Mr. MASON. Yes.

Mr. CAPLIN. I think it has been a relatively simple job to make that provision clear.

Mr. MASON. Then supposing we do make it clear in this revision, and I am the owner of a clay bed and I have been putting in this depletion allowance for the last 4 or 5 years. I have been handing out dividends on the basis of that and because of the uncertainty of it I have had to pile up in escrow, you might say, a lot of money that maybe the Treasury will collect from me some day and maybe it will not. Would you say in clarifying this that we should make it retroactive so that it would reach back for about 4 or 5 years.

Mr. CAPLIN. I would be satisfied if it were made prospective and at the same time the depletion rates were lower.

Mr. MASON. Thank you, sir. That is my attitude on this matter. Mr. HARRISON. Mr. Chairman.

The CHAIRMAN. Mr. Harrison will inquire, Mr. Caplin.

Mr. HARRISON. Mr. Caplin, I am sorry that I was late getting here. Did you state for the record that you are professor of law at the University of Virginia?

Mr. CAPLIN. Yes, sir; I have, sir.

Mr. HARRISON. Mr. Caplin, directing your attention again to page 10 of your statement, which Mr. Herlong asked you about, can you make any comment as to what, if any, loss of revenue there would be if there was a top bracket on individual incomes of 65 percent?

Mr. CAPLIN. I have seen some estimates from reliable people in the tax field indicating that a cut at 65 percent would not cause in excess of one-half billion. I have seen some figures slightly less than that. Mr. MASON. That is surprising. You are right.

Mr. HARRISON. Do you think it would cause any loss?

Mr. CAPLIN. I think about a half billion dollars under the present law, if you correct it at the same time as some of these other provisions, for example, a billion dollars could be picked up in oil depletion alone from some of the projections.

Mr. HARRISON. Directing your attention simply to a cutoff, is it not true that rates have gone as high as 91 percent, and a great many taxpayers who would have that 91 percent taxable income simply see to it that they do not have such and do not fall in such a bracket?

Mr. CAPLIN. I think from my own experience that when a person approaches the 91 percent bracket he will make every effort to take advantage of capital gains, possibly foreign investments, and many other provisions of the law.

Mr. HARRISON. Tax-free investments?
Mr. CAPLIN. Tax-free investments.
Mr. HARRISON. And hobby farms.

Mr. CAPLIN. And hobby farms, and oil depletion, which is a beautiful invitation to him. In other words, we are encouraging this sort of practice by having high rates and at the same time allowing tax havens, as they call them.

Mr. HARRISON. Can you name a percentage top bracket figure to which we can cut this back without any anticipated loss of revenue? Mr. CAPLIN. It would be very difficult for me to do that, sir. I think there must be some revenue collected at every bracket. If you just cut rates alone I think it is inevitable that we would lose. Mr. HARRISON. Is it not an offset in further ventured capital?

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Mr. CAPLIN. That is a theory that I do not feel competent to pass upon. I think that is certainly urged, if we cut the taxes we will have more-well, in this area not more purchasing power but greater incentive for investment, let us say.

Mr. HARRISON. In saying it is an area in which you do not feel competent to express an opinion, you put yourself in the same class with the Secretary of the Treasury, because that was his answer.

Mr. CAPLIN. I will tell you there was a good deal of material on this in the Joint Committee of the Economic Report, the joint committee report, which I think is quite valuable on this point, from qualified economists. I think they are quite helpful in understanding this problem.

Mr. HARRISON. Thank you, Mr. Caplin, very much.

Mr. CAPLIN. Thank you very much.

Mr. HARRISON. We appreciate your statement.
The CHAIRMAN. Are there any further questions?

Mr. HOLMES. Mr. Chairman.

The CHAIRMAN. Mr. Holmes will inquire, Mr. Caplin.

Mr. HOLMES. I notice on page 10, Mr. Caplin, and I am very much interested in your statement, "create a 10 percent bottom bracket." I think that, probably, has merit. As Congressman Harrison was talking about the top bracket, I like the merits of creating a 10 percent bottom bracket. How would you handle it administratively with a withholding tax?

Mr. CAPLIN. I would apply a withholding tax exactly as it is applied now with 10 percent, let us say, of the first $10,000.

Mr. HOLMES. You would be up against a tremendous number of refunds, operating in the face of around 30 million refunds annually, as well as 18 percent retained. You may be interested, and I think my memory serves me right, that at one time this committee did pass this legislation bringing that bottom bracket down to 10 percent and ran into so many administrative difficulties that the Senate threw it out. I may be wrong, but I think I am right in my recollection of that.

Mr. CAPLIN. Mr. Holmes, I would think we could adjust entirely our withholding procedure to reflect these decreased rates to attempt not to have these refund proceedings as much as possible.

