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TABLE IV.-Shift in shares of gross national more advanced technological methods at a The income tax acts somewhat like a
product in the United States and EEC more rapid rate than our industries and schedule of speeding fines which are intended countries, 1950-61 (gain or loss in per- now have, on the average, plants which are to discourage speeding; they rise by the numcentage points)
of more recent origin and, presumably, more ber of miles by which the driver exceeds the up to date.
speed limit. Speeding fines succeed in keepUnited EEC What stimulates investment is high profits ing most drivers within the bounds of perStates
and what deters it is low profits. In his mitted maximum limits. Likewise, our ex
just-published book, "Capital and Rates of orbitant graduated rates effectively restrain Private consumption_.-
Return in Manufacturing Industries," 30 the natural dynamism of our economy. Public consumption --
+6.9 +1.4 George J. Stigler, economics professor at While tax relief is needed and should be Capital formation and stock changes. -3.5 +3.0
the University of Chicago, shows that a close granted across the board to all income Net exports.--
correlation exists between longrun rates of classes, it ought to be most substantial in the Total
0 return and rates of capital investment in medium and upper brackets-not to help
manufacturing. The fact is that for some wealthy people but to help everybody by ecoSource: OECD, Statistical Bulletin, General Sta
years now rates of return have been falling nomic expansion. One example of such a tistics, November 1962.
in the United States. The First National plan is the Herlong-Baker bills (H.R. 348 and
City Bank of New York reported return on H.R. 265-88th Congress) which would reThe most significant changes were: capital net assets of leading corporations at a high duce the rate scale of personal income taxes formation expanded in the EEC countries but
of 13.3 percent in 1950, which declined to 11.3 shrank in the United States. The share of percent by 1956 and has been below 10 per
to a range from 15 percent to 42 percent and
the corporate rate from 52 percent to 42 perprivate consumption declined somewhat in
cent ever since 1958. It stood at 9.1 percent cent over a 5-year period. The bills have long the United States but fell very substantially in 1962.11
been waiting for action in the House Ways in the EEC countries. Government expanded
As a percentage of gross national product, and Means Committee. slightly in the EEC countries, very substan
corporate profits before taxes declined from tially in the United States. Exports slightly 14.3 percent in 1950, to 10.7 percent in 1956,
It appears unwise at this time to free 1.5
million taxpayers from all tax liability by better than held their own in the United
and to 8.6 percent in 1963 (first half, season establishing a minimum standard deduction. States but expanded substantially in the ally adjusted). Treasury Secretary Dillon
Particularly in a country in which economic EEC countries. recently expressed hope that corporate prof
well-being is at a high level and widely difIn 1961 private consumption and Govern
Its would again rise to at least 10 percent of fused, and which is the only industrial counment consumption accounted for a greater
gross national product but this may not soon share of GNP in the United States than in happen without major changes in Govern
try without a broad-based national conthe EEC countries—a reverse of the relative
sumption tax, there is little justification for ment policy.
increasing the incidence of "representation position in 1950. Capital formation equaled
Relaxation of depreciation rules and in without taxation.” a greater share of GNP in the European
vestment credits enacted in 1962 have been countries, both in 1950 and in 1961, but the
Income distribution of help. But depreciation provisions still difference between them and the United are more restrictive in the United States
There has been much misunderstanding States widened. Investment in machinery than in many other industrial nations.
of trends in our income distribution and and equipment in the EEC countries accounted in 1961 for more than twice as large
many wrong conclusions have been drawn. Moreover, a corporation tax rate of 52
percent is a deterrent to expansion. a share of GNP as in the United States.
At hearings of the House Ways and Means means that $2.08 is required in gross earn
Committee earlier this year President George Simon Kuznets demonstrated in a major ings for every $1 of needed net return. This
Meany of the AFL-CIO stated that “the basic historical-analytical study, “Capital in the eliminates many potential new projects from
reason why the American economy has American Economy,"9 that in the long run further consideration.
grown so slowly, why our national output is capital formation has been the prime deter
so far behind our productive capacity * * * minant of growth in the American economy,
Corporate tax relief
is a shortage of customers with money to and that investment has been in a sustained The corporate profits tax was scheduled in spend." He continued: “Income from proprelative decline due to a general preference 1954 to drop from its (Korean) wartime high erty_dividends, interest, capital gains-has for consumption and to the effects of tax of 52 to 47 percent. Personal income tax generally gone up at a rapid rate * * *. But ation. The remarkable growth of the Soviet rates were permitted to fall to their pre all this time * * * the wage earners and economy may be attributed to the high rate Korean levels but corporate tax relief has salary earners have been getting a smaller of capital investment (by the Government) been postponed every year since 1954. share of the pie.” 12 and not to expansion of consumption which In recent years a growing number of econ In reviewing this charge it is apparent remains at a comparatively low level.
omists have come to recognize the ill effects from table y that the share of wage and What stimulates investment?
of our high corporation tax rate. But the salary earners in the total personal income Some observers hold that we could stimu
proposals of the President, implemented in has substantially gone up for over 3 decades late investment by making consumption rise
H.R. 8363, would reduce the rate only to (which is as far as these statistics go back); faster. But this avoids the real issue. If a
50 percent and eventually to 48 percent. By it continued to increase even through the nation wants its economy to expand at a
advancing payment dates they would defer years of heavy unemployment since 1956. more rapid rate then it must put a greater
a reduction in corporate tax payments until The share of business and professional inshare of its resources into capital formation
the late 1960's. Whatever slight benefit come and dividends as well as other income and less into consumption. To favor con
might be derived from lower corporate rates has meanwhile just as steadily declined. .sumption is to start at the wrong end.
would be more than offset by the suggested That industrial managers are reluctant to repeal of the 4 percent dividend credit.
