Shortsighted Taxes

June 3, 1963

Even present taxes do not raise enough revenues to cover present expenditures. The Administration is not planning to cut expenditures but to increase them. The proposal to cut taxes now, to bring a deficit of $11 billion or more in fiscal 1964 and an indefinite series of deficits thereafter, is fiscally irresponsible.

It amounts to saying to the American people: “We are making you a present right now of a big fat tax cut. But of course you will have to lend us the $11 billion needed to make up the shortage.”

Clearly this does not make sense. If we assume that the Federal government ever expects to repay its debts in an honest dollar, it will have to raise taxes again later, not only to the present revenue level, but much above it, in order to pay off next year’s increase in debt.

The proposed tax cut is shortsighted for another reason. The plan is to make the main revenue cuts in the lower brackets—to reduce the basic 20 percent rate eventually to 14 percent, and to take nearly a million people off the tax rolls. Some day, given reasonable economy in government, such a change may be possible. But not with present levels of expenditure. Once such cuts are made, it will be politically impossible to restore present rates in anything less than a clear national crisis.

All this does not mean that important tax reform is not possible now. Suppose the proposal was for a tax reform that would keep revenues at approximately the present level, with expenditures cut to balance the budget at this level. What reforms would be most desirable?

Here are six The first and third were discussed here last week.

1—Abolish all personal income-tax rates above 50 percent. Such rates are prima facie confiscatory. Their yield is negligible, amounting to less than 1 percent of total Federal revenues.

2—Keep the 20 percent basic income-tax rate, but abolish the first upward jump to 22 percent on taxable incomes between $2,000 and $4,000. Make this bracket subject to a tax of only 20 percent. These two reforms would reduce the number of tax-rate brackets from 24 to eight.

3—Segregate capital gains and losses from ordinary income. Have them reported on a separate return. Tax these segregated net capital gains either at the same rates as ordinary income, or at nominal flat rates. If ordinary income-tax rates are used, allow a reduction of, say, 2 percentage points of the capital gain for every month that the capital asset has been held. If flat rates are used for capital assets held longer than a year, make the maximum rate, say, 25 percent for assets held between one and two years. Taper this rate down to 20 percent for assets held over two years, 15 percent over three, 10 percent over four, and 5 percent over five years. Let such assets be sold or exchanged without tax penalty if held over six years. Allow deduction of losses against gains, with an indefinite carryover until they are absorbed.

4—Make the maximum Federal tax on estates 50 percent, instead of the present maximum of 77 percent. And instead of demanding full payment of the tax within fifteen months after death, allow it to be paid, without interest or other penalty, in up to ten annual installments, with a maximum tax equal to 5 percent of the value of the estate in any one year.

5—Reduce the corporation income tax from 52 percent to 50 percent. Impose this only on undistributed income. Tax income paid out as dividends only 47 or 48 percent.

6—Repeal the new “investment credit,” but allow much faster depreciation write-offs, or a substantial write-off (say 35 percent) in the first year.

All these reforms have a common purpose: to simplify our tax system; to start reducing the number and extent of punitive discriminations; to mitigate double taxation, and reduce the excessive deterrents to initiative, effort, risk-taking, capital accumulation, saving, and investment.

Our present tax system is above all shortsighted. When it discourages individual effort, penalizes the transfer of investments, forces the sale or liquidation of family businesses, discourages new corporate replacement and investment, it not only slows down our economic growth, but reduces tax revenues themselves.