Mr. HOLMES. You probably would have to have a double refund system, as near as we can think of now, in relation to the 10-percent bracket. I think it has merit, but I did want to call your attention that you have a tremendous administrative problem there in relation to bookwork and refunds in the Treasury Department. I am interested in your comments because I was interested at the time that the committee considered that 10 percent.

Mr. CAPLIN. I really think that the service has worked out a refund procedure rather simply at this time, merely requiring a filing of the form 1040 which would set up procuring a refund without any great detail of work. I also think that the question of overpayment could be handled in connection with reduction.

Mr. HOLMES. Without belaboring the committee very long, the gentleman who has just arrived here is Congressman Kean of New Jersey.

We are talking about the 10-percent bracket. Mr. Caplin is advocating a lower bracket to reduce the 10 percent.

I believe Mr. Kean was the initiator of that piece of legislation a few years back, were you not?

Mr. KEAN. In the 80th Congress we had it. I think it was 15 percent at that time.

Mr. HOLMES. Was it 15 percent?

Mr. KEAN. Yes.

Mr. HOLMES. Anyway, I was telling him, Congressman Kean, that Mr. Caplin has given a fine statement here. We ran into tremendous difficulties in relation to it.

Mr. KEAN. On the withholding?

Mr. HOLMES. On the withholding.

Mr. KEAN. The Democratic Secretary of the Treasury opposed it then, at that time, after it passed the House, after it got over to the Senate, on how he was going to withhold, and I took up the same idea again with the Republican Secretary of the Treasury a couple of years ago and again he threw up his hands and said "Where are we going to withhold? Ten percent is quite a problem, you know. Where are you going to withhold?" Otherwise there were a lot of thoughts and questions of additional payments.

Mr. CAPLIN. I think, from the revenue standpoint, if we could stand a cut to 10 percent, that it would be an extremely valuable contribution to the entire graduation of our graduated system, and I have confidence that administratively this could be worked out.

Mr. KEAN. I think it could if they really want to do it.

Mr. HOLMES. That is what I think.

I was yielding the floor to Mr. Kean. I think it can be. I did want to bring up that point.

I think there is merit in your suggestion, Mr. Caplin.

That is all for me, Mr. Chairman.

The CHAIRMAN. Are there any other further questions?

Mr. BAKER. Mr. Chairman.

The CHAIRMAN. Mr. Baker will inquire, Mr. Caplin.

Mr. BAKER. Do you have any figures as to the revenue impact of creating this 10-percent bracket, leaving out your eliminating factors? Mr. CAPLIN. Again, I am depending upon secondary material, but I believe it might run as high as $3 billion.

Mr. BAKER. Three billion.

Mr. CAPLIN. Three billion. I may be wrong. I may be off on that. I do not know. Mr. Kean could help me on that.

The CHAIRMAN. Pardon me, Mr. Baker.

If we make adjustments of the type you are discussing, with a 10percent starting bracket and 65 percent top bracket, you would have to make adjustments in between, would you not?

Mr. CAPLIN. Yes, sir, I believe you would have to.

The CHAIRMAN. If you do that, the total cost of such a program would be about $8 billion, I understand.

Mr. CAPLIN. But I believe that by these offsetting provisions, if we took into account the depletion, placed a stricter requirement on capital gains to at least a 1-year holding period, limited the capital gain tax to only 50 percent of the gain on property over more than a year, that we recapture a great portion of that loss in revenue. The CHAIRMAN. Are there any further questions? Are you through, Mr. Baker?

Mr. BAKER. I am through.

The CHAIRMAN. Are there any further questions?
Mr. CURTIS. Mr. Chairman.

The CHAIRMAN. Mr. Curtis will inquire, Mr. Caplin.

Mr. CURTIS. Mr. Chairman, I would first want to join in commending Mr. Caplin for a very fine paper and state that I was just checking over the 12 specific suggestions he made and of the 12, 8 of them are ones that I myself have been advocating from time to time, and I have had bills on some of them.

The one thing I want to pose, though, is the difficulty this committee is confronted with whenever we talk about tax revision. Immediately the problem comes up of the revenue loss that has here been presented, as a matter of fact. To me it has been a very disturbing thing that in computing revenue loss the Treasury staff and our own committee staff generally looks at the rate only and thinks that you have a loss of tax simply when the rate is reduced.

You have shown in your paper one of the very important factors that I see. I regard three basic factors in computing the tax take. One, of course, is the tax rate, but also, of course, there is the tax base. There is another factor which I refer to as the ratio of collectibility, this being, as you have pointed out, a voluntary system. If our tax laws are inequitable, or in some way or other, people are not giving complete cooperation, we find a particular tax does not bring in the revenue that it theoretically should because of the resistance in paying it. It is for that reason that I thought your paper was particularly appropriate at this time.