TABLE V.-Distribution of shares in personal expand the plants while much of their pres
The present proposals are a bitter disap income (before taxes), selected years, 1929–
63 ent capacity lies idle is an oversimplification pointment to those who had hoped that the It is undoubtedly true that some of our in
promised tax reduction would be so designed dustrial capacity has not been fully used as to be effective in stimulating industrial
Labor Dividends, in recent years. McGraw-Hill reported last growth.
All other and
personal Personal income tax relief
and proJuly an 87-percent utilization in manufac
income turing although companies prefer to oper While the proposed reductions in the rates ate at a ratio about 5 points higher. But in of the individual income tax will give effec
Percent tive and long-needed relief to many persons,
Percent dustrial capacity and its relationship to out
21.9 put is an elusive concept as several studies they are not likely to produce as powerful a 1940.
16.9 have shown. A great deal of machinery stimulative effect on economic growth as is 1950
14. 5 dates back many years and is more or less hoped for and needed. The income tax struc
1963 (September, obsolete. It is counted as active, kept in ture has for the past 20 years been character
seasonally adreserve, and utilized when unusually heavy ized by an excessively step degree of progres justed)
12.1 orders justify this. But in normal operation sion which has stifled initiative and ventures only more up-to-date equipment is used. and dried up investment funds. This will Source: Economic Indicators, October 1963, and 1962 Also, only about one-third of plant and not be sufficiently mitigated by the proposed supplement. equipment investment is intended to add new scale. to capacity while two-thirds are for moderni
The incidence of low-income families has zation and replacement. European and
substantially declined and this trend is still Japanese companies have been changing to Princeton University Press, 1963.
10 National Bureau of Economic Research,
continuing, as table VI shows.
u First National City Bank of New York, # National Bureau of Economic Research, "Monthly Economic Letter,” April of each 12 President's 1963 Tax Message, hearings, Princeton University Press, 1961. year.
op. cit., p. 1957.
The upward push in income and the con- right if 7 percent of our work is being done 19 years old, in the labor force, is listed as sistent narrowing of the low-income segment on an overtime basis, when we have got 5 jobless. Unemployment is three times as of our population are among the most grat- to 6 percent unemployment.” 14
frequent among teenagers as among adults. ifying trends in American society and will, There may be several reasons why a com It is interesting to note that "in Great hopefully, continue. But a tax structure pany prefers to keep its workers overtime Britain, the unemployment rate for young which tends to penalize effort, enterprise and pay them a 50-percent premium. But people (aged 15–19) has generally been lower and success is likely to slow up this whole- since managers as a rule try to keep costs than for any other group, having seldom some development.
down and do not without good cause pay gone much over 1.0 percent in the postwar
rates which are 50 percent higher than nec period,” according to a report of our Bureau TABLE VI.-Distribution of households by essary, we may assume that there were not of Labor Statistics.16
real income level (before taxes), selected enough competent workers available for Even considering a difference in statistical years, 1929-62
hire. In other words, what was in short methods, this contrasts sharply with an un[1962 dollars (price adjusted)]
supply was not work to be performed or employment rate of 14.7 percent for boys, job openings, but competent workers whose 15.8 percent for girls, 16 to 19 years old in
output was at least the equivalent of a regu the United States in September 1963. Part Family personal income lar hourly wage. Companies apparently
apparently of the explanation may be found in a comfound that some of their workers were worth parison of the British and the American Under $4,000 to $8,000 and 150 percent of the established wage rate, school systems, curriculums, occupational $4,000 $7,999 over while some of those looking for jobs were training and attitudes. But a major reason not even worth the regular rate.
probably is that in Great Britain young peoPercent Percent Percent As stated, this may be an oversimplifica- ple must first serve an apprenticeship of sev1929.
8 tion and, unfortunately, there are no statis- eral years at merely nominal wages (virtually 1947.
tics available on the number of available job pocket money) until their work output jus33 40
30 openings. By and large, however, this prob- tifies paying them a regular wage. Many of
our teenagers are not hired because they are Source: Survey of Current Business, April 1963.
