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Court Kills the A.A.A.

To all intents and purposes, the processing tax, which is almost as vital to the A.A.A. as the code system was to the N.R.A., is as dead as its brother child of the New Deal. The United States Circuit Court of Appeals for the First Circuit on July 16 held the A.A.A. processing taxes unconstitutional. The case arose on a claim by the United States against former Senator William M. Butler and other receivers for the Hoosae Mills Corporation, operators of Massachusetts cotton-textile mills. Since the case was decided, several injunctions against the collection of A.A.A. taxes have been issued by federal judges in various parts of the country.

Processors may now either ask for injunctions against the payment of the tax or simply refuse to pay, as many of them are already doing. In that case the government can collect only by obtaining a favorable decision from some other circuit court or reversing this decision in the Supreme Court after that body reconvenes next fall. Either course seems likely to be unsuccessful. Although there are ten circuit courts of appeals and the Boston decision was not unanimous, the holding is likely to stand because it applied the principle stated by the Supreme Court in the recent Schechter case, which held the N.I.R.A. invalid.

The stated purpose of the A.A.A. is to increase agricultural purchasing power. In the original act seven basic agricultural commodities were recognized. These were wheat, cotton, corn, hogs, rice, milk and tobacco. The objective was to raise prices of all of them to a point that would enable the farmer's produce to buy as much as in a base period from 1909 to 1914, except that in the case of tobacco the base period was from 1919 to 1929.

The law gave the Secretary of Agriculture two groups of powers. Those in the first group enabled him to pay various sorts of bounties and rental allowances to farmers who cooperated in a cropreduction program. The second group dealt with marketing agreements and licenses. Powers in the second group were not limited to the basic agricultural products. To meet the expenses contemplated by the crop-reduction schemes. Congress appropriated $200,000,000 and in addition allowed the Secretary of Agriculture to impose certain processing and compensating taxes and expend their proceeds. A processing tax was levied on the first domestic processing of the commodity. A further provision allowed a tax on floor stocks of a com. modity and its products where the commodity is subject to a processing tax. This was to remove any advantage to manufacturers who laid in a large stock before the processing tax went into effect. The Secretary of Agriculture had discretion to determine when, if at all, a tax should be levied in respect to any basic commodity, and the rate of the tax, which could, of course, be changed from year to year.

The economic logic of the measure was clear. Supplies of crops had been increasing or remaining virtually constant, while their prices fell. Manufacturing or mining industries, faced with a similar situation, reduced their output and held up their prices, as far as they were able—and many of them did so with considerable success. Farmers, however, being numerous, highly competitive and without large capital resources, could not practise voluntary reduction of output. This law provided them with a means of paralleling industrial practice. They were induced to restrict production by government benefit payments. Money to pay these benefits was collected from those who processed the crops on the way to the consumer. Thus the result, both to producer and consumer, was precisely the same as if the farmers, like the manufacturers, had restricted production of their own accord. The grower got more per unit, and what he got, the consumer paid. Sometimes the consumer paid more than the extra amount the farmer collected, and sometimes less, but by and large the thing worked in that way.

The case decided in Boston involved both processing and floor taxes. The Boston court said these taxes were unconstitutional for two reasons. First, it was evident from the declared purpose of the law that it was not a revenue measure but an attempt by the federal government to control the production of farm products. This power is nowhere granted to Congress. The Tenth Amendment specifically reserves to the states and the people all powers not assigned to the federal government. The power to regulate commerce, said the court, gives Congress no power to control products of either agriculture or industry before they enter interstate commerce, merely because their production indirectly may affect interstate commerce. Second, the court said that Congress had unconstitutionally delegated legislative power. Only Congress can determine what property shall be subject to taxation. No definite, intelligible standard, it was held in this case, had been set up bjr Congress. To paraphrase the decision, the court said that in order to control crop production and raise farm prices. Congress authorized the Secretary of Agriculture, within broad limits, to determine who and what was to be taxed, and how much. What Congress was trying to do is unconstitutional, and even if this were not so. Congress could not abdicate its own legislative powers in favor of the executive branch of the government.

On both points the Circuit Court of Appeals professed to follow the Supreme Court's decision in the Schechter case. It will be recalled that the Supreme Court held that Congress in the N.I.R.A. had unlawfully delegated legislative power to the President, and that, furthermore, the N.I.R.A. attempted to control intrastate trade having only a remote and indirect effect on interstate commerce. The Boston court had no occasion to pass upon the functions of the A.A.A. relating to manufacturers' codes and licenses. Most of these, however, are subject to the condemnation of the Supreme Court under the doctrine of the Schechter case.

Processing taxes amounting to about half a billion dollars a year are now being collected. Approximately $900,000,000 realized from processing taxes have already been distributed to farmers. The A.A.A. has asked Congress to withdraw the privilege of suing the United States for the recovery of any processing taxes previously paid if the taxes are found to be unlawful. The Senate has modified this request by passing a bill allowing such suits only when the taxpayer can show the tax has not been passed on to its customers. The administration, as in its program of barring suits on bonds containing the gold clause, thus takes the position that it will refuse to acknowledge any responsibility on account of unconstitutional conduct. But manufacturers who have not yet paid their processing taxes will probably not be compelled to do so. The law barring tax suits thus will have only temporary operation. and will discriminate against those who have obeyed the law so far.

Apparently the decision docs not prevent the A.A.A. from making contracts with farmers to reduce output or from paying them benelits in that connection. But if the government is to raise the money to pay these benefits, it must do so out of taxes that have no ostensible connection with the purpose for which they are to be used. They might conceivably be ordinary sales taxes on foods, cotton goods and tobacco. But such taxes would be unpopular, inflexible and difncult to match closely against the benefits paid. It is quite possible that Congress would prefer to follow the inflationary route of paying the benefits out of borrowed funds or even by unsecured paper money. Of course, if the dictum of the court were followed through to its logical conclusion, the government could no nothing whatever to control the prices or "production of farm products.

It is ironical and unjust that what a large part of industry has power to do for itself by way of restricting output and maintaining prices, Congress has, under our judicially interpreted Constitution, no power to help the farmers to do. But in both cases the practice is anti-social and opposed to the best interests of farmers and workers alike. It would be much more to the point if Congress, to give parity to the farmers, could reduce industrial prices and enlarge industrial production. Any such attempt at control of industry, however, would also be unconstitutional under the Schechter and previous decisions. The courts forbid the government from doing anything important to regulate the national economy, whether it is bad or whether it is good. That is, they forbid it from doing anything that privately owned industry does not want done.

Relief to the farmers might come from the reduction of the tariff and a reopening of foreign markets. But since private interests do not sanction this course, either here or abroad, it is a policy that is not likely to be tested. If, as a result, we continue to grow more wheat or cotton than is really needed in this country, the only permanently sound solution would be, as Mr. Tugwell pointed out several years ago, a revolutionary change in land utilization, a shifting of population, and the growing of more fruit and vegetables, more pasturage, more forests in place of th'e discarded crops. But this would be almost equally difficult to achieve, and it would not work unless city populations had greatly enlarged incomes with which to purchase a more liberal diet. Again we should run into the obstacle of the Constitution, the courts, and private property in the means of production.