Double-Taxation Blues

April 11, 1955

As he gropes and calculates and curses his way through his income tax, the taxpayer is apt to curse the wrong man. When he is asked for his Social Security number or some other information in a space obviously too small to hold it, his wrath turns on the bureaucrats who framed the forms. But sober second thought should convince him that the main culprits have been his elected representatives who framed the laws the bureaucrats must apply.

It is the complications in the law that cause the complications in the income-tax blanks. Nearly all these complications arise from the fact that our lawmakers refuse to grant to persons with high incomes the deductions which, as a matter of simple fairness, they grant to persons with moderate incomes. If capital gains are to be taxed as if they were income, then capital losses should be fully deductible from income. But Congress arbitrarily limits the deduction to $1,000. If medical expenses above a certain amount are fair and proper deductions from taxable income, then they should be fully deductible above that amount. But Congress and New York State put an arbitrary limit on the deduction. If, finally, it is wrong in principle and harmful in consequences to tax the same income twice, then it is wrong to remove double taxation on a few moderate incomes but retain it on higher incomes.

The calculations that the taxpayer must go through in order to figure the amount of tax relief he is allowed on income from dividends are so fantastically complicated that a new Mark Twain or Bob Benchley could not think of anything more absurd. Yet after the taxpayer is all through, he can only exclude $50 of income from his dividends and get a tax credit of 4 percent on part of them.

These complicated calculations are necessary simply because the last Congress, in granting this merely token relief from double taxation of dividends, was in deadly fear of the accusation that rich stockholders would benefit from it. Yet from a political standpoint the Republican Congress responsible for the token relief gained nothing from all its super-caution. The CIO bosses and the Democratic dervishes are still shouting that the Republicans allowed rich men tax deductions on unearned income from dividends but refused to allow poor workers to make any corresponding deductions in income from wages.

If the Democrats should now try to throw out this dividend tax relief, in the form in which it now exists, the Republicans would be well advised either to let them do it or to offer an amendment of their own.

The double tax on corporate dividends is still flagrant. If a man invests his money in a corporation he pays a tax of $52 out of every $100 that his investment earns even before he gets it. Then, on the $48 that is left (or whatever part of it is paid out to him in dividends), he must pay a tax of up to 91 percent (now minus a 4 percent credit). On any dividend on which he pays the maximum tax rate he has only $6 left for himself out of every $100 the corporation earns. The government grabs the other $94.

Instead of giving the individual taxpayer this extremely complicated but negligible relief on his own tax, it would be much simpler all around to tax corporations themselves in a slightly different manner. Instead of requiring them to pay a 52 percent tax on their total net income for the year, for example, they could be asked to pay 52 percent on the amount of net income they retain, and, say, 48 percent on the amount they pay out in dividends. (In 1954, corporations had profits before taxes of about $35 billion, from which they paid out $10 billion in dividends.)

This would be an approach toward the British system of corporate taxation. Such a change in system would save the individual taxpayer an enormous headache, would be easier to explain to the inexpert, and would take phony issue away from the Democratic left-wingers. The individual taxpayer would once more pay precisely the same rate in his own tax bill on income received in the form of dividends as on any other income.