Many facts appear in employment statistics not worth the wage rate which they would
which ought to give us cause to ponder. Why have to be paid. Taxes, wages, and unemployment are 5 percent of all workers able to locate The unemployment rate among married The most important benefit which many
and hold several jobs simultaneously while men, with the wife present in the household, expect to result from pending tax revisions
an equal number can't find even one? Why was only 2.3 percent (equal to 1 in 43) in is a significant reduction of unemployment.
is the unemployment rate as low as 2.6 per- September 1963 which is the lowest rate The Chairman of the Council of Economic
cent among heads of households living with since early 1957. Since the incidence of unAdvisers was recently quoted as predicting
their families but averages between 5.2 per- employment declines conversely with the that “the proposed tax cut will add 2 mil
cent and 11.0 percent among the various level of skill, we may assume that it was lion or 3 million jobs to the economy in the
other classifications which consist of persons even lower among skilled workers. Unemnext 212 years," 13 and has expressed hope
not responsible for the support of a family? ployment rates of both sexes and all ages that it will bring the unemployment rate Why is the unemployment rate at 2.1 per- were, in September 1963: down from its level of 5 to 6 percent, in cent (equal to 1 in 48) among men 35 to 44
Percent recent years, to 4 percent or less.
years old, 7.2 percent among men 20 to 24, Managers, officials, and proprietors.---- 1.6 This assumes that our present unemploy
4.8 percent among women 35 to 44, and 9.6 Professional and technical workers--- 1.8 ment is of a cyclical nature, that it is due percent among women 20 to 24 years old?
Craftsmen and foremen..
2.8 mainly to lack of sufficient aggregate deDo such discrepancies suggest merely a lack Sales workers---
4.0 mand, and that it will rapidly melt under of job openings or a more serious imbalance?
4.2 the impact of a fast-growing GNP. But an Should an unemployment rate of 3.5 percent Operatives----
6. 2 increasing number of economists are coming among white men and 8.5 percent among Nonfarm laborers-to the conclusion that much of our large nonwhite men be wholly attributed to disunemployment is due to a growing imbal
crimination in hiring or are other factors In an analysis of trends during the 1950's ance between the nature of available job partly responsible?
based partly on unpublished statistics, which openings, certain traits of the unemployed
Many of the men and women who report was presented September 20, 1963, to the labor force, and the prevailing wage struc themselves to be unemployed in the monthly Senate Subcommittee on Employment and ture. If this view is correct, unemployment labor force surveys are not hired either be- Manpower, Prof. Charles G. Killingworth, of will not yield to accelerated economic cause they lack the necessary qualifications Michigan State University, found: "Clearly, growth. The President remarked at his news
or because they do not have a productive ca unemployment at the bottom of the educonference of October 11, 1962, that “we pacity which is at least equal to the estab cational scale was relatively unresponsive to could have a great boom and still have the lished wage rate. They form the hard core general increases in the demand for labor kind of unemployment they describe.” of the unemployed.
while there was very strong responsiveness at Until not so long ago it was widely taken This suggests that (a) many persons lack the top of the educational scale.” for granted that lack of available work was the training to fill available openings, and Mr. Killingworth's conclusion was: “The the cause of our high rate of unemploy- that (b) wage rates have risen to a level lagging growth rate is only a part of the ment. The rate averaged 3.9 percent of the which exceeds the value of the work output problem, and it may not be the most imporcivilian labor force in 1946–48, 4.3 percent of a growing number of low-skilled or un tant part. I think that it is extremely unin 1955–57, 6.0 percent between 1958 and skilled persons. If so, the cause of high likely that the proposed tax cut, desirable 1962. It stood at 4.8 percent (seasonally unemployment is not inadequate demand though it is as part of a program, will prove adjusted: 5.6 percent) in September 1963. and it is unlikely to be cured by tax relief to be sufficient to reduce unemployment to This means that 1 in 20 of the men and and a faster growth of GNP.
the 4-percent level." women whom the Bureau of Labor Statistics In a recent study, Lowell E. Gallaway, chief One reason often advanced for the concencounts as members of the civilian labor of the Analytical Studies Section of the So- tration of unemployment, and particularly force reported that he or she wanted a job cial Security Administration, concluded that: of long-range unemployment, among persons and did not have one. It does not mean "The post-1957 experience in the United of low skill and little education, is technothat the total number of jobs available in States represents a classic case of wage-push logical progress which has upgraded occupathe economy-i.e., work to be performed in inflation with its attendant unemployment tional requirements and wiped out hundreds terms of man-days—was 4.8 percent short effects. And, of course, alleviation of this of thousands of common laboring and other of the number of persons willing to fill unemployment through a deliberate stimu- simple jobs. This, it seems to me, is not an them.
lation of aggregate demand (such as the adequate explanation. In the same month, last September, 7.4 proposed tax reduction) mererly alters the In a free market the price of scarce goods percent of all hours in manufacturing (the situation to one of "qualified” wage-push will rise faster than the price of goods only industry for which this information inflation.” 15
which are in surplus. But studies of wage is available) were overtime hours, paid for Unemployment is heaviest among persons trends have shown that occupational differat premium rates. The industry could have with inadequate occupational training after entials have been narrowing and that the employed, at regular hours, all of its workers school and little or no experience, and among pay rates of skilled workers have been climband all of its unemployed-and still have the unskilled. About 1 in 7 teenagers, 16 to ing more slowly than those of unskilled had to get over 2 percent of its work done on overtime pay. Labor Secretary Wirtz was quoted as saying, "I think we have got to 14 Wall Street Journal, February 5, 1963. 16 Joseph S. Zeisel, “Comparison of British start asking whether things are working 15 Lowell E. Gallaway, “Labor Mobility, Re and U.S. Unemployment Rates," Monthly
source Allocation, and Structural Unemploy- Labor Review, May 1962.
