Tax Analysts®Tax Analysts®

Article Archive

February 15, 1996
Historical Documents: 'Facing The Tax Problem' -- Book Three, Conclusions.
Carl Shoup, Roy Blough, and Mabel Newcomber

====== SUMMARY ======

Book Three of the report, "Facing the Tax Problem," sets out a variety of recommendations for reforming the U.S. tax system. Perhaps most notably, the report suggests a broad expansion of the federal income tax and a reduction in most excise and consumption taxes.

====== FULL TEXT ======

Book Three


[pages 388-90 blank]

[page 391]

Chapter 25

The present chapter and Chapter 26 mark a sharp departure from those that have gone before. They are advisory, not factual, and give the views of the three directors of research on what should be done with the tax system. The present chapter contains general conclusions, and Chapter 26 contains specific recommendations for action based on these conclusions.


Although this chapter draws heavily on the information presented in Books One and Two, it necessarily goes outside it.

For one thing, time and space limitations have confined Books One and Two primarily to an analysis of the existing tax system. The effect of alternatives has been implied at times and has sometimes been explicitly stated, but on the whole it has been given little space. Consequently some of the statements of means and ends in this chapter will not be fully explained by the other material.

For another thing, the choice of objectives and the relative weight given to each objective must depend on innumerable other choices, many of them far removed from the field of taxation. Whether the tax on spirits should be sharply increased in an effort to promote temperance, for example, depends not only on one's views on the efficacy of the tax for this purpose, but also on one's opinion concerning the extent of intemperance and the propriety of forcing people to become more temperate.

[page 392]


The conclusions and recommendations presented in this and the following chapter depend on both the choice of aims and the forecast of the results that are to follow any given adjustment. Consequently, there is ample opportunity for an understandable disagreement among students of taxation with respect to the advisability of any specific tax measure.

It is sometimes implied that specialists in taxation are qualified to design a tax system that can be proved to be the best possible one. To us this view seems erroneous. The best tax system is the one that most fully promotes the public interest. Before such a system can be constructed two problems must be solved. The first problem is to determine what the public interest is. In part, the public interest reflects interests common to all persons; the task then is simply one of discovering these interests. In large part, however, ideas of what the public interest is differ radically. Often, perhaps usually, a person's idea of what is in the public interest is merely an extension of what he thinks is in his own private interest. Private interests conflict; determining the public interest involves choices and compromises among them. /1/ No one can authoritatively decide whose private interests should be recognized as the public interest, although everyone has an opinion. Determination of the public interest is a political problem; it requires a highly enlightened populace acting through properly organized democratic political processes. The result is reflected in the tax aims that are chosen and in the relative importance attributed to each.

The second problem is to devise a tax system that will most nearly achieve the desired combination of aims. This is a technical, not a political, problem. Its solution is limited only by lack of knowledge about the operation

/1/ See Note 1, Model Plans, p. 579.

[page 393]

and effects of taxes. The tax student may contribute technical
knowledge for devising methods that will achieve desired tax aims. He
may assist in discovering common interests. However, where a conflict
of interests is involved, his ideas of what tax aims are in the
public interest can be only opinions. These opinions will inevitably
color his conclusions and recommendations.


Our conclusions are stated in general terms in paragraphs 1 to 102 below. The presentation follows the order of the material in Book Two. The number in parentheses at the end of each paragraph is a page reference to the relevant material in Book Two.

The conclusions of course refer only to the tax system of the United States -- particularly the federal part of that system -- at the present time. They also assume the existing private capitalistic system of economic enterprise, with a considerable degree of governmental control.

Economic Limits of Taxable Capacity

1. We believe that the amounts now raised by taxation and the amounts that are likely to be demanded in the near future are not beyond the economic limits of taxation in the sense that they would so stifle business initiative and saving that they would be incompatible with an economy based largely on the private capitalistic form of enterprise. However, the uncertainties surrounding any present conclusions on this matter deserve emphasis. (61-66)

2. In our judgment, the existing tax system is too heavily weighted against risky types of enterprise -- particularly in view of the meagre study that the problem has been given. For example, the federal income tax and most of the state income taxes claim an appreciable share of any winnings, and they often do not allow the

[page 394]

taxpayer to offset his losses against his taxable income from other
sources. If a certain amount of restraint on hazardous undertakings
is advisable, it should be adopted consciously, not unconsciously.
Lengthening the accounting period by means of carry-over or averaging
provisions would eliminate some of the weighting against these
enterprises. (62, 283, 302-3)

Taxation as an Instrument of Social Control

3. We believe that taxation should not be barred as an instrument of social control. However, it is usually a crude instrument for this purpose, and obviously it should not be used if a better device is available. We warn against the naivete of those who, not familiar with the difficulties of forecasting the economic effects of tax measures, the technical difficulties of tax administration, and the political tax difficulties inherent in a democratic and decentralized state, would use the tax system for important and complex social reforms. This caution should not lead to a philosophy of despair, but to a vigorous effort to devise tax techniques and otherwise extend tax knowledge in order to make the system available for such control as is desired. We especially stress the need for study on this subject. Whether or not tax students believe in a large measure of social control through taxation, they should prepare themselves to offer sound technical suggestions, in order to avoid the unsound ones that will otherwise be adopted. (129-40)

4. Although an evaluation of the aims to be sought through social control is outside the scope of this study, a discussion of the tax measures suitable for each purpose is not. The possible aims are numerous, however, and each demands detailed treatment. Consequently it is difficult to offer specific advice in a survey as comprehensive as the present one. The factual information in Book Two, particularly in Chapters 9 to 14 inclusive,

[page 395]

should enable the reader to form a judgment on most control
objectives. Beyond these general principles, we offer a few isolated
and tentative remarks. (141-214)

Promotion of Specific Industries


5. We regret the lowering of the general standard of living of the country that is caused by the protective tariffs, which impose a barrier to division of labor -- that is, specialization in the kinds of production for which one is best fitted and the exchange of goods that goes with such division. Any sudden abolition of the existing protective system is not, however, recommended. The process of adjustment should be slow, but it should be as complete as is possible in view of aims other than a high standard of living -- for instance, self-sufficiency in preparation for war. (141-43, 249-50, 253)

Other Tax Measures Designed to promote Particular Types of Business

6. We object, in general, to tax measures designed to promote particular types of business if they have been enacted chiefly as a result of pressure from those businesses rather than in order to further some genuine social end. In this class we place the heavy taxes on oleomargarine, designed to promote the competing dairy industries, and the taxes on chain stores, designed to promote independent stores. (135, 145-46, 182-87)

7. Granting exemptions to particular classes of activity, notably educational, charitable, and religious activities, constitutes government support without government control -- a fact that should be clearly recognized. If the government is to exercise control, subsidy, not exemption, should be used. (296)

8. Whatever the desirability of state assistance to a

[page 396]

given activity, or of assistance with control versus assistance
without control, the hardships that would be occasioned by a sudden
and, above all, a retroactive shift in policy should be carefully
weighed. (249-50)

Tax Measures Designed to Promote Business in Particular Areas

9. We oppose, in general, the use of exemptions from the property tax for promoting particular businesses, notably manufacturing, in a given state or locality. The exemption is always at someone's expense, it gives governmental assistance without governmental control, and in any case it is apt to be futile, since everyone can play the same game. Here too, of course, the remarks made above concerning sudden and retroactive changes in policy apply. (148-50, 249-50)

