Evening star., 1935-08-07
END|NGEXEMPT|0
of TAX DIFFICULT.
Increased Cost of Loans Is
Seen 0ffsetting Higher
AT y 81.
Revenue.
RY DAVID LAWRENCE.

President Roosevelt's recent refer
ence to the way in which the "58
thriftiest" people do not pay income
taxes on their securities because the
latter are tax-exempt might give the
impression that it would be a simple
matter to adopt constitutional
amendment forbidding tax-exemption
and then the Government would get
q large amount of revenue.
The problem is not so simple. how
ever, for the House Ways and Means
Committee, in a report made last
year on the whole subject of tax ex-
emptions, has some significant things
90 <sr about how little revenue would
be produced. Says the committee re-
port in quoting l.. H. Parker. CHIEF
of the staff of tax experts of the joint
congressional tax committee:
'It is the opinion of this office that
II the income tax were applied in full
to all future issues of these bonds. the
increased interest cost would nearly
offset the additional revenue secured"
U, S. Bonds Subject to SurtaX.
Mr.. Parker had made an exhaus-
tive analysis showing that the small
taxpayer finds Federal tax-exempt
bonds attractive, but that the large
taxpayer prefers State and city issues,
not because the latter class is better
security, but because State and local
issues are free from surtax, while
majority of the Federal bonds are
subject to surtaxes.
What additional revenue" says Mr..
Parker, could be secured by subject
ing all this interest on the public debt
to tax? Based on the data available
and the existing tax rates, we believe
the maximum revenue which the Fed
eral Government could obtain would
not exceed $3.50 ,000, 900 annually. OF
this amount about $90,00o,o00 would
come from the individuals and about
$4,000, 900 from corporations:
"A study of the market quotations
on Government bonds indicates that
the wholly tax-exempt securities are
slightly preferred over partially ex-
empt securities. This is true in spite
OF the fact that both classes of Securi-
ties are wholly tax-exempt when In
the hands of corporations. Thus
broad tax-free market is open to cor
porations for the bonds which are only
partially tax-exempt in the hands of
individuals. If this were not the case.
authorities seem to agree that future
bond issues by our governmental units
would necessarily bear higher in
terest rate.
Illegality Is Seen.
"An increase in interest rate of one
fourth of per cent on SAC, ,000, ,000, 900
would cost our Government 100000
900 annually. An increase of one-half
of l per cent would cost 5000, ,000, 900
annually. OF course. the increase in
interest costs would not take effect
Immediately if Congress taxed bonds
already issued in tax-exempt form
without retirement and reissue How
ever, to do so would raise q serious
question of breach of faith and might
be construed to violate the Constitu-
ton
Mr.. Parker went on to say that a
substantial revenue could be secured
If the interest of all Federal, State
and local bonds we're to be taxed, ir-
respective Of the fact that they were
old or new issues. But he added that
the question Of whether such q pro-
cdure is right or wrong from a
moral standpoint is one beyond the
scope of this memorandum.
The views of Mr.. Parker are inter-
esting because he has been aiding the
Ways and Means Committee of the
House in preparing the measure it
adopted last week.
So the upShot Of the data furnished
is that to tax Federal issues by re-
tiring or withdrawing the tax-exemp-
ton would merely throw Federal
bonds out Of line with State and local
securities and cause the interest rate
tc 60 up to an amount that would
offset the sum gained through taxa
tion. The Roosevelt administration
could refrain from adding tax-ex-
empt issues to the market as it has
been doing In the last two years, but
the expense Of borrowing would be
thereby increased. If. on the other
hand, a constitutional amendment
were adopted taxing State and city
bonds as well as Federal Government
bonds, 1t is doubtful whether this
could apply to contracts already in
existence between the security hold
ers and the State and city govern
ments. The Supreme Court might
hold that to deprive the citizen of
his rights in existing contracts by
constitutional amendment might con-
f1ict with other articles Of the Con-
stitution.
Would Raise Loan Cost.
The States and cities could retire
and then reissue their securities, but
the expense Of borrowing would be
increased. 1t seems unthinkable that
the States and cities would ever sup
port constitutional amendment tax
ing away their tax-exemption privilege
because 1t merely adds handicap to
their own borrowing powers. The
State Legislatures would doubtless op-
pose such step and argue that they,
too, would lose in the cost of ad-
ditional borrowings, whereas the Fed
eral Government would absorb the
increased revenue from taxation and
the States would get no benefit.
Tax-excmption and the fact that a
few thrifty people have taken ad-
vantage Of 1t offers sore point from
q social viewpoint, but the way out is
not easy to find and certainly even
II constitutional amendment we're
adopted 1t would take decade be-
fore its benefits could be determined.