ment,” The American Economic Review, 17 Monthly Report on the Labor Force, Sep13 Newsweek, Oct. 21, 1963. September 1963.
tember 1963. CIX-1379
workers. This was demonstrated in an a reasonable chance to be hired at prevailing cent in the past 3 years. As a percentage of analysis by Paul G. Keat of I.B.M., "Long wage rates. It could turn out to be the most national income they averaged: Run Changes in Occupational Wage Struc effective method of widening the ranks of
Percent ture 1900–56." 18 the involuntarily idle.
of national The Economic Almanac for 1962 showed Some regard it as a mere coincidence that
income that the earnings of members of skilled oc in the United States, where workers enjoy
7.7 cupations as a percentage of earnings in un by far the highest wages in the world, the
6.3 skilled occupations dropped from 205 to 138 incidence of unemployment also is much
5.4 over a 50-year period. higher than in other industrial countries.
1963 (1st half)
5.5 This suggests that the wages of less skilled The Council of Economic Advisers remarked and unskilled workers were not set in a free in the Economic Report of the President, The profit squeeze made companies inmarket but by nonmarket factors—largely January 1962, that "the post-Korean years creasingly cost conscious. In an attempt to union pressure with government support were marked by the coincidence of relatively economize they kept hiring at a minimum which boosted contractual or legal minimum large wage increases with declines in indus and became more selective in regard to skills wages to a level that exceeded the produc try employment."
and qualifications of new workers. This is tivity of many. A large number of unskilled
Further analysis could produce more cases
not likely to be changed until the wagejobs were not wiped out by automation nor of such “coincidence.” It is likely that there price structure and lower corporate tax rates by too slow an economic growth rate but is a causal relationship between wages that
enable companies again to earn adequate by wage rates which left an employer only rise faster than productivity and an economy profits. the choice between hiring a worker at a which is unable to employ all workers who
It may be well at this point to recall a loss or not hiring him. With the steady are available at those rates.
pertinent statement by John Maynard rise in legal and contractual minimum
Senator PAUL DOUGLAS once explained this wages we may expect the unemployment rate relationship:
"Unemployment, I must repeat, exists beto continue its long-range upward climb.
"As has been stated, the curve of the di
cause employers have been deprived of profit. A tax cut and even rapid economic growth minishing increments attributable to labor
The loss of profit may be due to all sorts of are likely to be of only limited benefit to seems to be so elastic that if wages are
causes. But, short of going over to comunskilled workers. pushed up above marginal productivity unemployment except by restoring to em
munism, there is no possible means of curing The outlook is truly grave in the light of recent trends. During the past 7 years the there is a tendency for the employed work
ployers a proper margin of profit." 20 civilian labor force increased by 5.6 million
ers to be laid off at approximately three times
Labor under the capitalistic system, there The proposed cuts in personal income tax were added to government
fore, tends in the long run to lose appre- rates will be of material help to most tax
ayrolls, and almost one-fourth swelled the ranks of the
ciably more through diminished employment payers and spur the economy. They will ease Jobless, as table VII shows:
when it raises its wages above marginal some near-confiscatory rates to lower, if still
productivity than it gains from the higher exorbitant, levels, and effectively reduce the TABLE VII.—Increase in the civilian labor
rate per hour enjoyed by those who are em liability of persons in low-income brackets. force between 1956 and 1963 (September, ployed. The converse of this is that when But a tax cut which makes our tax strucseasonally adjusted)
wages are thus above the margin, a reduc ture more progressive by allocating the reltion in the wage rate will help labor as a atively greatest benefits at the lower end of
whole and increase the total amount paid the scale and gives little relief from the Number Percent
out in wages by causing appreciably larger corporate income tax, is not likely to provide
increases in the numbers employed and maximum stimulation to economic growth. Increase in private employment.-- 2,069,000
hence a decrease in the volume of unemploy- It may lead to an increase in the number of Increase in governmental employ
jobs, but I doubt that tax reduction can 2, 299,000 Increase in unemployment.
1, 238, 000
An effective way to accelerate economic make a major impact on our present type of
growth and combat unemployment would be unemployment which is caused by an imIncrease in the civilian labor
not to raise wages in keeping with (or more balance between the type of available job force.
5, 606, 000
than) advances in productivity but to keep openings, certain traits of part of the labor
wages stable and let prices fall. This would force, prevailing wage rates and profits. Source: Economic Indicators, October 1963, and 1962 improve our international competitive standsupplement.