The Differential Tax on Land

10. The economic possibilities of a distinction between land and improvements under the real estate tax are extremely important. Lighter taxation of improvements, in contrast with lighter taxation of land, apparently promotes production. However, any drastic program of this kind presents grave risks of injustice. The difficulty of drawing a satisfactory line between land and improvements is also significant, particularly in view of such items as wastable soil fertility and long-lived and already installed land improvements (for example, a ditch or a space for an underground vault). The whole question certainly deserves much more recognition and careful study than tax students have usually given to it. If the public demands further substantial reductions in the property tax, the question will become acute. Meanwhile, we must suspend judgment because of lack of information on the relative effects. (150-52, 290-91)

[page 397]

Control of Business Organization and Practices

Incorporated versus Unincorporated Enterprise

11. Without attempting to explore deeply the complex problem of the proper place of the corporation in economic life, we express the belief that the issue of "bigness" in business is not likely to be satisfactorily settled by such tax measures as have recently been adopted. The present degree of graduation in corporation taxes in the United States represents an indecisive policy that has but slight merit and works considerable injustice. If big units are really to be penalized, the graduation must be much more drastic than it now is. It must also be on a more refined technical basis, with some element of size of investment entering into the determination of amount of tax. Otherwise, graduation in corporation income taxes should be abandoned. We are not convinced that big units as such need to be penalized, and we are not convinced that a graduated income tax is a suitable method of penalizing them, in any event. Hence we favor a replacement of the existing graduated taxes on corporate net income by flat rates. (153-55)

12. The present system, especially in states that tax dividends fully under their personal income tax laws, makes the use of the corporate form impossible for many small businesses that would otherwise prefer to abandon the proprietorship or partnership status. We can see no sound reason for this discrimination. (155-58, 259-60, 309)

13. The attempt by the federal government, in the Revenue Act of 1936, to put corporate investors on the same income tax basis as partnership and proprietorship investors represents an aim to which we are decidedly sympathetic. In so far as it retained the corporation normal tax, however, Congress progressed only part way toward this goal. A more logical method would be (1) to abolish the corporation normal tax and (2) to force cor-

[page 398]

poration shareholders to pay both normal and surtax on their full
share of current corporate earnings, undistributed as well as
distributed. Thus corporate shareholders would be treated as partners
now are treated. Unfortunately, this procedure cannot be used without
certain constitutional changes and changes in corporate financing
methods, which are not likely to be obtained.

Another possibility, which may also require a constitutional amendment, is the taxation of all capital gains -- or at least all gains on common stock holdings -- that have accrued, whether or not realized, by the end of each taxable year. By allowing the taxpayer to select this method as an alternative to a less attractive method, an amendment might not be necessary. (160-68)

14. We regret the hasty passage of the act imposing the undistributed profits tax. Any measure with such complex economic effects should have had more careful study. However, we do not believe that this reason alone is sufficient to dictate immediate repeal. (168-70)

15. We look on this tax as a promising method, under present constitutional limitations, of integrating the corporation and individual income taxes. As such, it deserves careful study and a fair trial. One aim of this integration should be to remove the incentive for withholding corporation dividends that has been produced by the individual income tax. However, we view the tax not as a final solution but as a stop-gap either (1) until a special study has shown that the optional method is feasible for taxing accrued capital gains, or, if it proves not feasible, (2) until Congress has been granted more power by constitutional amendment to tax accrued gains and possibly also undistributed profits as such directly to the stockholder. (164-66, 170)

16. We do not believe that the effects of forcing the payment of cash or other corporation assets to stockholders have been sufficiently studied to justify the con-

[page 399]

clusion that they would be beneficial. We believe that the solvency
of certain types of corporation would be endangered. If such payments
are forced materially beyond the offsetting of the individual income
tax pressure previously mentioned, we think that the act should be
repealed until further study of the economic effects of such a
distribution has been made. A solution may be offered by the use of
the taxable stock dividend, which makes the distribution of corporate
assets unnecessary. Another method that may be useful is the offering
of rights to subscribe to new shares at a price well below that of
outstanding shares. Thus almost any corporation may get back most of
the money that it has paid out. Both methods have certain
difficulties, perhaps dangers, for corporate financial structures.
However, they are sufficiently promising to justify continuing the
tax until their possibilities have been tested. (174-76)

17. We think, however, that the failure of the undistributed profits tax to take account of business-loss years and of capital losses in excess of capital gains endangers the financial soundness of corporations. Furthermore, we consider it grossly unfair to corporations with violently fluctuating incomes. We recommend that the act be amended so that losses can be offset against the incomes of following years, and capital losses against other income, in computing the amount of undistributed profits subject to this tax. (160-68)

18. A relatively small amount, perhaps 10 per cent, of net income should be exempted from the tax on undistributed profits in order to give the corporation some leeway. If necessary, the rates of the top brackets might be increased. (160-68)

19. The "relief provisions" should be reconsidered and their injustices rectified as far as they can be without destroying the basic purpose of the act. (16)

20. A thorough and impartial study of the economic

[page 400]

effects and implications of the act should be made at an early date.

Control of Consumption

21. We do not in general favor the use of high tax rates on particular commodities or services to repress consumption. We do, however, believe that it is justified in the tax on spirits. The government, in our opinion, should be prepared to accept something less than the maximum possible revenue from the tax on spirits in order to accomplish repression of consumption. It is with considerable regret that we advocate taxation as a method of restricting consumption, since this method inevitably discriminates against those with low incomes. However, until some more satisfactory rationing plan is available, we believe that the former method, in which prices are made high because of a high tax, should be used. Whether the existing administrative situation would permit a repressive rate -- by which we mean a rate above the point of maximum revenue -- is a technical problem upon which we are not in a position to pass. (195-202)

Redistribution of Income and Wealth

22. In speaking of redistribution of income or wealth, we use "redistribution" to designate one of the possible ways of effecting a "change in distribution." An appreciable amount of redistribution of income, from the more well-to-do to the less well-to-do, is taking place under the existing tax system in the United States. More precisely, there is a redistribution compared with the situation that would exist if government confined itself to those activities that would be unanimously accepted as essential governmental services. We believe that this redistribution is both inevitable and desirable. We should not agree that the present amount of redistribution

[page 401]

should not be exceeded. An elaboration of this suggestion, however,
would bring us into the field of expenditures. For example, we might
not approve of redistribution in the form of veterans' pensions
financed by raising income tax rates in the brackets above the
$20,000 level, but we might approve of redistribution in the form of
slum clearance and low-cost housing financed in the same way. We
should not approve of redistribution beyond a certain total, because
of the dangers in an excessive slowing up of the productive
mechanism. In summary, we approve of the principle of redistribution
-- provided it is from the more well-to-do to the less well-to-do --,
but we may or may not approve of the amount and the kind of
expenditure involved. (203-14)

A Just Distribution of the Tax Burden

23. In a general way, we are inclined to believe that in the minds of tax students justice in taxation, as it has usually been conceived, will become of less relative importance compared with the effect of taxation on the operation of the economic system. Nevertheless, much work remains in order to achieve and maintain those objectives of tax justice that we consider of great importance. (217-20)

24. Some evidence exists that the tax burden is regressive below the income tax level, and perhaps for a short distance above it. Regressive means here that the lower the income, the greater the percentage of income that is taken by taxes, direct and indirect. Such regressiveness as there is should of course be eliminated. Scarcity of information on how progressive the rest of the system is, as a whole, makes it more important to concentrate on certain injustices or dangers of injustice that are known beyond doubt than on the degree of progression. These injustices and dangers will be discussed in the paragraphs immediately following. (232-37)

[page 402]

Past Events and Present Justice


25. We are concerned over the current campaign for reduction of the property tax, more particularly the real estate tax, because of the certainty that any widespread reduction will give an undeserved bonus to many purchasers who bought real estate when tax rates were at their present level and on the assumption that they would remain there. We are also concerned for the many property owners of long standing who can make a telling argument for relief from some of the property tax burden. The unfortunate fact is that any blanket reduction in the real estate tax will, in our opinion, give some taxpayers what they deserve and others far more than they deserve. Therefore, each state and local jurisdiction, before it makes any appreciable reduction in the real estate tax, may well consider how many owners it will be rewarding beyond their deserts. Consideration should also be given to the number of owners, tenants, and others that will be worse off after the lowering than before, in view of the replacement taxes. The loss of local self-government that may result if real estate tax reduction necessitates state aid presents a further problem. /2/ (238-44)

Vested Interests

26. What has been called "the innocent vested interest" impresses us as an important aspect of tax justice, but not one that can ever be allowed to bar a change if the change is made gradually. We are inclined to emphasize this interest because we feel that it has been neglected in many important discussions where it should have a place. It is fairly important when the real estate tax is raised, usually of less importance with an increase in the

/2/ See pp. 381, 385.

