GENERAL REVENUE REVISION (General Discussions) WEDNESDAY, JANUARY 29, 1958 HOUSE OF REPRESENTATIVES, Washington, D. C. The committee met at 10 a. m., pursuant to recess, in the hearing room of the committee, House Office Building, Hon. Wilbur P. Mills, chairman of the committee, presiding. The CHAIRMAN. The committee will please come to order. Mr. Herlong. Mr. HERLONG. Mr. Chairman, I now ask unanimous consent that I may be permitted to insert into the record a statement by George Wilson of Dyersburg, Tenn., the home of our late chairman, the Honorable Jere Cooper? The CHAIRMAN. Without objection, it will be included in the record at the appropriate place. (The statement is as follows.) STATEMENT OF GEORGE WILSON, DYERSBURG, TENN. My name is George Wilson, and I am secretary-manager of the Dyersburg, Tenn., Chamber of Commerce. I am here representing some 20 businessmen of the home district of the late Representative Jere Cooper. During the recess of Congress, just prior to his unexpected death, your late chairman talked with these gentlemen and invited them to present their views on the subject of taxation to this committee. Before presenting these views, I want to take the liberty of saying that I was as shocked as I know you gentlemen were by the sudden passing of Representative Cooper. He was my long-time, personal friend, and the people of his home district feel his loss even more keenly than does the Nation. The men whom I represent request that this committee, in its overall examination of our tax structure, give a special examination to the tax exemptions of consumer cooperatives. These organizations, growing both in number and in size, seem to present a threat to the general tax structure. It is our feeling that this committee, with its specialized knowledge and expertness, can determine the seeming dangers in the exemptions of these cooperatives. Generally, it is the belief of those whom I represent that the first real breath of fresh air to penetrate the stifling atmosphere of excessive taxation of recent years has been generated by the identical bills, H. R. 6452 and H. R. 9119, introduced by Representatives Sadlak and Herlong. The members of this committee are more familiar with the provisions of these identical measures than I am, so I will not attempt to go into any detail concerning them. I would, however, like to quote briefly from the remarks of Representative Sadlak, made last March in the House. I quote: "There can be no doubt that both the present high combined corporate tax rate and the steeply progressive individual rates are serving to prevent an adequate flow of investment funds, and especially venture capital, into new and expanding business. In fact, it may be stated flatly that this Nation has a severe shortage of new capital, and especially venture capital, because the tax laws are designed to produce such a shortage. The extremely severe rates in the middle- and higher-income brackets are an especially limiting factor on the accumulation of new capital for investment in new and growing enterprises. "When this situation is considered in relation to the needs of a rapidly growing population, and millions of new workers coming into the labor force, it becomes clear that the time has come to begin an orderly plan for reducing the rates which discourage individual effort, prohibit adequate savings, and threaten the industrial vitality and supremacy of our Nation. Even under a fair and moderate rate structure, our economy may be hard pressed to generate all the savings needed to meet all opportunities to advance production and living standards without inflation." Despite the many events and the many changes in the world, it is difficult for us to realize that this Nation has had an income-tax law for only 45 years. In view of today's tax rates, it is almost unbelievable to recall that under the 1913 income-tax law the rates varied from 1 to 6 percent; that the 1-percent rate applied to incomes of $20,000 to $22,000; that the 6-percent rate applied to income over $200,000; and that the personal exemption for married persons was $4,000. In the whole year of 1913, income-tax collections amounted to $35 million; today, working only a 40-hour week, the Bureau of Internal Revenue collects $35 million every time another hour and 28 minutes rolls around. However, I do not want to take up the time of this committee by recounting figures or harking back to bygone days. We live in the present; a present beset by many threats on many sides. If we believe even part of what we read and what we see, we must conclude that our very Nation is in danger from outside sources. This may be, but many of us in Tennessee do not worry so much about the destruction of our Nation from without as we do from within. We of the Volunteer State cling strongly to the basic American principle of the freedom of the individual. As our own Nation's history has written, there is nothingshort of outright tyranny-that is more destructive of individual freedom than excessive taxation. The very existence of this committee, and the fact that it is holding these hearings would seem to prove that you gentlemen, too, are aware of these things. The Tennessee businessmen whom I represent commend you for your efforts, and strongly urge that you report favorably on H. R. 6542 and H. R. 6119. By so doing you will be performing a significant service to the Nation. The CHAIRMAN. Our first witness this morning is Mr. Robert Anthoine of the Columbia University School of Law. Mr. Anthoine, while you appear at the invitation of the committee, will you please come forward, and for the purpose of the record