Evening star., 1939-05-16

1921 per cent on corporate securi-
ties as far as his retained income
after tax is concerned after deduc-
ton of taxes.
In view Of these circumstances, 1t
is to be expected that wealthy in
dividuals will make large invest
ments in Government securities, de-
spite the fact that they are precisely
the people who, because of their
ability to assume risks, should use
their funds for industrial under
takings. The extent of tax-exempt
security ownership by wealthy in
dividuals is indicated by Federal
income tax data In 1887, Is per-
sons, each with net incomes in ex-
cess of 100000, received almost
$1,000, 900 of wholly tax-exempt in
terest. They probably held well
over $200,000,000 in wholly tax
exempt securities. Their savings in
Federal income taxes alone amount
ed to S6,000,O0O. Stated another
way, these individuals had almost
one-third more income left after
taxes than they would have had
left If the interest from Govern
ment securities were taxable, even
after an allowance is made for a "a
per cent increase in yield. In one
instance an individual with very
large tax-exempt security holdings
paid 81 ,000, 900 in income taxes, while
if the interest he derived from
wholly exempt Government securi-
ties were taxable, he would have
paid almost $2,500,000 in Federal
income taxes.
Loss Made Up Elsewhere.
These tax savings which accrue
to the rich by virtue of their owner
ship of tax-exempt securities repre-
sent corresponding reductions in
income tax collections. The loss
OF revenue. of course, has to be
made up elsewhere, frequently from
less desirable sources. This is un-
fortunate. for the individual income
tax, on which we primarily rely for
progressiveness in our tax system.
is much too unimportant already.
1t produces today less than 10 per
cent OF combined Federal, State and
local tax collections. Estimates of
the loss in Federal income tax COL
lections alone, due to the existence
Of tax-exempt securities, range be-
tween 100000, 900 and $500, 900 900
In other words. the loss of income
tax revenue due to tax-exempt
securities may be in excess of the
total current yield of the Federal
gasoline tax ($2036 million in 1889
1t may also be in excess of the total
yield of all Federal manufacturers
excise taxes, other than gasoline
($213.2 in 1889, which includes the
yield of the excises on automobiles
trucks. tires, tubes, automobile parts
and accessories, electric energy
lubricating oils, radios, refriger-
ators. cameras, not to mention a
variety of others.
In recent years we have witnessed
a great expansion in governmental
expenditures and the pressure for
further increases continues AS q
member Of the Senate Finance Com
mittee am conscious of our re-
sponsibility to increase Federal tax
revenue in order to J1llg about q
better balance betwet n .evenues and
expenditures. I am conscious of
our responsibility to explore every
practical channel for increasing tax
collections. In that quest, the po-
tentialities of discontinuing the is
SUE OF tax-exempt securities should
not be overlooked. Such a step
would not only add to the equity of
the tax system but would result in
substantial revenue increase. The
Undersecretary of the Treasury es-
timated that the elimination of tax
exempt securities would eventually
mean an additional annual Federal
revenue of from $179,0OO,O0O to
1887 900 900. This increase, of
course, would not occur in full for
many years, because, If the issuance
of tax-exempt securities were dis
continued at once, it would require
almost so years for the entire sup
ply of securities now outstanding to
reach maturity. The resultant in
crease in revenue would be small in
the early years, but would assume
substantial proportions in later
years.
Argument Against Proposal.
The major argument advanced In
opposition to the proposal that the
issue Of tax-exempt securities be
discontinued is that such a step
would greatly increase the cost OF
borrowing for all governments
These increased costs, however
would be small in comparison to the
increase in revenue which would
result. The increase in the cost OF
borrowing for the Federal Govern
ment and the Federal instrument
talities is estimated between $19,-
000, 900 and 1000, 900; that for the
State and local governments be-
tween $40,000,000 and $105 900 900
These increases, however, would oc-
cur only slowly as the supply of ex-
isting securities was replaced by tax
able securities. For State and local
governments, for instance, assuming
a one-fourth per cent increase in
interest rates, the cost of borrowing
will have increased, by 1945 by only
2 per cent, which is equal to II
cents per capita, and by 1864 by
per cent, which is equal to 80 cents
per capita. The full increase In the
cost of borrowing would occur only
at the end of approximately SO
years and would never quite amount
to 6 per cent Of the present cost OF
borrowing.
The constitutional aspects Of this
question are most important. The
reason State and municipal bonds
are not taxed at the present time
| Is, in my judgment, due to the fear
heretofore held that such . tax