The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1935-08-01
THURSDAY. AUG. l. 1885.
PHANTOM TAXES

7 ETS talk about the SO "thriftiest" persons
who had incomes of more than million
dollars a year and who. the President says,
paid no taxes on 81 per cent of their aggregate
income They avoided taxation on that portion
by investing in tax-exempt securities.
To infer that they we're naughty to do it
does not solve the problem. They did it be-
cause of the desire for profit, which is as
constant and irresistible as gravitation.
To make the thing simple, let us suppose
that one of the SO persons had an idle
million dollars to invest. Let us say that he
had chance to buy a million dollars worth
of per cent tax-exempt bonds, which meant
a net return of $4,000. Let us say he also
considered private proposition, promising
return of 8 per cent. That would have meant
a gross return Of 100000. But being person
who had a million-dolar income from other
sources, that return would have been subject
10 the highest bracket of Federal income tax
4 per cent normal tax plus SO per cent surtax.
That meant that the Federal government
would take So per cent-S50, 400-of that
$4,000, leaving him a net return of $4,000.
Obviously it was better business to take
$4,000 net from a glt-edge government bond
investment than to take risk in a private
enterprise that could not possibly net as much.
SO the private investment went begging.
Now, let's apply the same mathematics to
the situation that would be created by passage
of the pending tax bill. 1t would continue the
present per cent normal tax, and raise the
surtaxes to a top of IS per cent, on incomes
above IS 900 a year. That means that the
top-bracket Federal tax would be 70 per cent.
So man in that top-bracket class, looking
for more income. would choose to invest his
spare million dollars in per cent govern
ment bond and salt away 100000, rather than
risk investing in a private enterprise, even if
it promised yield of IA per cent. For the
government would take 70 per cent-s11O6O 800
of the $4,000 gross return on such a venture,
leaving him net of only $29, 400 And where
can safe" private investment be found that
will pay anywhere near IA per cent?
The above calculations showing the differ
entails favoring tax-exempt investments on
the part of the very rich. do not include state
income taxes or taxes on intangible property,
which make the differential even greater. And
the advantages of buying tax-exempts extend
10 Ol16IS DeSlOeS InulIlInllllOIdlTeS. "A man
with an income exceeding $4,000. for example,
under the pending bill would have to pay
IS per cent tax on the first part of that
excess. That means That because of the Fed
eral tax alone, any prospective private invest
ment would have to yield him twice much
as an investment in a government tond.
So in pressing for enactment of higher
surtaxeS while the proposed constitutional
amendment abolishing tax-exemption Ian
cuisines in committee, Congress seems to be
putting the cart before the horse. AS long as
tax-exempts offer refuge. higher surfaces on
the every high incomes will, to large degree,
be phantom taxes. They may look good on
paper. but they won't produce the revenue.
So we urge Congress to get busy on the
constitutional amendment And we point out
that. so far as new issues of Federal securities
are concerned, there is no reason to wait for
ratification of the amendment. Congress can
stop exempting them from taxation, any time
it wishes.