The rate of economic growth could be ing and boost the purchasing power of per- more effectively stepped up by giving greater In the next 7 years the civilian labor force sons whose income does not rise at the same relief to the sectors which have lagged beis estimated to expand by about 10 million, rate as wages established by collective bar hind the rest of the economy, particularly or twice as much as in the past 7 years. gaining or minimum wages set by legislation. behind private consumption and government How will those millions of new entrants find American practice in the postwar period spending, namely business profits, and capijobs while the present imbalance between has favored continuous rounds of wage tal formation, and by increasing incentives productivity and wage rates continues? boosts. The 1962 Economic Report recorded for effort and enterprise. Government
It has occasionally been suggested to cure the average annual increase in output per should not hold a majority interest in anyunemployment (and accelerate economic man-hour in private nonagricultural indus body's income and the top rate of the pergrowth) by sharply boosting wage rates and tries during the postwar period (1947 to sonal income tax should not exceed 50 perparticularly minimum wages. This is like 1961) at 2.9 percent, the corresponding boosts cent. The medium bracket rates would not telling a merchant that he ought to double in hourly compensation at 5.1 percent. Much be given sufficient relief under the prothe price of goods which he has been unable of the steeper increase in wage rates was,
visions of H.R. 8363. I believe that they to sell. Instead of not selling them at $1
of course, expressed in and consumed by the ought to be lowered by at least one-fourth he will then not sell them at $2. Are workresulting price rises. But part of it benefited
from their present levels. The corporate tax ers who cannot find a job at $1.50 likely to some of the workers—those who were able
rate should be gradually cut to about 40 improve their chances by having their wage rate lifted to $2 or $2.50? This will push up to hold on to their jobs.
percent and depreciation allowances further
liberalized. prices and make more people unemployable.
Another part of the wage increases came If raising wages were an effective method to out of profits. Under the pressure of grow
II. SHOULD RATE CUTS BE LINKED WITH TAX
REFORM? stimulate rapid economic growth and em ing competition from home and abroad and ployment, why don't we double them? Why under Government influence, companies were
In the lively tax debates of recent years don't some of the underdeveloped nations reluctant to raise prices and absorbed part the term “tax reform" has acquired a specific where wages are truly low-lift themselves of the higher costs. This explains the oft
and somewhat restricted meaning: a broadby their bootstraps by boosting wage rates? mentioned fact that prices have been rising ening of the tax base through a reduction of To raise wages, in our present situation, at a slow rate, approximately 1.5 percent per The principle of that type of tax reform is
exclusions, exemptions, deductions, or credits. to a substantially higher level would aug annum, for the past 10 years. In fact whole- almost noncontroversial: everybody agrees ment the purchasing power of workers able sale prices have remained perfectly stable that a broad tax base with low rates is prefto keep their jobs and add to their effective for the past 5 years. This found its expres- erable to a narrow base with high rates. But consumer demand. But it would also make
sion in a shrinkage of profits. Corporate net there is probably no more controversial subthe competitive standing and profit picture of our industries more difficult, tend to
profits declined as a percentage of sales from ject in the tax field than the question which channel orders and capital flow abroad, and
5.3 percent in 1950 to 3.7 percent in 1956, of the various provisions freeing certain further restrict the range of Jobseekers with and have ranged from 2.8 percent to 3 per
20 John Maynard Keynes, "Essays in Per18 The Journal of Political Economy, De 19 PAUL DOUGLAS, “Controlling Depressions,” suasion,” New York, Harcourt, Brace & Co., cember 1960. Chicago, Norton, 1935, p. 221.
1932, p. 275.
types of income from the tax ought to be ence between personal income and taxable Most of the demands to "close the loopnarrowed or eliminated. As a result, very income-accrued to the benefit of persons holes” have ignored the big nontaxable items few of the much talked-about reforms have in the lower brackets, as is evident from of personal income and focused attention on ever come close to enactment. table IX.
relatively small items. Had the proposals The most frequently heard assertion in
been enacted they would have broadened the this debate which reached its climax in the TABLE IX.—Taxable and nontaxable personal tax base by little and not added significant second half of the 1950's was that Congress
income in 1960
sums to revenue. But those revisions would by intent or oversight had permitted hun
have made the income tax more progressive. dreds of “loopholes" to slip into our tax laws.
Billion Percent To redistribute income more drastically, rathThose escape hatches, it was said, enable
er than to broaden the tax base, seems to the rich to avoid much or most of their tax
have been the purpose of the "close the loopliability while low-income persons, particu- Taxable income--
43 holes" drive. larly wage earners who have their income Nontaxable income...
