Evening star., 1939-05-27

legislation making all Government
salaries hereafter earned and inter-
est on all Government securities
hereafter issued subject to Federal
and State income tax laws. That
part OF this recommendation dealing
with Government salaries, I am
pleased to note, has already been IN
corporated into law.
g. In my statement of March "a,
1889, I presented for your consider
alton four alternative rate plans for
old-age insurance contributions dur
ing the next three years.
Even though comprehensive re-
vision of the tax structure probably
will not be feasible at this time, that
fact, in my opinion, should not re-
strain your committee from giving
serious attention to removing from
the tax laws any manifest inequities
or other defects.
Wants Revenue Level Kept.
Before specifying the tax pro-
visions which believe deserve your
special attention at this time, I wish
to emphasize the importance of
maintaining the present revenue in
any tax revisionS which may be
made. We must not forget that one
OF the important objectives of our
fiscal program is to approach a bal
ance between revenues and expendi-
lures. For this reason, any tax re-
ductions must be offset by tax in
creaSes.
If tax revision were confined to
tax reductions. the resulting un-
certainty as to our future fiscal
position would injure and not help
business. We should take no step
which the public may interpret as
moving away from the objective of
balanced budget.
In discussing the elements or
features of the tax system which
you may wish to re-eXamine. I
should like to classify them roughly
into three groups.
The first group includes features
which have been characterized as
likely to hinder business expansion
and investment.
"One such feature is the absence
OF provision in our income tax laws
for carrying over net business losses
to be deducted from business profits
OF future years. The profits or losses
OF each year are considered without
reference to those of any other year.
In consequence, business with
alternating profit and loss now pays
higher taxes over period of years
than does business with stable
profits although the average income
OF the two firms may be equal.
New enterprises and the capital
goods industries are especially sub
ject to wide fluctuations in earn
ingS.
"As a second example, I should
also like to mention the question
OF tax-exempt securities and surtax
rates in the higher brackets. These
two questions should be considered
together. Tax exemption of secur-
ltles is highly inequtable and tends
10 nullify our progressive surtax
rates. Most persons subject to the
high surtaXes have sizable holdings
OF governmental securities which
yield them an income free from
Federal income taxation, while 9TH
er persons entirely escape the high
surtaxes in this manner.
TAX exemption also operates as
magnet which pulls persons subject
TO high income taxes away from
investments in private business
We should by all means pass legis-
lation to make it impossible in the
future to issue any more tax-ex-
empt securities.
Rates May Be Too High.
This having been accomplished
nrst, 1t would then be fair and
Ioglcal 10 re-examine the question
OF whether the present surtax rates
on very large incomes NAV not be
so high that they discourage the
limited number of individuals sLb-
Ject to them from taking normal
business risks.
IN second group are features of
our tax system which have been re-
Ierred TO as tax irritants.' As an
example. I would mention the un-
distributed profits tax. In its pres
ent form, this tax is unimportant
and does not accomplish the obiec-
ives OF the original proposal. The
tax produces little revenue and has
little effect on business. It has ac-
CURED prominence as PSYCHOLOGICAL
lrritant largely because of the wide
spread and emotional criticism
winch has been directed against it.
one OF the objectives which the
law sought to attain was to prevent
tne avoidance of the personal in
come tax through the retention and
accumulation of earnings by cor
porauons. This is still an impor-
tant and, to my mind, a sound OBJ
JectlVe. The law in its present form
does not attain it. Since the in
come tax on corporations. of which
the undistributed porfits tax is
MINOR segment, expires by it's own
terms at the end of this year, your
committee should deal with this
problem. The Treasury. of course
STANDS ready to work with you on it
Another example is found in the
capital stock tax and the related
excess profits tax. Under the nres-
ent law the capital stock tax is
based upon declared capital stock
value which the taxpayer NAV re-
wise every three years. The declared
value may be any figure that the
taxpayer desires to submit. regard
less OF the actual value of the stock
Taxes Operate Erraticallv.
The excess profits tax ann,ies
to profits in excess of 10 per cent
OF such a declared value. The
taxes are thus not really taxes m
the value of capital stock or on ex-
cessive profits. Their major defect
is that they operate very errati-
cally. The tax liability they i'm
pose depends on the taxpavers
ability to forecast profits for the
next three years as well as unon
the amount of profits actually real
iZnH Gllrinu ooch 4l.-