[page 403]

income tax burden, and of major importance when an excess profits tax
is levied or a protective tariff is imposed or repealed. In contrast
with the capitalization problem, it is of chief interest when tax
increases, rather than tax decreases, are being considered. (249-54)

Repressive Effect on Sales

27. A special tax on a particular commodity or service has a repressive effect on sales, which is usually financially damaging to its producers and distributors. We believe that too little attention has been paid to this aspect of special taxes. Because of this effect, we are opposed to further manufacturer's excises or other narrowly specialized taxes, whether levied by the federal government or the states, unless they are imposed for social control. Similarly, we do not favor any increase in the rates of the existing taxes of this kind. Whether any increase in justice to producers and distributors is to be gained by lowering the rates of the existing taxes or by abolishing them is, however, highly questionable. (245- 49)

28. We doubt very much whether the cigarette tax rates need to be lowered so far as justice to producers (including tobacco growers) and distributors is concerned. The rate has remained unchanged for nearly twenty years, and many new owners -- stockholders, owners of farm land, etc. -- have bought in with full knowledge of the tax. The consumers whose smoking is reduced because of the increase in price caused by the high tax present a different question. We see no reason for discriminating against cigarette smokers compared with those who use other forms of tobacco or who do not use tobacco. This statement assumes that the retail price of cigarettes would be much lower if no tax existed, as it doubtless would. Consequently, we believe that, if the federal government enters an era of tax reduction, it should reduce the cigarette tax at least as soon as it re-

[page 404]

duces others, such as the income tax. We emphasize that the injustice
to consumers is represented not only by the actual tax that they pay
in the form of a high price but also by the number of cigarettes that
they cannot buy at all, solely because of the high price. This aspect
of the tax burden is commonly overlooked. It is never reflected in
data on tax collections. (247-48, 317-20)

29. The spirits tax presents a special problem of regulation, already discussed. /3/ The gasoline tax and motor vehicle license taxes are discussed below, under benefit taxation. /4/ Practically all the other federal and state taxes on specified commodities and services are so light that the repressive effect on sales is probably causing little damage to producers or consumers. (24, 25, 249)

30. One of our objections to a general sales tax, such as the manufacturers' sales tax recently proposed for the federal government or the retail taxes levied by the states, is the repressive effect on sales and the consequent damage to certain producers and distributors. Correspondingly, of course, the net effect on some consumers is to deprive them of certain things that they would otherwise purchase. The injustice is likely to be much less than in the case of the special taxes, however. For a given amount of revenue, the rate will be much lighter, and the business firms affected will be so numerous that the degree of discrimination will be less. (245-49)

Benefit Taxation

31. As to benefit taxation, we are influenced in opposite directions by two sets of considerations. (255-57)

32. On the one hand, we believe that some of the strife and bitterness would be removed from the tax conflict if taxpayers knew that they were paying for a specific service by a tax directly relevant to that service.

/3/ See p. 400.

/4/ See pp. 405-6.

[page 405]

Moreover, benefit taxation, if the "beneficiaries" agree that there
is a benefit, offers the government a chance to accomplish many
valuable things that it otherwise could not accomplish because of the
strenuous objections to general revenue taxation. (255)

33. On the other hand, we are disturbed by the emphasis that benefit taxation necessarily places on the existing distribution of economic power. We cannot, therefore, say that benefit taxation should be pushed to its technical limits -- and indeed probably no one would say so. The problem is much the same as that discussed above under redistribution of income. The answer depends on certain views toward expenditures that cannot be developed here. (256-57)

Highway Taxation

34. The motor vehicle tax and the gasoline tax offer suitable methods of financing most of the cost of highways and part of the cost of city streets. Part of the highway and street costs can be met by special assessments or the real estate tax because of the benefit to real estate. Another part can be met by general fund revenue because of the general public interest that is involved. We are very uncertain, however, how satisfactorily the existing rates of these taxes distribute the burden among the various road users. Some extremely complex problems are involved. Study should be given to them, since neither facts nor theories are well enough developed to guide tax policy at the moment. Tentatively, we do not think that the state gasoline taxes and motor vehicle taxes are too high, in view of the volume of highway expenditures; therefore, we recommend no decided decrease in the rates of those taxes generally. (258, 260- 262, 267-68)

35. The federal automotive excises other than the gasoline tax are technically unsuited for use as benefit taxes and should not be so used. In view of the elements

[page 406]

of national defense benefit and postal benefit in highway
expenditures, the federal gasoline tax, at its present 1-cent rate,
is high enough. It covers a large part of federal highway
expenditures (58 per cent in 1935). (261)

Corporation or Business Benefit Taxation

36. The corporation income tax raises the question of why such a tax should be imposed at all if there is a personal income tax and if, in some such manner as is suggested above, /5/ the stockholder's total share in the corporate earnings is taxed each year. Business firms in general -- and to some extent corporations in general as opposed to other forms of business -- sometimes cause the government special costs and get special benefits that increase net profits. In our opinion, they should pay for these costs and benefits. We think that the ordinary income tax alone is not adequate, and the capital stock tax even less so. We therefore recommend that, where business firms cause special costs -- for example, in court litigation and in some forms of police protection --, an attempt be made to assess special charges to cover these costs. The charges should not always be strictly on a proportion-to-use basis; to some extent they should include a flat-charge element. Otherwise the tax might have such repressive effects that the community in general would suffer. (259- 60)

37. We further recommend that heavy excess profits taxation, not limited to corporations, be used to counteract in part the excessive benefits that certain governmental services may sometimes give to business firms. Such benefits will, we believe, often appear in the form of excess profits. We are not prepared, however, to recommend state taxation of excess profits. (289)

38. In view of the considerations expressed above, we favor only very light taxes on corporation net income,

/5/ See pp. 397-400.

[page 407]

provided always that a suitable method of taxing all the current
earnings to the stockholder is used. (259-60)

39. If the corporation tax is entirely repealed, "excess" may well be made a more comprehensive concept than it has been in the past -- for example, excess profits might be considered to start at 5 per cent or even lower instead of at 10 per cent. (289)

Social Security

40. The social security plan offers some extremely perplexing problems with which we are not prepared to deal. However, we see no overwhelming reason why either the unemployment compensation plan or the old-age annuity plan should be financed on a benefit basis, as they doubtless will be if all the payroll taxes really rest as a burden on the workers. (263-65)

41. We also see no reason why the rates should be so heavy that the old-age annuity taxes will in effect be covering part of the federal government's current deficit for general purposes. In other words, if the federal government is unwilling to raise enough general fund tax revenue to meet general fund expenses and thus to keep the debt outstanding in the hands of the public from growing, we cannot see why it should insist that the social security taxes shall raise more than is required by current social security needs and thus reduce the publicly held debt. The general fund and the social security reserve fund may be in water-tight compartments in an accounting sense, but they are not in an economic sense. Perhaps, however, the excess of the old-age taxes over current payments on contributory pensions will all be absorbed in paying for the non- contributory old-age pensions. (124, 263)

42. The payroll tax that the federal government is collecting under the unemployment compensation sections of the act goes almost wholly for general fund purposes.