Would you not agree that this thread of philosophy runs through it, that the tax take does not necessarily mean the rate?

Mr. CAPLIN. Yes, sir, I think that they have to be viewed in conjunction with the other elements that you mentioned. I think that any rate reduction should not be considered in the abstract, but as a part of the program of tightening up other provisions to bring back into the base many of the factors that are now leaking through.

Mr. CURTIS. As a matter of fact, a high rate actually provides the force that directs a lot of what we call loopholes or methods of getting away from paying at a higher rate. It provides that incentive to do that. If the rate were lower the incentive to utilize many of these loopholes would disappear.

Mr. CAPLIN. There is a tremendous pressure placed on tax advisers today and a lot of energy going into that from clients who are prepared to pay high fees into that. I think it is an undue emphasis being placed there.

Mr. CURTIS. I have a feeling if we do not do something about basically revising, inasmuch as so many decisions in business are being made on the tax effect rather than the economic effect, we are badly damaging our economy right now and going to continue to do so. Mr. CAPLIN. That is so.

Mr. CURTIS. Thank you.

The CHAIRMAN. Are there any further questions?

Mr. Caplin, let me thank you again for coming to the committee and giving us the benefit of your veiews. Thank you, sir, very much. Without objection, your entire statement will appear in the record. I notice you omitted parts of it.

Mr. CAPLIN. Mr. Mills, I would like the opportunity to make a few minor corrections, and I will submit this in a few days.

The CHAIRMAN. Without objection you have that permission. (The above-mentioned corrected statement follows:)

THREATS TO THE INTEGRITY OF OUR TAX SYSTEM

By Mortimer M. Caplin, Professor of Law, University of Virginia, Counsel to Perkins, Battle & Minor, Charlottesville, Va.

I. SOME CURRENT ATTITUDES

It is often pointed out that ours is a self-assessing tax system, and that the soundness of such a system depends upon the good faith of our people and their continued willingness to report their income and assess themselves in a fair and honest manner. To this there is usually added that Americans are trustworthy, and that this facet of our internal revenue system is working effectively.

I do not question the inherent honesty of the people of this country; nor do I have the facts to dispute the assertion that most of them report their income fully and fairly. But there are disturbing signs, there seems to be a current lack of confidence in our tax laws, marks of disrespect for the administration of these laws, and increased tendencies toward tax avoidance and dishonesty. Recently it was reported that more criminal convictions for tax fraud were obtained in the past 5 years than in the entire preceding 12 years.

People also appear to be developing a lethargy over tax enforcement, reminiscent of the former widespread attitude under the Volstead Act. Not that fraudulent tax evasion is currently accepted or approved by any large segment of our society; rather, the evidence is that of indifference and sometimes sympathy when a member of a locality is charged with tax violations, criminal or civil. Practitioners certainly weigh this factor carefully in deciding whether a jury is desirable in a tax proceeding.

These attitudes constitute serious threats to the integrity of our taxing system. At a crucial moment in our history, when this system is being strained by an indefinite period of high taxation, it is imperative that firm steps be taken to reverse these trends.

Before considering possible remedies, it might be helpful to examine briefly some of the causes of our present plight.

II. PART OF THE BACKGROUND

What accounts for this lack of confidence in our tax laws? I see at least five causes.

1. Impact of rates.

First, rates are extremely high at all levels of our graduated income tax. We certainly have marched a long way since the 1894 levy of 2 percent of net income, with a $4,000 exemption for individuals-an act which Mr. Joseph H. Choate villified as "communistic in its purposes and tendencies." Our 1913 act also evokes pleasant memories, with a 1 percent normal tax and a graduated surtax of 1 percent to 6 percent on income above $20,000. But the needs of the day have undergone remarkable change, and so too our tax rates.

High rates have made us a tax-conscious people. Taxes are a major part of the family budget, and a controlling force in the way we conduct our businesses. Many of us have developed an acute sensitivity to the importance of tax deductions and the costliness of nondeductible expenditures. This has led to increased interest in tax planning, in means for arranging one's affairs to minimize taxation, in tax avoidance.

It should also be recognized that there is a growing awareness of the artificiality of our highest brackets. Individuals frequently hear of expense accounts, fringe benefits, and persons earning huge sums but paying little taxes. The remark made the other day by a salaried employee is typical: "Why does everyone have a loophole but me? Why shouldn't I have a window to crawl out of?"

2. Complexity.

Along with increased rates, our tax laws have become unbelievably complex. Many men are devoting their lives to the study, practice, and administration of these laws, laws developed in a piecemeal fashion-to meet new situations that arise, to plug loopholes, to offer incentives, to provide equity, to create certainty, and even to attain simplification.