New Britain herald., 1922-12-06
Secretary of the Treasury Would Make Up Differ ence by Closing Possible Avenues of Escaping Pay ment.

Washington, Dec. 6.--Reduction O the maximum income surtax rat from the present 50 per cent to no more than 25 per cent and the clos ing up so far as possible of existing avenues of escape from federal taxe are urged by Secretary Mellon in hi' annual report, transmitted today tt Congress. No general revision of tho revenue laws is proposed nor are ad' ditional taxes suggested, MT. Mellor expressing the hope of meeting an, indicated government deficit through collection of back taxes and income from other sources.
 The treasury secretary informs congress that to attempt alone to stoI the gaps through which there is ar avoidance of tax payments to the gov ernment will not be enought because tho existing rates of surtax put such heavy pressure on the larger taxpayers to reduce their taxable in comes" that new ones would surely be found. He adds that the high rates sound productive" but that the fact remains that they are becoming increasingly ineffective and are yield ing less and less revenue each year
 Then bluntly he tells congress the time has come to face the facts squarely' and to correct the artificial conditions which now prevail and which, he asserts, are not wholesome from the point of view of business or industrial development. and, at the same time, are impairing the revenues of the government.
 How to Reduce
 The more important of the methods used by the taxpayers to reduce the amount of income subject to taxation are listed by MT. Mellon as follows:
 Deduction of losses on sales of capital assets, with the failure to real ize on capital gains.
 Exchanges of property and securi- ties so as to avoid taxable gains.
 Investment in tax-exempt securi- ties; and
 Division of property, creation of trusts and the like.
 Not all of these things can be controlled by law or by regulation he continued, ''and most of them lead to unnatural and frequently harmful economic results. To reach the evil the thing most necessary is the reduc- ton of the surtax rates themselves, in order to reduce the pressure for avoidance and maintain the revenues derived from the surtax.
 Until some such readjustment is made the yield of the higher sur taxes will tend, in the ordinary course of events, to drop toward the vanish ing point The wise course- is to re- form the surtaxes now while the sys tenn still functions and at the same time to close, so far as possible, thu gaps which now exist. On this basis the revision can be made without loss of revenue. and, insthe long run with material benefit to the revenues.
 Against High Taxes
 To support his argument that the high surtaxes gradually are defeat ing their own purpose" he calls at tention that while net incomes of all classes during" the period from 1916 to 1920 increased from $6,29S,577,620 in 1916 to $23.735,629,1S3 in 1920, and the number of returns from 437,- O36 in 1916 to 7.259,944 in 1920, the number of returns of incomes over $3o0.00o decreased during the same period from 1,296 in 1916 to 396 ir 1920, and the amount of incomes over $3o0,ooo from $992.972,9S6 in 1916 to $245,354,5S5 in 1920.
 In earnestly urging prompt adop. ton of the proposed constitutional amendment against the further is. suance of tax exempt securities, the treasury secretary says these securi- rate of about o,o00,oo0 annual ly, form the ''outstanding avenue ol escape from the surtaxes.
 With these securities available foI investment, fully exempt as they art from federal income surtaxes," Mir Mellon continues, investors who would normally put their surplus funds into productive enterprise, arc automatically driven under the pres sure of high surtax rates into invest ment in tax-exempt securities, with the result that the federal govern, ment loses the revenue, business and industry loses the capital, and funds badly needed for productive purposes are diverted into unproductive and frequently wasteful expenditure.
 This is a situation which can not l. ta vxr,f 1n, ,t grave danger to our economic struc- ture, as well as our system of taxa tion."
 Pointing out that the present law limits the tax on gain in capital trans actions to 12h per cent of such gain but puts no limit on the deduction of losses in such transactions, Mir Mellon urges that the amount by which the tax may be reduced on ac- count of losses from the sale of capi- tai assets shall not exceed 12k per cent of the amount of such loss.
 This would. to a large extent" he asserts, check one of the methods widely used by taxpayers at the pres ent time for decreasing their yearly income. The alternative is to refuse to recognize either capital gain or capital loss for income tax purposes, and if the present situation is all lowed to continue there is no doubt that it would save revenue to adopt his course. This is, in fact, the prac- tice which has been followed in Eng land for many years"
 As to the avenue of escape afford cd in the section of the law dealing with exchanges of securities. the treasury secretary urges that tho