[page 408]

The amount involved will become small as the states levy their own
unemployment compensation taxes and thus bring the credit feature
into play. If the states do not act promptly, however, we suggest
that some other arrangement be sought, since we are opposed to this
payroll tax as a general fund tax. (194, 264-65)

43. Even as an unemployment compensation tax the payroll tax does not particularly appeal to us. It presents the obvious danger of putting pressure on the employer to use machinery that would ordinarily be uneconomical, and thus perhaps adds to the volume of technological unemployment. (264-65)

44. A much more thorough study of the financing of social security is needed before recommendations of much value can be given. For example, a study should be made of the tax implications of financing social security by general ability taxes rather than by levies on consumers of a kind that would stress the social cost of each business. Tax students in the decade or two prior to the passage of the Social Security Act gave almost no attention to the problems of financing that any such program would entail. The act was rushed through before the financing aspects could be adequately considered. The uncertainty of the constitutional outlook for the act has discouraged special study of the effect of its specific provisions. (194)

Special Assessments

45. In our opinion, local improvements to real estate present one of the strongest cases for benefit charging. Recently such improvements have been financed, to some extent, in other ways -- notably, by grants from the federal government as part of an emergency program. We are opposed to a continuation of this policy. We are also disturbed over the relative failure of special assessment theory and practice to improve in the past decade or two,

[page 409]

particularly in some of the large urban centers. We therefore urge
that city authorities everywhere, and officials of many classes of
rural districts, devote much more thought to this matter than they
have done in recent years. These recommendations do not, of course,
conflict with those made above for highway financing. /6/ (265)

Postal Rates

46. We can see no reason for asking the users of first-class mail to bear the burden of the partially free service given to other classes of users. Therefore we recommend that the first-class charge be reduced until it merely covers the costs of first-class mail -- presumably, 2 cents would be the only practicable figure. The rates on the other services should make up the difference, or, if these services are to be subsidized for some reason, a general revenue tax could be used. (266-67)

Taxation Based on Socially Undesirable Income

47. We believe that monopolistic elements exist on a large enough scale in the United States today to justify an attempt to build up an excess profits tax for use in peace-time. Another reason for such a tax /7/ is the possibility that certain businesses may receive excessive net benefit from governmental services. It would, of course, be preferable to eliminate the causes of the excessive profits. We doubt, however, whether they could be eliminated to an appreciable extent. Modern industrial and commercial conditions seem inevitably to result in an important amount of monopoly control, using the term "monopoly" in its widest sense. (276-78)

48. Because of the technical difficulties, we favor the introduction of such a tax at substantial rates only after a considerable period of record-keeping. Furthermore,

/6/ See pp. 405-6.

/7/ See p. 406.

[page 410]

this delay will have the advantage of making some allowance for
innocent vested interests. (252-53)

49. A set of broad recommendations such as these need scarcely specify details for an excess profits tax. However, we do recommend that a strenuous effort be made to apply the tax to unincorporated firms. Perhaps all firms below a certain size, whether incorporated or unincorporated, should be exempted -- solely because of administrative difficulties. So far as possible, each business should be taxed separately. Indeed, an effort might be made to isolate and tax the monopoly productions and transactions within a single business, though this may of course prove to be impossible. The tax should be based on return from business assets. Consequently, no deduction should be allowed for interest paid, and, in effect, the structure of the liabilities side of the balance sheet should be disregarded. The accounting period should be made several years in length, by means of a carry-over of losses or averaging devices of some kind. The rate of return that is called "fair" should vary with the degree of risk. The stage at which a profit is considered at least in part excessive could be much lower than it was for the special war taxes. Finally, special attention must be paid to eliminating the excess profits element itself in determining, for tax purposes, the amount of the invested capital. (278-90)

50. The so-called excess profits tax now imposed by the federal government is clearly unsuited for the task, chiefly because of its connection with the capital stock tax. (271)

51. We have no idea how much revenue can be expected from the kind of tax that we propose. We are not drawn to it primarily as a means of capturing high profits from risky enterprises, or windfalls, or inflation profits. If it were not for the monopoly problem, we should not

[page 411]

recommend the tax at all, for we are impressed by its theoretical and
technical difficulties. (274-90)

52. From the point of view of justice alone, we can see little or no appeal in the single tax for the United States at the present time. The graded land tax has been touched on above. Land increment taxation is certainly worth more of a trial than it has been given, but it might be incorporated as part of an excess profits tax. In framing it, care should be taken to pay due regard to innocent vested interests. (290-93)

Ability to Pay

53. A tax system cannot be precisely formulated on the basis of any existing set of principles for tax justice. Whatever may be thought of the various doctrines of sacrifice, no way has been found to reduce them to terms concrete enough to serve as guides in deciding, for example, whether the income tax rate on a $20,000 income should be 10 per cent or 20 per cent -- or more or less than either. We have, however, several remarks to make on particular aspects of particular taxes. (320-21)

Property Tax

54. In common with practically every other observer, past or present, we deplore the obvious injustices found under the property tax. We urge that they be speedily lessened, even though complete elimination is too much to hope for. Continual pressure for better assessors and better assessment under the real estate tax must be exerted. Whether state assessment rather than local assessment is called for is a matter that must be decided in each state in the light of local conditions, but we should like to see a few states, at least, try the experiment. There are substantial reasons for abolishing the tax on tangible personal property in any state that can possibly raise its revenue in another way. It is difficult to administer.

[page 412]

Even if it is perfectly administered, it is a poor means of measuring
either the benefit to or the ability of an individual or a business
firm. As to the intangibles tax, practically any new revenue source
would be an improvement, at least if the intangibles tax is of the
orthodox ad valorem full-rate type that is applied to practically all
bonds and almost all stock, except sometimes the stock of domestic
corporations. It is harder to administer than the tangible personalty
tax, and the principle of the tax is even more faulty. (294-95, 297-

55. Exemptions under the property tax have been touched on above. It may be added, however, that from the point of view of a just distribution of the tax burden we can see no merit in the homestead exemptions recently adopted in Florida and several other states. The most obvious injustice in such exemptions is that they discriminate against the tenant, who must bear in his rent at least part of the real estate tax burden on his dwelling, and favor the person who happens to be able and willing to own his home. (295)

56. The recent property tax limits that have been embodied in some state constitutions, especially limits of the over-all type, seem to us to be ill-advised, particularly from the point of view of tax justice. They have been set so low and made uniform over so wide an area that they have disrupted long-established fiscal relations between taxpayer and government, and between different units of government. They have given undeserved bonuses to some taxpayers, inflicted heavy burdens on others who have had to supply much of the replacement revenue, and have made some localities largely dependent on the state. (297)

Income Tax

57. For the United States we favor the unified type of income tax. Therefore, we urge that capital gains con-

[page 413]

tinue to be a part of the income tax base, not under a separate
special tax. We also urge adoption of the principle that capital
gains and losses be computed annually on an accrual basis, although
we realize that in practice this plan would, for some time at least,
be substantially restricted in its application by serious
administrative difficulties. Capital losses should be allowed as
deductions against other income. Capital gains and losses on assets
held until death are at present not taken into account; this anomaly
should be removed. We should like to see some state experiment by
taxing imputed income from home ownership and farm produce. We
recommend a longer accounting period than one year, to be achieved
either by a carry-over of losses or by an averaging device.

