Offer an adequate response, anticipatorily, to the current international situation; and

Fully consider the prospective Federal surplus for the fiscal year ending June 30, 1948.

That a need for substantial tax relief for American taxpayers exists is not to be questioned. Very little relief has been forthcoming since the substantial increases in tax rates encountered with the enactment of the Revenue Act of 1941.

Compared to the year 1929, a most prosperous one, the demands upon the American taxpayer today are incredible. By way of a few comparisons: In 1929, a man with a $4,000 net income, after exemptions, paid a $60 tax. On the same income, in 1947, he paid $798, or over 13 times as much. A taxpayer with a net income of $8,000, after exemptions, in 1929, paid $180 in taxes; in 1947, $1,862, or over 10 times as much. A taxpayer with a net income of $25,000, after exemptions, paid a tax of $1,450 in 1929, and $9,634 in 1947. In 1929, the top surtax bracket, that is, net income over $100,000, was taxed at a rate of 25 percent.

The CHAIRMAN. Is this a married man or a single man?

Mr. FOOSANER. It is any individual, after exemptions, sir.

Under the law today, the top combined normal and surtax rates total approximately 8612 percent.

In 1929, the national income approximated $87,000,000,000. While the national income in 1947 was more than twice that of 1929, the average taxpayer today is carrying from 4 to 14 times the income tax load.

Here are several observations. A man with a $25,000 net income, after exemptions in 1929, paying $1,540 in income taxes, had approximately $23,500 for his own use. Under the law today, with the same income, a taxpayer pays $9,640, and is left with approximately $14,400. Noting that approximately 50 cents in 1929 bought what costs $1 today, in effect a taxpayer who was permitted to spend approximately $23,500 in 1929 must manage to get along on approximately $7,200 today.

It might be added that even if a taxpayer earned twice as much, or $50,000, in 1947, he would still only have about half as much to spend as he had in 1929 with half of the income.

Under the Federal income tax law today, citizens of community property law States are favored. On the other hand, by virtue of amendments to the Code made through the 1942 Revenue Act, citizens of community property States are subject to certain additional estate and gift tax burdens, with which citizens of noncommunity property States are not concerned. While all citizens should enjoy split-income tax benefits, cognizance must be taken of the 1942 estate and gift tax provisions affecting citizens of the community property States. Succinctly, H. R. 4790 provides the following:

1. Increased personal exemptions for taxpayers and dependents from $500 to $600.

2. Split-income tax benefits for spouses in all States. 3. Repeal of 1942 community property amendments. 4. New estate tax provisions.

5. New gift tax provisions.

6. Additional $600 exemption to taxpayers attaining age 65. 7. Additional $600 exemption for blind taxpayers.

8. Income tax rate reductions.

Observing the higher cost of living, citizens in the lower income tax brackets would be greatly assisted financially by an increased personal exemption from $500 to $600.

In practical operation, the savings here would be substantial. A table has been attached to indicate the variance in these savings.

It has been estimated that by increasing exemptions from $500 to $600, approximately 6,000,000 low-income earners would be removed from the roll of taxpayers. It has also been estimated that the over-all decrease in Federal revenue here would be $2,000,000,000. This would not constitute a complete loss, however, since by reason of removing the 6,000,000 taxpayers, substantial savings in administrative outlays would be effectuated. The Federal Tax Lawyers Committee favors these increased personal exemptions.

There are at the present time 12 States which have community-property laws. In addition, of course, is the possession of Hawaii. Oklahoma enacted its present community-property law in 1945. Oregon, Michigan, and Nebraska all enacted community-property laws in 1947. In each of these instances, the sole motivating factor for the enactment of a community-property law was to effectuate income-tax savings for the married citizens of the above respective States. Pennsylvania also enacted a community-property law for the avowed purpose of securing income tax benefits. This law was declared unconstitutional on November 26, 1947, by the supreme court of that State.

