A new principle of taxation which, if adopted, would demoralize the laws of supply and demand and tend to break down the NRA, as well as the AAA, is under consideration by the House Ways and Means Committee and the Senate Finance Committee.

The idea originated with the manufacturers of ten-cent cigarettes who are finding the increased costs brought about by NRA and the Processing taxes a bit too hard for them, something they did not anticipate when they started a vigorous price war in June, 1932--and now they are pleading with the government to let them have a lower rate of taxes by the simple device of classifying cigarettes according to selling prices. These ten-cent cigarette makers insist they would pass on some of the reduction to the consumer.

The argument for the reduction is that the people would buy more 10-cent cig- arettes and hence the internal revenues would increase. Members of the House Ways and Means Committee asked in a recent hearing why, if this were true, it would not be better to make a uniform reduction in taxes on all classes of cigarettes, since this would mean a lower price to the consumer. The defenders of the new principle have not given a satisfactory answer to that question.

The facts are, of course, that despite protestations to the contrary from some of the manufacturers, there is a decided difference in quality between the 10-cent and the 15-cent cigarette. Members of Congress from tobacco producing states indicated as much in their line of questioning when this subject was up before the committee in January.

Some of the larger tobacco manufacturers are prepared to prove that the purpose of the classified tax is really to demoralize the whole tobacco industry in the United States so that foreigners may be able to dictate the price at which they shall buy tobacco from American growers.

Thus of the 10-cent cigarette manufacturers the largest is owned 100 per cent by the British-American Tobacco Company, with offices in London, which in turn is owned about 33 1-3 per cent by The British Imperial Tobacco Company, and the remainder is scattered throughout the world, instead of being, therefore, a small independent unit trying to help the American Treasury get along, the chief proponent of the new tax idea is controlled and owned by a foreign concern.

The real object of the fight, it is asserted, is to break down the American companies into such fierce competition for volume that tobacco farmers will have to sell at a lower price. One of the large independent companies, wholly American owned, has telegraphed Senator Byrd of Virginia, that, while it makes a 10-cent cigarette and might temporarily benefit by the reduced tax, the situation that would be created would cost the tobacco farmers of Virginia and North Carolina alone approximately $30,000,000 a year through the effect it would have on tobacco prices.

Of far more significance, however, than a single industry is the principle involved in the controversy. Representative McCormack of Massachusetts, in opposing the classified tax, queried the proponents of it thus: "If you can do it with cigarettes, why not do it with anything else? Why not use the internal revenue laws to say we will put a lower tax on a California product than we do on a Massachusetts product, or a lower tax on a Kentucky product than on a Tennessee product, and so forth?"

The only argument in reply has been that tax revenues would increase if a lower priced cigarette could be stimulated by government action. The probabilities, however, are that the higher priced cigarette manufacturers would be compelled to put out a 10-cent cigarette to meet the competition, the public would get a poorer quality of cigarette all around, and the revenues which the government thought it had from the 15-cent product would diminish materially, and the farmer would get less for his product.

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Certainly once the principle were established there would arise all sorts of requests for discrimination in favor of lower priced-articles in competition and the whole revenue structure of the government from these excise taxes would be imperiled, to say nothing of the danger to the AAA if the processing taxes now levied on various products fell down in volume because of the government's own interference with the competitive forces and the laws of supply and demand in business and agriculture. It is inconceivable that Congress will approve a tax device which, under the guise of increasing revenue, really is an effort to penalize the farmer and to break down competing American companies which are large employers of labor and large purchasers of raw materials