The advisability of allowing any deduction, even the present limited one, for contributions to charitable and other non-profit organizations depends upon the issue of control, mentioned above. /8/

We regret the existence of tax-exempt securities, with the consequent distortion in the operation of the progressive tax rate scales. There is no prospect of a solution in the near future, but we urge adoption of a constitutional amendment that will permit each jurisdiction to tax the future security issues of any other jurisdiction. Unhampered access to the capital market by the federal government in time of war, and perhaps in other emergencies, should, however, be guaranteed. Likewise, we recommend a change to allow non- discriminatory taxation of governmental salaries. (300-6)

58. If an increase in revenue from the income tax is needed, we believe that the rates in the middle income brackets should be raised. This measure would of course increase the tax of all persons whose total incomes fell either in or anywhere above these brackets. (70-82)

59. The personal income tax is so well adaptable to

/8/ See p. 395.

[page 414]

the personal status of the taxpayer that we recommend that it be
extended below the present levels, to include the smallest incomes
that administrative considerations allow. The new burden on these low
income groups should, however, be offset by repealing other taxes.
Perhaps administrative experience with the social security taxes will
open the way for a genuine income tax on practically every single
person receiving more than $500, and every married couple receiving
more than $1,000. If it is not administratively practicable to put
the exemptions at precisely these levels at once, at least an
approach to them can be made. (354-58)

60. The corporation income tax is a relatively poor tax from the point of view of the ability-to-pay concept. If it is to be used as anything more than an impersonal business tax, we should prefer to see such use limited to two objectives. First, it might be used as a means of collecting at the source, and in advance, a personal income tax on resident holders of corporation stock. Second, it is the only means of collecting a tax on the income of non-resident holders of the stock of corporations that do business within the taxing jurisdiction. (306-9)

61. The corporation tax can be used as a partial method of taxing a particular kind of so-called "unearned income." The complex problem of earned versus unearned income cannot be discussed here. The only real distinction that appeals to us in the present connection is adequately taken care of by other recommendations, particularly those relating to death taxes, excess profits taxes, and land taxation. (273, 290, 313-15)

62. We do not favor the heavy taxation of all corporation profits, compared with partnership and proprietorship profits, that occurs, for example, under the federal income tax and in some states, such as California. Likewise, we do not favor the heavy taxation of all profits, corporate or otherwise, compared with all interest

[page 415]

and preferred dividends, that occurs in New York State. (306-10)

Death Taxes and Gift Taxes

63. From the point of view of justice, we should like to see the highest and widest-reaching rates in the system not in the income tax, where they are now, but in the death taxes. A limiting factor, however, is the fear of the possible repercussions on the volume of saving, since the death taxes are more likely than most taxes to be paid out of money that would otherwise have been saved for investment. (61-66, 311-15)

64. Balancing the various factors, we believe that the present federal and state death tax rates, except in the very highest brackets, are too low in view of other tax rates, and that the exemptions are too high. The death tax has important possibilities as a source of revenue, both federal and state, that have only been superficially explored. Moreover, as administration improves, serious consideration may be given to adopting genuine refinements such as the Rignano plan. We do not favor all the purposes associated with Rignano's plan. We should, however, like to see some experimentation in distinguishing between wealth that has been passed down by only one generation and wealth that has been passed down by two or more generations. (85-87, 315)

65. We believe that, for the present at least, the federal government should avoid the inheritance tax and retain the estate tax. We have no objection to graduation based on consanguinity provided it can achieve its aim, but the results can be very wide of the mark set by the legislator. Until the actual effects of the inheritance tax have been thoroughly studied, we favor the estate tax, largely because it is simpler. (311-13)

66. Although it presents many important problems, the death tax has not received the careful study that the

[page 416]

income tax has. We do not care to make further recommendations on
matters about which so little is known. (315)

67. The present federal gift tax is better than none at all. However, we urge that a search be made for some way to co-ordinate gift tax rates with death tax rates. At present, payment of a low gift tax on the first gifts that one makes saves payment of a death tax perhaps five or ten times as great. (315-17)

68. Because of the large current volume of gifts, many of the states will probably find it advisable to levy gift taxes. They will, however, tend to impose low rates, and obtain correspondingly slight revenue, unless the federal government extends the death tax credit to gift taxes. (316)

Taxes on Commodities and Services

69. From the point of view of a just distribution of the tax burden, taxes on commodities and services (except highway taxes and regulatory taxes) are distinctly mediocre. They should be used, so far as justice is concerned, only if some more refined instrument, such as an income tax, is not available. We urge therefore that the federal excises, except the gasoline tax and the liquor and tobacco taxes, be among the first to be repealed when a tax reduction program is effected. We also recommend that the federal government refuse to adopt a manufacturers' sales tax, and that the states search carefully for other sources before continuing or introducing a general sales tax or selective sales taxes. (317-20)

Sensitivity to Fluctuations in Prices and Business

Federal System

70. Whether the existing system is too sensitive to fluctuations in business activity and prices is a much-debated question. The great drop in federal revenues in

[page 417]

the period 1930-33 was caused largely by a provision of the income
tax law that has since been dropped -- the allowance of a deduction
of capital losses against income from all sources for the year in
question. The desirability of a fluctuating revenue system depends
upon basic views of money and banking. It also depends upon the type
of governmental unit -- the federal system presents an entirely
different problem from the state systems. Furthermore, it depends on
one's faith in Congressional willingness to reduce the debt in
prosperity somewhat in proportion to its increase in depression.
(123-27, 323)

71. While we feel uncertain about some of these matters, we believe that a high degree of revenue stability in the federal government's tax system is not desirable, because it would sacrifice certain principles of tax justice that we hold more essential. For example, we do not believe that large incomes should be taxed lightly in prosperity merely because, since such incomes disappear in depression, heavy taxes on them in prosperity tend to make the tax system unstable. Moreover, because of certain economic consequences, we favor a federal tax system that is consciously designed to follow the fluctuations of the business cycle and thus exert pressure for a certain amount of federal governmental borrowing during depression and a certain amount of debt reduction during prosperity. Even the drastic drop in federal revenues in 1930-33 would not be too great if there were much more assurance than now exists that the debt would be rapidly reduced during prosperity. (322-29)

State and Local Systems

72. Most of the state systems are probably already sensitive enough, in view of the economic and legal limitations on state borrowings. We are not, however, alarmed over the present degree of sensitivity. (322-35)

73. The local tax systems present a much more serious

[page 418]

problem. They need stability most, if local independence is to be
preserved. For a variety of reasons, property tax collections have
proved much more sensitive to cyclical influences than was generally
supposed. The sensitivity can be appreciably reduced by improving
property tax administration, especially through stricter methods of
collection. (44-45, 331, 346-47)

Reaction to Inflationary Price Rises

74. Opinions differ on the probability of a drastic inflationary rise in prices in the United States in the next few years, but few would care to deny the possibility. This would not be a cyclical fluctuation, with the rise in prices followed by a decline. It would be a more rapid and longer price rise than is usually associated with cycles, and it would not be followed by a decline to anywhere near the former levels. The kind of price rise that we have in mind, although we attempt no prediction concerning it, might develop as a result of credit conditions that already exist, largely as a consequence of devaluation of the dollar; the possibility of war is another factor. In any case, the matter seems important enough to warrant discussion. (329)

75. Both the income tax and the property tax present grave dangers in such a period. One is the probable failure of the revenue to grow with expenditures. This danger is slight or non-existent for the income tax, at least during the early stages of an inflation. The possibility of revenue failure presented by the property tax, however, is serious, chiefly because of inadequate assessing procedures, lag in payment, and rate limitations. The sluggish response of the tax to the price rise would result in increased borrowing, and, if the inflation became very great, the localities might become financially dependent on the state and federal governments and lose their present degree of independence. (330-35)

