The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1933-06-13
TUESDAY. JUNE ID. 1899.
LOOPHOLES IN THE LAW


TINE income tax law in the United States
Il represented the successful elimination Of
a long effort on the part Of liberals to subject
to taxation the new sources Of wealth produced
by industrial and finance capitalism.
The vested interests fought long and
bitterly but they could not stem the tide of
growing revolt and progressivism, which
eliminated in the period Of the ratification of
the income tax amendment.
Therefore, the next best thing was to shape
and administer the income tax law SO that it
would be as favorable as possible to the
wealthy. This has been achieved through the
capital gains and losses provision, the admis-
sion Of a large group of tax exempt securities,
the supreme court decision that stock dividends
can not be legally taxed, the failure to tax the
rich in proportion to their actual capacity to
pay, and the generosity of Mr.. Mellon and
others in refundng income taxes paid by the
very wealthy
The overwhelming majority of expert
opinion Is against the validity or equity of the
capital gains and losses provision of the income
example, to tax the profits made in stock deals
and to deduct from current taxable income any
losses contracted in the sale of stocks Gre
stricted in details by the law).
This is an unsound taxation principle, be-
cause it invites the wealthy to obscure their
losses, a process in which they are given
unusual competence and success through en-
ployment of expensive lawyers. Moreover, it
means that in periods of depression, when
governmental expenditures are high and rev.
enue is needed specially, the proceeds of the
income tax fall off notably. Great money
masters like Morgan can avoid paying any
income tax whatever at the very time when
the government most needs their money.
In short, capital losses never should be
allowed as a deduction from income tax
liability, while capital gains should be reached
and taxed by means other than the income
tax-for example by property tax, an I'M
earned increment tax. or an increment
property tax
Great Britain, save for a moment during
the World war, never permitted the capital
gains and losses principle, and France has
stood with her Germany admitted the prn-
ciple in 1920 but abolished it in 1925 The
trend is decisively against it, in both theory
and practice.
Inasmuch as our present income tax sys-
tenn is legalized by a constitutional amend
ment the supreme court could not set it aside
as it did in the Pollock case in 1895 But it
modified it in part through the decision that
this manner This favors the wealthy since
the corporations dominated by them can di-
vert part of their cash dividends into stock
dividends.
Another loophole is the existence of large
body of taX-exempt securities. There are in
all about $4,000 100000 worth of securities,
wholly or partly exempt from federal taxa
ton. OF this amount, some $40, 500 100000 is
wholly exempt from both the normal income
tax and the surtax In addition about $12 $685.
100000 is exempt from the normal income tax,
but not from the surtax.
These taX-exempt securities represent a
definite challenge to principle of the income
tax. AS DR.. Charles o, Hardy observes:
Where the progressive income tax is the ex-
preston of a thoroughly modern tendency,
the tax-exempt security is, to a large extent
a relic of the past"
These taX-eXempt securities constitute
bonds of the states and subsidiary divisions
thereof, bonds issued by the federal govern
ment and its possessions and bonds issued
under provisions of the federal farm loan act.
Experts such as Professor Seligman, esti-
mate that the federal government loses about
$30OO00OO0 annually in revenue as a result
of the exemption of these securities. The ex-
emption of state and local bonds is matter
of constitutional rights. The exemption of
the federal bonds is simply matter of statute
law and could be altered quickly.
In spite of rather high surtax rates for
larger incomes, the rich never have been taxed
in proportion to their actual capacity to pay
under our income tax law, with the possible
exception of a short time during the World
war Moreover, since 1917. no less than
$l,271 100000 has been returned in income
tax refunds.
While it is not necessary to assume, as
some radicals do, that every cent of this was
a dishonest return to the rich. yet there is
no reason to doubt the fact that consider
able part of this gigantic refund represented
special favoritism to the very wealthy.