228 57 The late Senator Robert S. Kerr wrote in taxes withheld, are subject to the full impact
an article in Look magazine, March 13, 1962:
401 All personal income..
100 of the nominal rates of the law. One tax Nontaxable income.--
"One of our most persistent national myths
228 100 expert told the House Ways and Means Com
is that U.S. tax laws include provisions that mittee in 1959 that "our tax law is riddled Social welfare payments---
favor small groups of people and permit by the benefits that are given to the wealthy,
Exempt labor income (employee
them to escape paying their fair share of
10 and for the most part the benefits that are
welfare plans, etc.)---Computed rent on owner-occu
taxes. The statement is frequently made given to the average man are negligible." 21 pied homes.
by some professors, editors, economists, auThat charge has a strong emotional appeal
thors, radio and TV commentators, and even but is contrary to the facts.
a few politicians--that if Congress would
Income in kind.. It is true that the personal income tax
Exempt military pay-
close 'loopholes,' substantial reduction in
2 reaches less than half of all income. The Property income of nonprofit
income taxes could be made. After serving percentage of personal income which appears organizations....
on the Finance Committee of the U.S. Senas "taxable" on Federal income tax returns
ate for over 12 years, I have come to the equaled only 43 percent in 1960, up from Total. --
conclusion that the word 'loophole' is loosely
70 37 percent in 1950 and 31 percent in 1945.
used to apply to some provision of the InAvailable statistics do not permit us to com Items which are taxable, although not
ternal Revenue Code that some industry,
income: pare personal income with taxable income
group of persons, or individual does not like, by income brackets. But we can relate ad
Contributions to social insurance.
regardless of its merits." justed gross income to taxable income. Such Other..
Little revenue would be added by elima comparison, as shown in table VIII, reveals
inating the most frequently mentioned loop
-18 a steeply progressive scale: 26 percent of the
holes. Several years ago, I concluded that income of persons making less than $3,000
"substantial reductions in tax rates through is taxable; then the percentage rises sharply, Personal exemptions...
43 the closing of 'loopholes' is not a hope but Itemized deductions..
33 equals 58 percent in the $7,000 to $10,000
a mirage." 23 Standard deductions.
5 bracket and reaches 80 percent between $25,- Nonreported income
Simplification of our tax laws is, of course,
33 000 and $100,000 income. At $100,000 and
highly desirable. But it is unlikely to hapover it equals 78 percent.
pen as long as taxes are as heavy as they Source: Computed from "The Tax Base for Individual
now are. Theoretically, we could repeal all TABLE VIII.—Taxable income as a percentage Incomes,” Survey of Current Business, May 1963, and IRS Statistics of Income, 1960.
exclusions, exemptions, deductions, credits of adjusted gross income, 1960
and other differentials and collect as much Income class, adjusted gross
Personal exemptions, social welfare pay
revenue from a comprehensive income tax income:
Percent ments, standard deductions and imputed with a flat rate of 10 percent as we do now All ---
54 income account for close to three-fourths with rates ranging from 20 percent to 91 perUnder $3,000---26 of the difference between personal income
But this is politically impossible. $3,000 to $5,000---
42 and taxable income. Unreported income is That a tax statute as intricate as our In$5,000 to $7,000--
49 estimated at $33 billion (of which more than ternal Revenue Code contains some inequi$7,000 to $10,000 --58 $5 billion may be disclosed in the audit proc
ties is virtually inevitable. As they are found $10,000 to $15,000. 67 ess) and itemized deductions amounted to
and recognized as flaws they should be cor$15,000 to $25,000_ 74 $33 billion. Itemized deductions have fig
rected. This is why tax reform must be a $25,000 to $100,000 -----
80 ured prominently in the debate as a means continuous process rather than a one-shot $100,000 and over---
78 of escape from income taxes for wealthy proposition.
The President recommended certain reSource: U.S. Treasury Department, Internal Revenue Service, "Statistics of income, Juctions were relatively larger in the low visions in his 1961 tax message and an
brackets. 1960; Individual Income Tax Returns for
nounced that he would place a comprehen1960, 1962."
TABLE X.-Itemized deductions claimed on sive tax reform program before the succeed
1960 personal income tax returns as a per ing session of Congress. A comparison by brackets between per
centage of adjusted gross income (AGI) Most of the changes which the President sonal income according to concepts of the
recommended in his 1963 tax message were Department of Commerce, and taxable in
Income class, adjusted gross income: Percent
18.7 not of a major character except the plan to come according to tax returns, would, if it
place a 5-percent floor under itemized deducwere statistically possible, undoubtedly
$3,000 to $5,000---
21.7 reveal an even steeper progression than ap
tions. This would have sharply curtailed the $5,000 to $7,000__.
use of deductions and adversely affected pears in table VIII.22 The fact is that most
$7,000 to $10,000 ---
donations to many worthy causes. When of the income in the higher brackets is
103 out of 104 witnesses testified against it,
$10,000 to $15,000.subject to the Federal income tax and much
$15,000 to $25,000 or most of the income in the low brackets
the House Ways and Means Committee $25,000 to $100,000
quickly killed the proposal. is not.
20.4 $100,000 and over--
The President subsequently explained why Most of the $228 billion personal income not subject to Federal taxation-the differ
Source: U.S. Treasury Department, Inter
he refrained from advocating more extensive
tax reform at this time. He felt that the cut nal Revenue Service, "Statistics of Income,
in tax rates—which he called the most im21 "Tax Revision Compendium," Papers 1960; Individual Income Tax Returns for
portant domestic economic legislation in 15 submitted to the Committee on Ways and 1960, 1962."
years-should not be jeopardized or delayed Means, H.R. 1959, vol. 1, p. 538.