[page 419]

76. Another danger is an unjust change in the relative positions of taxpayers. In the case of the income tax, this is apt to result from the effect of the price rise on exemptions, graduated rates, and the capital gains provision. As to the property tax, the danger lies in the failure of assessments to register proportionate increases in actual value and the failure to exact equally prompt payment from all taxpayers. (329)

77. For the income tax, the only practicable safeguard would be the use of certain kinds of index numbers. These would be of two contrasting kinds. First, a deflating index, to be applied to the net income figure. This would lessen somewhat the extra burden on taxpayers caused by the lowering of the real, or purchasing-power, value of the exemptions, and would also lessen the increase in the real severity of the rate schedule caused by the rise in prices. Second, an inflating index, to be applied to the tax due. This would compensate the government for the loss in real value that it suffers as it waits for the tax to be paid. The property tax can be technically improved so as to aid appreciably in safeguarding local finances in such a period. Intervals between assessments should be shortened, assessment technique should be improved to make assessments more responsive to changes in prices, and collection procedure should be speeded up. The first two measures would tend to increase the cyclical instability of the tax. Despite this fact, it is urged that all three be adopted. (331, 335)


78. The technique of tax administration is a special field full of pitfalls for the uninitiated. Consequently, the recommendations made here will be among the most tentative of the entire chapter. Fortunately, associations of tax administrators, with their periodic meetings and their publications, are rapidly spreading advances in

[page 420]

technique. Before long an impressive body of information on these
matters may be assembled. (348)

Cost of Administration

79. We do not believe that the data on cost of tax administration reveal unduly high costs. In our opinion they are more probably not high enough, because the governments do not care much about collecting taxes from small taxpayers. We oppose the unofficial exemption of a large body of small taxpayers that is granted simply because the cost of reaching them is so much greater, per dollar of tax collected, than for large taxpayers. We do not urge that collection be pushed to the point where the cost of collecting the last dollar of tax equals the amount collected. However, we believe that collection is often not pushed far enough, especially in the income taxes and the sales taxes. The responsibility is usually not that of the administrator, who has to apply a given appropriation to the most fruitful ends. It may instead be traceable to the false sense of economy of legislators or their constituents -- an economy that has great potentialities in breeding disrespect for laws in general. (336-41)

80. We realize the caution with which any cost-of-collection figures must be used. Nevertheless, we think that attempts at refining the figures are justified. The federal government, for example, might make an effort to segregate at least some of its internal revenue costs among the several taxes. It would be interesting and probably valuable to see some tax administration body try to split its costs for some one tax among different types of taxpayer -- particularly with a view to determining the approximate cost of the most expensive taxpayers. (338)

81. Our concern over the administration of the property tax has already been indicated. The more obvious methods of reform -- replacing town or village assessors

[page 421]

by county assessors, and having them appointed rather than elected --
have been elaborated and discussed by tax specialists many times. We
offer nothing new, but merely emphasize the good advice that has
already been given. (347)

82. The income tax is, to our minds, in danger from certain administrative faults. The federal government is developing in its income taxpayers an ill-will that, if it continues, will prove unfortunate indeed. Whether the remedy lies in changing the administrative provisions of the law, the administrative regulations, or the requirements for personnel are questions best answered by specialists in administration. Unless we have been misled by a few highly atypical cases, a prompt remedy is called for if the effectiveness of the income tax is not to be seriously damaged by a lack of co-operation from taxpayers. (348-50)

83. The state income taxes, on the other hand, suffer in many states from a too easy-going administration. We are of the opinion that current state tax yields could in several states be greatly increased by spending more money on income tax administration. (340)

Tax Consciousness

84. Although little direct evidence bears on the point, it appears that tax consciousness is in general a force for good government. To be effective, however, it has to make the taxpayer aware of the different levels of government, so that, for example, he will not attribute to the federal government chief responsibility for the weight of the real estate tax. It also has to show the taxpayer a connection between amount of expenditures and amount of tax. A flat tax, which does not vary even though governmental expenditures change, shows no such connection. For this reason, we do not favor a universal, flat filing fee under the income tax as much as an extension of

[page 422]

the regular income tax in the lower income groups as far as is
administratively possible. We do not absolutely oppose the filing
fee, since we realize that administrators may find it of value in
checking evasion under the income tax. The federal government could
promote intelligent tax consciousness by stating the amount of the
tax on the cigarette tax stamps and perhaps on liquor tax stamps,
provided due caution was taken to indicate that the tax may or may
not have been fully passed on in the price. (354-58, 362)

85. The real problem of lack of tax consciousness is represented by the mass of urban tenants and farm tenants who do not own automobiles and do not have enough income to be taxable under existing income tax laws. They bear a real tax burden, of course, but it is hidden. We see no practicable way of bringing it out in the open except by substituting, for some of the tax they now pay indirectly, some form of income tax. This would be a difficult task, and it might prove inadvisable. For example, if the local property tax were partly replaced by an increase in the state income tax, with a return of the additional income tax revenue to the localities, the shift in fiscal responsibility from the lower jurisdiction to the higher might not be desirable. Furthermore, injustices might be caused by giving undeserved reductions in tax to certain landowners. (353)

86. We should like to see some plan developed that would make the burden of the real estate tax on rented dwellings apparent to the tenant, but we have not been able to devise any plan that would not be misleading. It is difficult to ascertain just how much of the tax is passed on in rent in a given case. Perhaps some inaccuracy might well be risked, but we condemn the careless statements, so common in popular discussion, that seem to assume an easy knowledge of precisely how much of each tax is shifted -- for instance, an assertion that sixty-three

[page 423]

taxes are taking $3.53 out of an $18 suit. Dogmatic statements like
this are ridiculous, and are apt to create a spurious kind of tax
consciousness that will hinder rather than promote an understanding
of the tax system. (362)

Federal-State-Local Relations

87. The conflicts arising from the overlapping tax powers of the different taxing jurisdictions in the United States can and should be materially reduced. We do not urge, however, elimination of all the conflicts, since this would necessitate a much greater degree of governmental centralization than we favor. A certain amount of inconvenience, waste, and injustice in the tax system is a price that it is necessary to pay for the benefits of a democratic and somewhat decentralized form of government. (365-66)

88. Recommendations to improve the existing situation can be conveniently treated under three headings: state-local relations, federal-state relations, and state-state relations. The fourth possible category, federal-local relations, is not likely to be of much importance in the near future, except in emergency periods. Even then the states can, if they wish, make the federal government deal through them rather than directly with their subdivisions. (366-68, 379)

State-Local Relations

89. As long as the administration of a wide variety of governmental functions is left in local hands, local independence and responsibility should be maintained except as they are conditioned by the desire to equalize burdens among districts. This point is discussed below. Independence and responsibility can best be promoted by increasing the availability of the real estate tax to the localities through reduction or abolition of state taxes

[page 424]

on real estate, abolition of most forms of tax limits, and diminution
of exemptions. (295-97, 385)

90. No prescription for the state tax on real estate is applicable to all states, but we believe that many of the states that now use the property tax for state purposes could well use other revenue sources instead. We are not advocating an increase in the total of state and local expenditures. Rather, we are suggesting an alternative to other means of financing a given total of expenditures, such as sharing taxes. The latter procedure weakens local responsibility without giving any assurance that local revenues will be any better adapted to needs than with a local real estate tax. (380)