identify yourself by giving your name, address, and the capacity in which you appear. STATEMENT OF ROBERT ANTHOINE, SCHOOL OF LAW, COLUMBIA UNIVERSITY, NEW YORK, N. Y. Mr. ANTHOINE. My name is Robert Anthoine. I am a professor of law at Columbia University. The CHAIRMAN. Professor Anthoine, do you have a copy of your statement available? Mr. ANTHOINE. I regret that I have no prepared statement, sir.. I have only some notes. The CHAIRMAN. That is perfectly all right. Mr. ANTHOINE. I would like to make a preliminary observation that the excellent papers in the document, Federal Tax Policy for Economic Growth and Stability, submitted by panelists before the Subcommittee on Tax Policy of the Joint Committee on the Economic Report in late 1955, leave little new material for one to comment upon. However, I would like to make some general observations and then discuss a few specific points. I think, first of all, that we have to recognize that our system today is much more of a schedularized system than one might expect. We take different classes of income, from different sources, and treat them differently; that is, we have income from natural resources in one category; tax-exempt interest which is not taxed at all on any schedule; we have capital gains which are treated separately, schedularized, so to speak, and indeed, within the category of capital gains we do, of course, have a wide variety of items today, not only stocks and securities but also restricted stock options that are perhaps more in the nature of additional employment income, the special provision for taxing inventors as distinguished from authors, and so forth. I personally think it is unfortunate that we have this tendency to schedularize the system. I would prefer to see us remove most of the special provisions and reduce rates overall and perhaps avoid the socalled anti-incentive effects through the lower rates. That is to say, I would like to see, if possible, the reduction of the top rate to about 65 percent and certainly the maximum effective rate of tax down to at least 65 percent. This would be desirable in several contexts. First of all, it would seem to me that it would enable the committee to eliminate some features of the law today, such as restricted stock options which are regarded as incentive provisions for executives who are otherwise taxed at enormous rates; secondly, it would avoid a lot of the falderal today in connection with the use of corporations. It is really rather surprising to see some people so pleased as Punch that they can throw income into a corporation taxed at a 52 percent, flat rate, even with the knowledge that it is going to cost them another 12 percent to get it out, even at capital-gains rates, when, on the ultimate liquidation of the company, they will pay one-fourth of the remaining 48 percent, for an effective rate of tax of 64 percent on the entire income. Yet I am sure that a good many of the plans today for high-income people contemplate the use of corporations. We have heard of it in connection with the Hollywood situation. It seems to me if you reduced the maximum rates down to about 65 percent, in that neighborhood, you would obviate the necessity for these rather strained forms of doing business. It is true that in some businesses it is possible to utilize multiple corporations. Under this technique, the income of the corporation is kept, if possible, down to a $25,000 level, with the result that the corporate tax is 30 percent only. Accordingly, on the subsequent liquidation of the company, under the present capital-gains structure, the maximum rate of tax is in the neighborhood of 472 percent on the entire income. This is not a feasible way of doing business in most situations, but I expect that it is possible in some particular enterprises. In connection with a further examination of rates and exemptions, I would think that in conjunction with a reduction of the top rates, it would be desirable either to increase the personal exemption or, in the alternative, to cut the rate in the first bracket. I think exemptions are rather low in terms of the cost of living; consider what has happened to the cost of living since the $600 exemption went into the law. On the other hand, one has to consider the side effect of losing a great many taxpayers from the tax rolls and the possibly more desirable alternative, therefore, of simply reducing the rate in the first bracket, or reducing the rate to, say, 10 percent on the first $1,000 of income. With respect, again, to the schedularization of income, and I see it, the class of taxpayers that seems to be in the most unfavorable position today is the group of wage earners who have no means of avoiding the high rates in the upper brackets. I think that if you applied, for example, the percentage depletion idea of natural resources income, you would have to say in terms of the demand today for scientists and science teachers, that a portion of their income should be deductedin the fashion of a depletable in-oil payment-as an allowance for earned income, with the result that their effective rate of tax would be considerably reduced. I personally do not think that is the way to do it. I would rather that we eliminated such features and moved in the other direction of a more uniform tax base with, again, the rates coming down sharply, and if an incentive is needed for particular activities, such as drilling oil wells or providing inventions for national defense, and so forth. simply that we provide a direct Federal subsidy and let it be taxed to the recipient so that those who deserve need the money get it and those who can