Tax Reform Now

June 24, 1957

We are being warned from Washington that all hopes for tax cuts that would apply even to part of the fiscal year 1958 are vain and unrealistic. The tacit assumption on which all these warnings rest is that the proposed $72 billion expenditure total for 1958 is sacred and untouchable, and might “have to be” even larger.

Let us, for the sake of argument, grant that the $72 billion budget “can’t” be reduced—or at least won’t be. It is still possible to make, now, major reforms in our tax laws that would not reduce revenues at all.

We saw last week that if the present personal income-tax rate structure were cut off at a maximum of 50 percent, 98 percent of the revenue would still be obtained—even on the assumption that the drastic cut would do nothing to stimulate an increase in taxable income in the high brackets affected. But from the whole history of rate and revenue changes since 1916, as the Tax Foundation’s study shows, it is enormously probable that cutting off the top progressive rates at a maximum of 50 percent (instead of the present merely punitive 91 percent) would lead to an actual increase in governmental revenues.

DISCRIMINATIONS

Other major reforms could be made in the personal income tax that would involve only a negligible loss in revenue. One would be to reduce the present discrimination against irregular incomes. An inventor, novelist, or motion-picture actor may earn $100,000 this year and nothing for the next three years. He would pay (if single) a tax of $66,798. A corporation executive, on the other hand, with a $25,000 income for each of four years, would pay a total tax on his $100,000 of only $39,184. Such discrimination could be greatly reduced by allowing a taxpayer to “average down” his tax for a certain number of years on the basis of his average annual income over the whole period.

There are half a dozen different ways in which the great injustices in the present capital-gains tax could be mitigated.

The corporation tax is another area where a major reform could be made without reducing revenues. At present, corporations pay a “normal” tax of 30 percent on the first $25,000 of net income, and a “surtax” of 22 percent (or a total of 52 percent) on all net income above $25,000. This “progression” is quite unjustified. For a corporation earning $25,000 may be wholly owned by one rich man, whereas millions of low-income stockholders in big corporations are paying nearly 52 percent on their share of the net income of these corporations (before paying their personal income tax). Yet nearly all the bills in Congress to change the corporate income tax would carry this grossly misapplied “progressive” principle still further, either by reducing the tax on “small business” or by levying confiscatory rates (up to 75 percent, for example) on big corporations.

CORPORATE TAX CHOICE

There is a simple tax reform which would discriminate neither against sole proprietorships and partnerships nor against small corporations. This would be to make the corporate net income tax a flat 52 percent, but to allow any corporation the option in any year of paying the personal tax rate on net income instead. In practice (assuming present personal income-tax rates), this would mean that any corporation earning less than $46,000 a year would find it advantageous to pay the personal rates (although the personal income-tax bracket between $44,000 and $50,000 pays 72 percent). This plan would mean a smaller tax than at present for all corporations earning less than about $14,000 a year and a higher tax for others.

The net effect of such a change would be to bring in a higher total corporate revenue than the present system. This could be offset by allowing corporations a lower rate on the part of their net income that they paid out in dividends, in place of the present clumsy and confusing system of dividend credits for individuals.

These major tax reforms could be made immediately, to apply to income of the 1958 calendar year. They would not reduce revenues; they would remove inequities; and they would greatly stimulate economic progress.