In New Jersey, a bill has been introduced for enactment of community-property law in that State. Rhode Island has appointed a special committee with a view to adopting a community-property law, and in New York the subject is being seriously discussed. The married citizens of the 36 non-community-property States have been discriminatorily treated from an income-tax viewpoint. The citizens of the country, as a whole, favor the split-income tax treatment for married couples of all States. I say that advisedly, having discussed that situation with many citizens in the 12 community-property States.

It has been estimated that a law enacting the split-income benefits would result in a revenue loss to the Treasury of approximately $600,000,000. The Federal Tax Lawyers Committee favors such a split-income tax bill.

Repeal of 1942 community-property amendments is another factor. H. R. 4790 proposes a repeal of the following sections of the provisions of the Internal Revenue Code:

811 (d) (5) respecting the inclusion generally of community property transferred in contemplation of death.

811 (e) (2) respecting the inclusion generally of all community property in the gross estate of the spouse who is the first to die.

811 (g) (4) respecting the inclusion generally of life insurance proceeds where premiums were paid from community-property funds. 1000 (d) which presently provides that all gifts of community property are considered to be the gifts of the husband, with certain exceptions.

It is believed that the citizens of the community-property States are entitled to some alleviation from the present provisions of the sections above enumerated. It is also concluded that an outright repeal of the 1942 amendments, however, will once again discriminatorily favor these citizens as against those domiciled in non-community-property States. Recognizing this fact, an endeavor has been made through the new provisions contained in H. R. 4790 to equalize the tax treatment of all citizens for estate and gift tax purposes insofar as is practicably possible.

The CHAIRMAN. Roughly speaking, it simply extends the splitting feature to estate and gift taxes.

Mr. FOOSANER. It attempts to do that, but simultaneously invites some ambiguities that I would like to touch upon.

A studied consideration, however, of the various new provisions contained in H. R. 4790, leads us to the conclusion that provisions as presently proposed leave much to be desired. Admittedly, the provisions treat with some very difficult adjustments. This being so, maximum care and study must be devoted to avoid ambiguities. Only such provisions as will treat all citizens fairly for estate and gift-tax purposes and as will simultaneously be capable of meeting most of the situations which are likely to be presented, should be enacted into the new law.

In a conviction that this entire question of new adjustments to accomplish an equalization of estate and gift tax treatment for all citizens requires a great deal of further study, it is recommended that:

1. The estate and gift tax sections above referred to be repealed with the enactment of the current tax reduction law; and

2. That the proposed estate and gift tax equalization provisions be studied further with a view to accomplishing both greater clarification and simplification.

It seems to me, if I may point out to this body, that this law as drafted might possibly invite a multiplicity of interpretations.

The CHAIRMAN. Have you discussed the matter with Mr. Stam, the director of our committee?

Mr. FOOSANER. I have not had occasion to do so.

The CHAIRMAN. I wish that you would get in touch with Mr. Stam and have a talk with him while you are here.

Senator GEORGE. In what sort of a situation would it lead to a lot of ambiguities and uncertainties? Can you give us one example? Mr. FOOSANER. For example, under the new proposed estate tax law, there would be a so-called marital deduction.

Senator GEORGE. That is under the gift taxes?

Mr. FOOSANER. Under the estate-tax law. The marital deduction would prevail in favor of a spouse. That is circumscribed by certain limitations. So it is provided, that if one spouse, say the wife, has a right to have all of the income from the corpus of the trust, the testamentary trust, with no right to invade any portion of the corpus, either through herself alone or in conjunction with another trustee or trustees, but has full power of appointment and full power to generally dispose of the entire estate, the marital deduction is warranted. Senator GEORGE. You have then effected a division of the estate. Mr. FOOSANER. Yes.

Now, to get it down concretely, Senator George, assume, that subject to the new limitation, $1,000,000 is left in the form of testamentary trust for the benefit of the surviving wife only to the extent of its income. There are no children. She has a full power of disposition of the corpus. She outlives her husband by 15 years, and then through her last will and testament, through the exercising of a general power of appointment, leaves the entire $1,000,000, which has remained intact because she has had no right to invade the corpus, to a second cousin. This, as I see it- and I am not trying to interpret it for the courts--would permit the passing of this entire $1,000,000 so left in trust, to a second cousin tax-free, at the time of the husband's death. The marital deduction would be permitted in the computation of the original estate by virtue of the fact that the wife had no right to invade the corpus during the period of the testamentary trust, notwithstanding the fact that she had a full general power of appointment to any individual or individuals.

