Evening star., 1939-05-16

of Michigan, who spoke last nigl
in the public interest and constitu-
tional. We were very happy that
some weeks thereafter the Supreme
Court came to the same conclusion
in the OKeefe case. The public
salary tax became law. The return
while not large will probably pro-
duce between fifteen and twenty
millions of additional income to the
Federal Government. To me the
principal gain is that tax justice is
done as between public and private
taxpayers.
Sixty-five Billion Outstanding.
We have not as yet formally re-
ported on the bond tax question. A
report will be made within the next
few weeks. I do not tonight speak
for the committee respecting the
bond tax. 1 give my own views.
There are approximately sixty-five
billion dollars in taX-exempt securi-
ties outstanding, of which amount
approximately twenty billion are
those of the States, cities, school
districts and other municipal units
The remainder are the securities
of the Federal Government and its
agencies. Not all of these bonds
are wholly tax-exempt, but are
either wholly or partially tax-ex-
empt. I estimate that If these
securities were taxable, at current
rates by Federal and State gov
ernments they would bring in almost
one-half billion dollars per year in
taxes. That there would be some
rise in the cost of Government
financing if the income tax was
applied to all Government securi-
ties, there is no doubt: but that
amount would be small in COM
parison with the return The pro-
posal which our committee is con-
sidering would authorize taxation of
Federal bonds by the Federal Gov
ernment and the State govern
ments and of State and municipal
bonds by the Federal Government.
We do not believe we should tax out
standing governmental bonds. We
do not propose to make the tax
retroactive, but we apply it to all
newly issued securities, Federal,
State and municipal.
I pass for the present the legal
question involved and discuss the
matter from an economic stand
point. The exemption of this tre-
mendous sum of IS billion dollars
from income taxation is objection
able Cd because it provides means
by which wealthy taxpayers may
largely escape taxation and 90
because the Government loses
large part of its revenue-close to
per cent of its present income.
Takes Up Tax Justice.
I take up the matter of tax JUS
tice.
The exemption of interest on gov
ernmental securities from Federal
and State income taxes results in
great inequities. 1t affords propor-
tionately greater tax-saving oppor-
tunities to the wealthy than to the
less well-to-do. This follows from
the fact that the Federal and
practically all State income taxes
have progressive rates, applying the
accepted tax theory of ability to
pay. which increase as the amount
of taxable income increases. Con-
slider dollar of wholly tax-exempt
interest in the hands of people diff
ferently situated. To an individual
with only $4,000 or $4,000 of taxable
income, dollar of wholly tax
exempt interest affords a Federal
income tax saving of only cents.
If the interest we're taxable it
would add cents to the Federal
tax liability. In the hands of an
individual with $4,000 the same
dollar of interest affords saving
of % cents. This saving increases
with further increases in income,
amounting to 81 cents per dollar for
an individual with $4,000, SO cents
for an individual with 100000, and
II cents for an individual with ST.
000,000 The exemption of this in
terest from State income taxes adds
to the disparity.
In view of the progressive char
acter of the income tax, a tax
exempt security is worth much more
to rich man than to an individual
with relatively small means. Rich
and poor, however, can buy these
securities at identical prices. The
available supply of Government Sc
curities is so large, in relation to
the demand on the part of those
who desire them most-the wealthy,
that the tax exemption privilege
these securities possess can be had
by paying little or nothing for it.
Because they can purchase tax
exempt securities at very favorable
terms, the wealthy are encouraged
to stay away from taxable securi-
ties-the type of securities which
represent investments in private
enterprise.
Higher Net Yield.
Individuals with large wealth can
obtain a higher net yield from low
interest, tax-exempt Government
securities than from taxable high
yield corporation securities. For ex-
ample, an individual with an annual
income of 100000 would have to
hold an equal amount of bonds bear
ing 7.3 per cent interest in order
to match a yield Of per cent on
tax-exempt security. 1t is impos-
sible to get 7 per cent on good
bonds. A man with an income of
81 900, 900 a year would have to re-
ceive 12h per cent on his corpora
ton bonds to match a yield of 3 per
cent on a similar amount of tax
exempt securities. Expressed in an
other way, If a man with 81 ,000, 900
income was fortunate enough to ac-
quire 4 per cent tax-exempt mu-
nicipal securities (and such is en-
tirely possible), his return would be
equivalent to an interest rate Of