It is of course true that much "adjusted by injecting highly controversial issues 22 Most of the items which are counted as gross income" in the top brackets is not taxed which faced a doubtful reception by Conpersonal income by the Department of Com at the nominal rates of the personal income gress. Several major organizations, of labor merce but not included in adjusted gross
tax. If it were, our economy would have and of management, also have suggested that income accrue to low-income persons, e.g. fallen into stagnation long ago. Capital pending desired structural changes were of social security, public assistance, unemploy- gains are the major reason for the difference
secondary importance (and some of quesment compensation payments, income in between nominal and actual tax rates at high
tionable merit), and should not be permitted kind, imputed income, etc. Capital gains, income levels and account for close to two
to interfere with prompt action on rate reon the other hand, are included at 50 percent thirds of total realized income in the top
ductions. in adjusted gross income but not regarded brackets. An attempt to tax capital gains as personal income and are wholly excluded at regular rates would sharply restrict capi 23 Roger A. Freeman, "Taxes for the by the Department of Commerce; see table tal mobility, freeze investments with unreal- Schools,” Washington, the Institute for SoIX.
ized gains, and might result in less revenue. cial Science Research, 1960, p. 96.
A substantial majority of those who have nity to amend it under the closed rule The proposition that what this country participated in this debate expressed their focused most attention on the merits of an needs is bigger deficits now, if it is to have belief that the most urgently needed tax re action which, at least initially, would sub balanced budgets later on, suggests, as form is a lowering of our exorbitant income stantially increase the size of budgetary George J. Stigler of the University of Chicago tax rates and that other desired changes deficits and of the national debt. This fairly remarked, that "the way to avoid a huge should wait their turn. I agree with this reflected the uneasy feeling among broad deficit is to seek a large one." proposition. While there are many provi- sections of the American public which was The theory that large deficits raise the sions in the Internal Revenue Code which well summed up in the New York Times of rate of economic growth or lift employment ought to be thoroughly scrutinized and September 22, 1963, by John D. Morris: to sustained higher levels has never been amended, I can see no reason why this should “Despite the heaviest tax burden in his- proven. Federal outlays in the fiscal years be tied in with rate reduction. A structural tory, the average voter today seems to be less 1933–34 through 1938–39 were twice as large revision which cannot find approval on its interested in getting some relief from it than as in the preceding 6 years with virtually own merits without a "sweetener,” may not in balancing the Federal budget."
all of the additional funds deficit-financed. necessarily be an improvement. I question The results of several Gallup polls were But unemployment declined only from an whether it is good procedure to gain through confirmed by dozens of polls which Members average of 12.4 to 9.9 million, which still simultaneous rate cuts the consent of a of Congress conducted in their own con left 1 of every 6 workers unemployed. The majority for the placing of heavier taxes on stituencies: about three-fourths of the Federal deficits of the mid-1930's were, in a vote-weak minority.
American people are opposed to a tax cut relation to the size of the economy, equivaH.R. 8363 contains several structural which would boost the deficit and the na lent to a present annual deficit of $20 to changes with relatively small revenue con tional debt. They may be less sophisticated $25 billion. If a red balance of that magnisequences. Some of them, and I mention
than some of our governmental economists tude for several successive years does not particularly the sick pay exclusion, casualty but are reluctant to believe that we can bring back full employment and prosperity, loss deduction, and moving expenses, are de create lasting prosperity by spending beyond how big an annual deficit would we need, sirable,
income and providing the necessary money and for how long, to have the desired Four changes in H.R. 8363 are more sub by printing it.
impact? stantial. The elimination of gasoline, alco
Do budgetary deficits create lasting
Federal cash transactions in the dozen hol, tobacco and certain other minor State
years 1946 through 1957 yielded an aggregate and local taxes as deductible items serves to broaden the tax base. It also makes it
A contracyclical policy of "leaning against ment rate averaged 4.2 percent. In the
surplus of $11 billion, and the unemploysomewhat harder for states and localities to the wind," and of balancing the budget not succeeding 5 years, from 1958 through 1962, finance their own highway construction and annually but over the business cycle, has
the Federal Government ran a net cash other activities, and establishes a questionbecome widely accepted, not only by econ
deficit of $24 billion, and unemployment able precedent. omists but, as several polls have shown,
averaged 6 percent. The President proposed To reduce from 50 to 40 the percentage of also among the general public. But what is
in January 1963 an aggregate cash deficit of capital gains on items held more than 2 proposed here is something much more
$18.6 billion for the fiscal years 1963 and years which are includible in income as a ambitious: to raise through planned sizable
1964, but this is unlikely to reduce unemdesirable change. A reduction to 30 perdeficits the prevailing rate of economic
ployment to the level that prevailed prior to cent, as proposed by the President, would growth.
1957.26 have been even better.