Senator GEORGE. Under this bill she could dispose of it to any class, second cousin, or even strangers.

Mr. FOOSANER. Total strangers, as I read it.

Senator GEORGE. If that is right, it does look like it goes a little too far.

The CHAIRMAN. Let me repeat my suggestion that you get in touch with Mr. Stam, who is the Director of the Joint Committee on Internal Revenue Taxation, which advises this committee and the House Ways and Means Committee on the technical draftsmanship of these bills, and I am sure that he would like to have the benefit of your comments. Mr. FOOSANER. I might add, if Senator George desires me to do so, that while this seeks to equalize from an estate- and gift-tax viewpoint, it completely ignores a situation, for example, where a man is divorced or his wife is dead and he has four or five infant children. In such a situation there would be no such things as a marital deduction be: cause these new provisions of H. R. 4790 deal with spouses only.

I might also supplement my comments by saying that one of the estate-tax provisions of the Internal Revenue Code which would be repealed, introduced by the 1942 amendments in the act adopted then, would, subject to the new proposed limitations, now remove life insurance proceeds payable upon the death of the decedent, with premiums from community property, from his gross estate. Today, in 36 non-community-property States, where a man pays premiums directly or indirectly, or possesses any of the legal incidents of ownership in a life-insurance policy, either exercisable by himself alone or in conjunction with some other person at time of death, all of the proceeds, irrespective of the fact that they may be payable to a named beneficiary or named beneficiaries, are held to be includible in his gross taxable estate. But through the repeal of 811 (g) (4), all premiums can be paid from community property, which as a practical matter may have emanated or originated with the deceased spouse, the husband, and yet these proceeds, subject to the over-all limitation presently proposed, will be excluded in computing the adjusted gross

estate.

I mention those as some of the thoughts that struck me in trying to reconcile the various aspects of this bill.

The CHAIRMAN. You may proceed.

Mr. FOOSANER. Observing the present national income, the probable Federal surplus at the end of the current fiscal year and the tax relief which our taxpayers require today, it is concluded that an over-all tax reduction of $4,000,000,000 should be presently made.

The new split-income tax law, the increased personal exemptions, and the repeal of the estate and gift tax provisions affecting citizens of community-property-law States, will result in a total loss of revenue aggregating somewhat less than $3,000,000,000. An additional billion dollars in the form of income-tax-rate reductions can, and should, be made at this time.

Senator GEORGE. I think that you have pointed out, and as I read the House bill, it does seem to go a bit too far. While the 1942 act as it was construed was unfair in the community-property States with reference to the estate tax, this bill does seem to go a bit too far, and I hope it will be studied, Mr. Chairman.

Mr. FOOSANER. As a matter of fact, I might say this, Senator George, for the temporary alleviation that the residents of community-property States might receive by virtue of a some $60,000,000 loss in revenue as contemplated, there is an offsetting series of complicated situations which they encounter, not sustained by citizens of noncommunity property States. One of the finest things that happened, probably, in the State of Pennsylvania, was for the supreme court of that State to declare its law unconstitutional on November 26, 1947, because the citizens of that State became involved in many complicated and intricate problems..

Senator GEORGE. I think so, too. I hastily read that law, and I would have regretted it very much had I the responsibility of interpreting and administering it.

Mr. FOOSANER. My only purpose in making that last comment is to indicate that even if, in the final analysis, citizens of communityproperty States were to receive a slight estate- or gift-tax advantage. This advantage would be more than offset by the burden or responsibility that they must carry.

Senator GEORGE. They will have some additional burdens that they must carry that you do not get by merely splitting the income for income-tax purposes.

Mr. FOOSANER. I should like to file these schedules with the committee.

(The schedules referred to follow :)

Names and addresses of members of Federal tax lawyers committee