91. The state can aid the localities more by assisting them in administering the real estate tax than by subjecting them to tax limits embodied in state statutes or state constitutions. It can also aid them by refusing to pass measures allowing such exemptions as those of homesteads. Through these steps, with special emphasis on state assistance in assessment, the local real estate tax can be made much more equitable, and it can also be made to yield an appreciable amount of revenue to replace other, less satisfactory, local sources. We emphasize that we are not, in these recommendations, anticipating much, or even any, absolute increase in the real estate tax. Our expenditure estimates do not indicate a substantial increase in local government tax needs over the next few years. Instead, we are proposing methods for preserving local independence and responsibility, which we fear will be greatly impaired if the localities, losing faith in the real estate tax, turn to the states for aid. We have no objection to state aid if it is given for any of the reasons noted below; we do object to it if it results from a failure to use obvious and sound methods of improving the real estate tax as a means of local revenue. (104-20, 386)

[page 425]

92. A substantial degree of state aid is desirable. It should take the form of grants-in-aid (subventions) rather than shared taxes, since grants are more adaptable to local needs and to central control. This assistance should ordinarily consist of equalizing grants rather than stimulative grants. The latter tend to benefit most the communities that are best able to meet their own needs. (372-73, 378-80, 385)

93. Wherever grants-in-aid form a substantial part of local income, it is important to establish central controls, even though local initiative is largely limited in the process. The activities for which aid is given should be those of a peculiarly general interest. (385)

94. It is also desirable to consider (1) redistricting so that the local units can finance themselves more readily and preserve their independence, and (2) transferring complete administration of some governmental service to the state so that the state is made directly responsible for the performance of the function. In any case it is essential to guard against perpetuating submarginal communities if the ultimate liquidation of such communities might prove preferable. (385-86)

Federal-State Relations

95. Some decrease is desirable and possible in the duplicate administration and the competition for taxes between the federal government on the one hand and the state governments on the other. This is best achieved, at least for the present, by the moderate use of a number of devices rather than dependence on any one. We recommend this diversity (1) because of the great uncertainty of the results of any of the co-ordinating devices in their more drastic stages, and (2) because we think federal-state relations will be more amenable to change if no one device is pushed very far. We believe that these relations must be kept amenable to change pending the

[page 426]

time when a specially constituted body, such as an official
federal-state committee or commission, can give a year or two of
concentrated study to the problem. We favor the immediate appointment
of such a commission. (387)

96. Meanwhile, a certain amount of separation of sources is feasible, and also some sharing of taxes and some use of the crediting device. Cigarette taxes might be given up by the state governments, and the gasoline tax by the federal government. We do not, however, particularly favor the federal government's giving up the gasoline tax entirely, in view of federal expenditures on highways. The federal liquor taxes might be shared with such states as would give up their own liquor taxes. Thus, power over liquor taxation would be concentrated in the hands of the federal government -- an important factor in the campaign against illicit liquor. The crediting device, a co-ordinating measure also important in state- state relations, can continue to be used in the estate tax, and perhaps be extended to the gift tax. None of these devices should be carried so far that any one state depends on them for most of its revenues. Separation, sharing, and crediting are too inflexible and bear no relation to needs. Consequently, a certain amount of federal aid to the states must be expected. More attention, however, should be given to equalizing features in distributing this aid than in the past. (371-81, 383-87)

97. There is little hope that the recommendations in the preceding paragraph will be put in effect if matters are allowed to drift as they have been. The complete failure to achieve liquor tax co-ordination in 1933-34 under relatively favorable circumstances is a case in point. A series of piece-meal suggestions will simply result in a series of rejections by one or another jurisdiction. The only worth-while plan that will be accepted is a comprehensive one that includes much more than tax

[page 427]

features, and that offers enough to every unit to ensure its
acceptance. Such a plan can be drafted only by a special body endowed
with adequate funds and governmental support and given adequate
time. (387)

State-State Relations

98. The remarks just made apply also to state-state relations. Until a comprehensive plan is proposed, however, some promising ways are available to the states for lessening interstate tax competition and decreasing the harassing tax compliance burdens and multiple taxation burdens on taxpayers, particularly business firms. (367-68)

99. We recommend that all the states seriously consider adopting the Massachusetts formula for allocating profits under the income tax, although we realize that some states can give reasonable arguments against it. We do not believe that interstate businesses can claim, as a right, a guarantee that they will never be subject to any multiple taxation whatsoever. (381-83)

100. Among states some degree of difference in levels of tax rates is inevitable and desirable. One state, for example, may well have need of a 6-cent gasoline tax, and another need of only a 2-cent tax. (260-62)

101. We are not so impressed as many popular writers on the subject seem to be with the threats of industries to move from one state to another as a result of tax differentials. There is practically no good evidence available that the differentials have caused such movements, outside of a few isolated cases. We realize that tax differentials among states present a real problem -- one that must be considered in the comprehensive plan that we recommend be made. It appears, however, that the problem has been overemphasized in certain quarters. (149)

102. In conclusion, then, the problem of federal-state-local relations can be ameliorated even at the present

[page 428]

time by certain measures that have been noted. However, the degree
of betterment under these measures cannot be great. A generally
acceptable solution that marks a substantial advance can be achieved
only by a comprehensive plan prepared by a body that is adequately
constituted for such a task. Such a plan must cover many fields --
for example, expenditure, debt, and political controls -- in addition
to the field of taxation. Finally, no one who believes in a
considerable degree of democracy and decentralization can reasonably
ask for a tax system with no overlapping, no conflicts, no
administrative duplication, and no multiple taxation. (370, 387)

[page 429]

Chapter 26


A program of action for changes in the tax system is herewith submitted by the Directors of Research. The numbers in parentheses refer to the relevant paragraphs in Chapter 25. Absence of a recommendation does not necessarily imply approval of the status quo; on some matters -- e.g., payroll taxes -- we are not prepared to make definite recommendations. With this qualification, we recommend:


A. That the constitutions of the federal government and the state governments be amended to give legislators greater freedom in defining taxable income -- particularly to enable them to tax gains before they are realized and to tax corporate shareholders on their total current share in corporate earnings; and that the possibility of changes in the laws governing corporation finance be considered to facilitate such a taxation of corporate shareholders. (13)

B. That the federal surtax on undistributed profits of corporations be repealed unless either the taxable stock dividend or the issuance of rights to buy new stock can be shown, in the near future, to be a practicable means of avoiding loss of control, by medium sized and small corporations, over the disposition of their earnings. (16)

C. That, if the undistributed profits tax is kept, it be redrafted to lessen the pressure on certain corporations, notably those that, under state laws, find no practicable way open to them to pay dividends. (18, 19)

[page 430]

D. That, if the undistributed profits tax is retained and dividends are taxed under the individual normal tax, the federal normal tax on corporations be lowered to approximately a 5 per cent level. (36-38)

E. That every state's corporation income tax be integrated with its personal income tax, either by excluding dividends from taxed corporations in computing personal net income, or by taxing all dividends but either allowing a credit for the corporation tax paid against personal net income tax otherwise due or lowering the rate of the corporation tax to a point determined by considerations that are outside the scope of the income tax system proper. One consideration of this kind is the impersonal taxation of corporations on the basis of special privilege. (12, 36, 38, 60)

F. That the progressive rates now used by the federal corporation normal tax and several of the state income taxes on corporations be replaced by flat rates, regardless of the action taken on points A to E above. (11)

G. That the personal exemptions and the credit for dependents in the federal income tax be lowered possibly to the following levels: $500 (single), $1,000 (married), and $200 (for each dependent), and that this new burden be offset, at least for taxpayers with low incomes, by a lightening of the concealed tax burden through a lowering or a repeal of some of the regressive taxes on consumption, particularly the import duties imposed by the customs tariff. (5, 24, 59, 69)