The American economy is not now in a
Last February, George Terborgh, research Is it good public policy to free 1.5 million recession and has not been in one for some
director of the Machinery and Allied Prodtaxpayers from all tax liability by the estab- time. It is on the whole prosperous and
ucts Institute, presented to the Joint Ecolishment of a minimum standard deduction? gives no indication of an imminent or im
nomic Committee a quarterly analysis of What effect will that have on their interest pending downturn..GNP is continuing to Government deficits and economic growth in the fiscal operations of the Government expand at least at its long-range historical rates in the postwar period. It showed and on their attitude toward expansion of rate.
a slightly positive correlation between budget benefits in whose financing they do not of course, everybody would be happy if surpluses and rising GNP (+0.39) when reshare?
national income grew more rapidly. Would lated to simultaneous economic data, and The purpose of permitting deductions a planned budget deficit in the next 2 fiscal virtual zero correlation (-0.04) with a 6from adjusted gross income is to give due years produce a lasting increase in the rate month lag between budget and GNP figures. consideration to relatively heavier burdens of economic progress and lead to rising Gov
There has been much comment on a study or to recognize donations to worthy causes.
ernment revenues and balanced budgets sev- by Andrew H. Gantt according to which the A modest standard deduction is justified for eral years hence, as the President promised? United States incurred fewer and smaller administrative convenience. But to ex Or shall we be told 2 or 5 years hence that
budget deficits in the 1950's than Great Britpand that privilege, regardless of burdens the rate of growth still is not high enough, ain, France, and Germany.28 Subsequent reactually borne, opens a loophole and nar or the rate of unemployment not low
search by Michael E. Levy generally confirmed rows the tax base for no legitimate reason.
enough, to permit our budget makers to keep Gantt's findings but did "not indicate any To repeal the dividend credit would prove expenditures within revenues?
systematic relationship between budget defidetrimental to economic growth. The credit The President warned the Business Com
cits and growth” in a comparison of the was established in 1954 to encourage equity mittee for Tax Reduction last September: United States and six European countries. investment and to give at least a token rec- "If this program isn't successful, then other The study "does not support current arguognition to the fact that not all of the means must be suggested." He and his ad ments which imply that larger deficits-or corporate profits tax is shifted to con visers have left no doubt but that they re low-saving budget structures—as such, are sumers, and that some part of it is borne gard a tax cut as an alternative to sharply bound to result, almost automatically, in acby stockholders and taxed twice. The credit increased Government spending. The pri- celerated economic growth over the years." + ought to be raised to 10 percent. The Treas vate economy is to be given a chance to Another comparative analytical study of the ury's argument in favor of repeal 24 can be grow more rapidly with a reduced tax bur United States and several other countries by reduced to the aim of making the tax den, before enlarged spending is resorted to. Beryl W. Sprinkel suggested that economic structure more steeply progressive.
The President and his economic advisers growth was more likely to be spurred by Summary
maintain that a restraint on spending would monetary expansion than by larger deficits.30 The most urgently needed tax reform is a The latter would boost aggregate demand which the U.S. Government dispatched to
nullify the beneficial effect of the tax cut. It is well known that some of the experts reduction of personal and corporate income tax rates. Other tax revisions should be
but lower spending would reduce it. The asacted upon in due course and separately. sumption behind this belief is that the drag
26 According to more recent estimates the Some of the structural changes in H.R. on the economy is not caused by our lop8363 are desirable improvements. I believe, sided and excessive tax structure but by the deficit may actually be somewhat smaller;
but this is immaterial to the basic arguhowever, that the creation of a minimum fact that budgetary deficits have not been standard deduction and repeal of the divi- big enough. This was clearly indicated by ment over the growth-creating effect of
deficits. dend credit are detrimental and ought to be
John P. Lewis, a member of the Council of eliminated from the bill.
Economic Advisers, who told his audience at 27 "January 1963 Economic Report of the
Notre Dame University on September 11, President,” hearings before the Joint EcoIII. SHOULD A TAX CUT BE ACCOMPANIED BY
1963, that taxes "had gotten too high rela nomic Committee, 88th Cong., 1st sess., 1963, RESTRAINTS ON SPENDING? tive to Government expenditures.”
pt. 2, p. 773 ff. The House debate on H.R. 8363 turned A statement supporting the adminis 28 "Central Governments: Cash Deficits and almost exclusively on whether Congress was tration's proposals, signed by about 400 econ- Surpluses,” the Review of Economics and justified in cutting taxes at a time of rising omists, suggested that the economy might Statistics, February 1963. expenditures and big deficits. There was, to be spurred to faster growth "by reducing tax 29 Michael E. Levy, "Fiscal Policy, Cycles be sure, concern over some of the substantive revenues, by increasing government expendi and Growth,” National Industrial Conference provisions of the bill, but lack of opportu- tures, or by some combination of the two." 25 Board, 1963, pp. 51, 56.
30 "Relative Economic Growth Rates and 24 President's 1963 tax message, hearings, 25 Daily CONGRESSIONAL RECORD, Sept. 30, Fiscal Monetary Policies,” the Journal of op. cit., pp. 246 ff. 1963, p. A6118.
Political Economy, April 1963.