afford to pay the tax on it do so. There are two other general points. First, on capital gains: I know the subject has been discussed up and down for years. A great many people would like to lengthen the holding period for capital gains and perhaps increase the rates. Others would like to go the other way. As far as I can see, no two people who want to tighten up the capital-gain holding period provisions, and so forth, are able to arrive at the same answer. I must say, in batting it around, that I cannot come up with any better suggestion, as far as holding period goes, than the law that we had in effect here from 1934 to 1938, or at least something close to it. Under that scheme, say after a 1-year holding period, the taxpayer would be allowed to exclude 20 percent of the capital gain from gross income; after 2 years of holding period, he would be allowed to exclude 30 percent; after three years 40 percent, and so forth, possibly going as far as the 1934 to 1938 law did by excluding 70 percent of the long-term capital gain after a holding period of 10 years. Of course, on the theory of bunching of capital gain you should not go this far, you should not exclude a portion of the capital gain from income. Rather, you should permit averaging of the gain over a period of years. Perhaps such a provision is too much to expect. however, and at least under the present situation I would be contented if the holding period were extended along these lines. Of course, I think, too, that the nature of capital gains should be examined to be sure that some of these items such as restricted stock options and the treatment of inventors are eliminated, and the law made more consistent. One other general point I would like to make is with respect to an integrated transfer tax. It seems to me that we should strive to attain an integrated transfer tax that would cover the present gift and estate taxes, would provide an increase in rate on dispositions through life and at death. I think that we could do a lot more with the transfer tax than we are now doing today. The burden of estate taxes is really quite light after you take into account particularly the marital deduction. Even if one does not consider the possibility of the gifts to the family foundation or other charitable bequests, and other provisions, the marital deduction itself produces a rather astonishingly low rate of tax on a substantial estate. While it is true that in absolute amounts, the forecast for revenue from the estate and gift-tax laws is on the upgrade a bit-I think about 1.6 billion for fiscal 1959 is predicted-a good deal more could be done with an integrated transfer tax. It is a rather easy way of obtaining funds and also I think that it does not have any of the antiincentive provisions that an income tax does. For example, I would prefer to see a strengthening of the estatetax structure rather than an increase in income tax rates, although this is a somewhat impractical comparison because the amount of revenue that you can derive from the estate tax is sorely limited. With respect to a couple of other points, I think that in connection with capital gains and in connection with an integrated transfer tax, 1 point should be considered, and that is that the present provision which permits property to take a basis equal to its fair market value at the date of death or 1 year after death should be removed. It seems to me that the basis of the property in the hands of the estate should be continued at the low base of the owner or, preferably, I think distinctly preferably, that the unrealized gain or loss should be taken into account in the owner's last few income-tax returns. I think that that would have a marked effect upon planning and also upon the socalled locked-in feeling that people have with respect to capital gains. I think on some particular issues that the problem of pension and profit-sharing plans needs some study, primarily, perhaps, not by this committee, but at least in conjunction with other committees, to determine to what extent the tax laws should be reshaped if at all. The problem is one that goes well beyond taxes, however, and when one considers the enormous amount of assets now held by pension and proft-sharing plans, which I believe is over $30 billion at the present time, and which may well go on up to $70 or more billion before leveling off, I think certainly that some equalization should be made between the trust that is used as compared with the insurance company funding. I understand that the life-insurance companies bear some small, perhaps 7 or 8 percent rate of tax on the reserves that they have for the pension funds that are left with them as distinguished from the notax that now applies on the pension trusts set up by the company. I do not think it is feasible to tax pension and profit-sharing trusts more than perhaps a nominal amount, but I would certainly tax them a nominal amount rather than to go the other way and exclude the insurance companies from any tax on them. I think there are some other points that have been mentioned many times before that deserve consideration, such as possibly taxing interest on future municipal bond issues, although again we get there into a problem that is perhaps semipolitical science. I would think, though, that despite the enormous need by communities for new schools, school construction could be handled without the tax subsidy now granted. to such bond issues and their holders. I am frankly not qualified to say to what extent tax exemption of municipal bond interest encourage uneconomical borrowing, but I can see that it is a difficult problem. |