Tax Reform Now

June 25, 1962

The Administration is to be congratulated for recognizing that tax reform and a reduction of the total burden of taxes are imperative if we wish to reduce the deterrents to production. But the Administration refuses to consider the reversals in its policies and attitudes that would be necessary to put these reforms into effect. At the moment, it is suffering from schizophrenia. It has begun to talk about a new tax-reform and tax-reduction bill for 1963. But it still insists that Congress must go through with the tax bill now before it. This is as if Mr. Kennedy were to say: “Before you consider a tax bill to restore business confidence you must first of all pass the existing bill that tends to undermine it.”

TO RESTORE CONFIDENCE

Business confidence needs to be restored now, as quickly as possible. A big step in this direction could be taken if the Administration abandoned several features of the existing tax bill and agreed to some changes it is talking about for next year:

1—Congress should abandon, or postpone for further study, the proposal for tax withholding on interest and dividends. This has been correctly described as “impractical, unnecessary, and unwise.” It would create an administrative nightmare both for business and the government.

2—The Administration should abandon its proposals for punitive taxation of income from sources abroad. These proposals would force American companies operating abroad to bear simultaneously the full weight of foreign taxes plus the extra weight of higher U.S. income taxes. Prof. Dan Throop Smith of Harvard has characterized this section of the bill as bad in principle and raising administrative problems “which are little short of appalling.” The June monthly letter of the First National City Bank of New York presents an excellent analysis of the harmful features both of the tax-withholding and foreign-income provisions of the present tax bill.

3—The consensus outside of Administration circles is that the proposed 8 percent investment tax credit is too complicated, inequitable as between various types of business, and a doubtful long-run incentive to investment, especially because of the “compensating” tax revenues the government asks for. It would be far simpler, fairer, and more stimulating to investment to allow a depreciation write-off of, say 30 or 40 percent in the first year, or to write faster depreciation schedules into law, as in Canada.

4—The tax burden on corporations is excessive, and a deterrent to investment and production. At least one reform would be possible immediately. This would be to keep the 52 percent corporate income tax only on retained earnings, and to tax at only 50 percent all dividends paid out. As dividends when received are also taxed as personal income, they are subject to a double taxation that is a drastic discouragement to investment and economic growth. The differential should eventually be much greater than the 2 percentage points here suggested. But at least the principle of differential tax rates on retained and distributed corporate earnings should be established now. If this were substituted for the present $50 dividend exclusion in the personal income tax and the 4 percent tax credit against dividends received it would mean no net loss in government revenues.

5—All personal income-tax rates in excess of 65 percent should be dropped to that level now. This would mean practically no loss in government revenues. In fact, even if the top rates stopped at 50 percent there would almost certainly be a net long-run gain in government revenues. But this would be far less important than the stimulus this change would give to production and investment.

These changes in the tax laws would reduce immediate tax revenues very little, and long-run tax revenues not at all. But their moral effect would be immediate. They would reassure business and stimulate investment. This stimulating effect will not be achieved by tax cuts merely designed to create budget deficits and more inflation, nor will it be achieved by the deplorable kind of speech Mr. Kennedy made at Yale, contemptuously dismissing all criticism of his policies as “worn-out slogans” based on “myths.”