborate and expensive machinery of