H. That states not now imposing a personal income tax, or imposing it at low rates, prepare to meet from this tax most of, if not all, the increase in state revenues that may be demanded in the near future. In some states the state constitution will have to be amended. This recommendation is in addition to whatever changes in the income tax follow from adoption of the recommendation in VII-A below (sales tax). (58, 59)

[page 431]

I. That the federal and state personal income taxes (and corporation income taxes, so far as they are retained) (1) include capital gains as a part of the regular tax base, instead of exempting them altogether or applying a separate rate to them, with a provision -- perhaps the annual accrual provision discussed on pp. 166, 398, and 413 -- to prevent the taxation of gains, accrued over a number of years, at high surtax rates merely because the gains are realized, and therefore taxable, in a single year; (2) allow capital losses as deductions not only against capital gains, but also against other income, with such modifications as may be found desirable from the point of view of stability of revenue (for instance, there might be some degree of carry-over instead of complete deduction in the current year); and that the failure of the personal income tax to consider gains and losses accrued to death be remedied. (17, 57)

J. That some states experiment with the inclusion in the income tax base of imputed income from home ownership and consumption of farm produce. (57)

K. That both federal and state laws make the accounting period longer than one year by carrying over losses or using some averaging device. (2, 17, 57)

L. That the Constitution be amended so that the future issues of state and local securities would be liable to non-discriminatory federal taxes, and future federal issues similarly liable to state and local taxes, provided the federal government has ample access to the capital market in war and perhaps in other emergencies; and that the amendment permit non-discriminatory taxes on salaries and wages. (57)


A. That no further inducements to the delinquent payment of taxes -- such as extraordinary delays and the remission or reduction of penalties -- be offered, and that

[page 432]

the present ones be removed as soon as is consistent with good faith.
(73, 75-77)

B. That, unless some particular local or regional conditions make the procedure obviously inadvisable, the interest penalty for delay in payment be raised to at least twice and perhaps three times the rate on real estate loans, so that taxpayers will not be tempted to borrow from the government by withholding taxes. (73, 75-77)

C. That assessment technique be improved by adopting the measures best suited for the particular locality; these will usually include (1) appointment instead of election of assessors, (2) use of no assessing unit smaller than a county except urban centers, (3) state assistance of and some state control over assessors, and (4) in a few states abolition of the local assessor and complete control of assessment, at least outside large urban areas, by the state. (54, 75-77, 81)

D. That property be reassessed once every year or at least once every two years in every state. (75-77)

E. That the total dollar amount of tax exemption that is given to educational, charitable, and religious organizations and other similar groups be periodically reviewed by legislatures somewhat as if it were an expenditure total, and not solely a tax matter. (7)

F. That no further exemptions from the property tax be given to business firms as inducements to locate within the taxing jurisdiction. (9, 89)

G. That, in most of the local jurisdictions, no drastic decrease be made in the real estate tax. (25)

H. That substantial increases in the real estate tax rate be made only for the purpose of financing such local activities as clearly tend to enhance the value of real estate in the community. (26)

I. That all the remaining state ad valorem taxes on intangibles at a full rate be repealed. (54)

[page 433]

J. That the tax on personal property, both tangible and intangible, be repealed wherever the personal income tax can be called on to replace the revenue. (54)

K. That homestead exemptions of the type enacted in the past three or four years be repealed. (55, 89)

L. That constitutional over-all property tax rate limits be repealed. (56, 75, 89)

M. That state governments work toward the abolition of the state tax on property, taking care at the same time not to lose all state control over assessment. (89, 90)


A. That the federal death tax rates be increased and the exemptions lowered -- the added revenue to go to the states (through extension of the crediting device) or to the federal government, depending upon the need for such revenue at the time the change is made. (64)

B. That the federal government study the possibilities, from an administrative point of view, of levying a specially high tax rate on property that has been passed down through two or more generations. (64)

C. That, if possible, some adjustment in gift tax rates be made so that it does not offer in its lower brackets such an inducement to avoid the upper brackets of the estate tax. (67)

D. That the federal government extend to the gift tax the crediting feature of the death tax, not necessarily immediately, but perhaps as one of the first moves in a federal program of tax reduction. (68, 96)


A. That the existing federal excess profits tax be replaced by one that will carry only nominal rates until a basis has been provided by five or ten years of record keeping for a true excess profits tax as a permanent part of the federal revenue system. (37, 47-52, 61)

[page 434]

B. That the new excess profits tax embody the suggestions made in Chapter 25 above on the definition of excess profits. (39, 49)


A. That experiments be made, both by the federal government and the states, with special service charges on business firms to cover some of the special costs of police, courts, etc. caused by the demands of business upon government. (36)

B. That each state consider the applicability of a program of business taxation such as that outlined in paragraphs 36 and 38 above.

C. That the federal capital stock tax be repealed. (36)

D. That the present chain store taxes be repealed. (6)


A. That, in the event of federal tax reduction, the taxes on specified commodities and services be abolished before the personal income tax is cut severely, with the exception of the liquor taxes, and the gasoline tax, and all tobacco taxes, although the cigarette tax might be reduced somewhat. (21, 24, 27-29, 35, 69, 96)

B. That the amount of the cigarette tax be printed on the cigarette tax stamps, with some such caution as, "This tax paid by manufacturer; the government assumes no responsibility for its being passed on or not being passed on by the manufacturer, in whole or in part, to ultimate consumers"; and that the use of similar liquor tax stamps be seriously considered. (84)

C. That the federal government and all the states that now levy it repeal the oleomargarine tax within the next five or ten years. (6)


A. That, unless urgent considerations concerning the present level of income tax rates dictate otherwise, the

[page 435]

states now imposing a retail sales tax at a rate of 1 per cent or
less repeal the tax, and that states now imposing a retail sales tax
at a higher rate reduce or repeal the tax -- in either case the
replacement revenue to be obtained from the personal income tax. (30,


A. That the present protective tariffs be reduced gradually, perhaps with special governmental support for a time to the owners and workers in the affected industries and their allied industries, until

(1) only the following remain: (a) import duties designed as counterparts of domestic excises on similar articles, (b) import duties levied for revenue purposes only, on commodities not produced in the United States, and (c) import duties levied to prevent dumping; or

(2) some factor of public interest other than the general standard of living -- for instance, desire for self-sufficiency in the event of war -- dictates a certain level of protective duties and thus stops the lowering process short of the goal set in (1) above. (5, 26)


A. That the first-class mail rate of 3 cents be reduced to 2 cents. (46)

B. That the revenue lost under recommendation A above at least in part be made up by increasing the charges on other parts of the postal service so that these charges come much closer to covering the cost of the service rendered. (46)


A. That each state seriously consider the merits of substantially increased appropriations for enforcement

[page 436]

of the tax laws, particularly state income tax laws. (79, 83)

B. That some states experiment with detailed costing systems to ascertain the relative costs (expressed as a percentage of receipts) of collecting taxes from taxpayers of various incomes, occupations, etc. (80)

C. That the federal government segregate at least some of its total internal revenue collection costs among the several taxes. (80)

D. That the federal Treasury devote special effort to gaining the good-will of honest and reasonable income-taxpayers by showing that it is as fully aware of the taxpayer's rights and interests as of those of the government. (82)


A. That both federal and State aid be based to a greater extent on equalization grants-in-aid rather than stimulative grants or shared taxes, and that grants be given only for those specific purposes of particularly strong nation-wide or state-wide interest. (92, 93, 96)

B. That some form of central control be established wherever the grants form a substantial part of the receiving unit's income. (93)

C. That a small committee with ample resources be appointed by the federal government to devote a year or two to federal-state-local co-ordination and to formulate a comprehensive plan. (95, 97)

D. That the states adopt the Massachusetts plan, or some plan closely resembling it, for allocating profits subject to the income tax. (99)