The best-laid fiscal plans often go awry. That was the case with President Truman's tax reform effort in 1950. Conceived in peace, it was swept aside by war. 1950 would not be remembered for Truman's modest January gesture toward tax reduction. Instead, it would be recalled for September's march toward sweeping tax increases.
In January 1950 Truman asked Congress for a series of revisions to the federal tax structure. Coupling a modest reduction in excise levies with a range of base-broadening reforms and rate revisions, the plan was not exactly a crowd pleaser. Republicans were demanding larger tax cuts, and even many Democrats were eager to roll back more of the heavy taxes left over from World War II.
But Truman's plan offered a starting point, and in February Treasury Secretary John W. Snyder laid out the details. In testimony before the House Ways and Means Committee, he urged lawmakers to exercise a modicum of self-restraint. "The immense task of increasing tax revenues during the war overshadowed the equity considerations which in normal times could not be disregarded," he acknowledged. And after the war, new responsibilities and commitments compelled the nation to delay revision for several years. But the time had finally come for at least some tax relief, Snyder said. And the place to begin was with excise taxes.1
In the short term, only a few excises should be reduced or eliminated, Snyder said, targeting those on telephone calls, telegrams, furs, luggage, jewelry, transportation, toilet preparations, and baby oils and powders.2 This last had been identified ina February 1950 Gallup Poll as the nation's most hated excise.3
Snyder stressed that the cost of these tax reductions -- estimated at $655 million annually -- should be offset by a variety of base-broadening reforms and rate increases. He spoke at length on the evils of percentage depletion and stressed the need for major changes to the taxation of insurance companies and charitable institutions engaged in business unrelated to their core missions.4 Closing those loopholes would raise about $590 million, he predicted.5
Snyder also asked for revisions to the corporate income tax and the estate tax, which together would provide just over $1.08 billion in new revenue.6 On balance, Truman's tax plan would actually raise about $1 billion.
Ways and Means members were unimpressed. In particular, they objected to the short list of excises targeted for revision. Rep. Thomas A. Jenkins considered the list capricious, the result of some fiscal version of "eenie, meenie, minie, moe."7 But Snyder defended his selections. "We would like to include them all," he said. "We have carefully considered the facts and viewpoints presented in determining which taxes are the most burdensome to the industries affected, which create the most serious competitive problems, which fall with undue weight on low-income groups, and which impose barriers to investment and consumption."8
Snyder's testimony was followed by weeks of hearings, including comments from some 275 witnesses, most arguing for narrow tax reductions relevant to their industries and organizations.9 Months passed, but eventually the House delivered a report departing sharply from the administration's plan. The committee endorsed more than $1 billion in excise reductions, pointing out that "war excise taxes have been borne by our people for a period of 9 years, 5 of which, including this year, are after the cessation of hostilities with both Germany and Japan."10
The committee also raised corporate taxes less than Truman had asked and "butchered" his proposals to curb tax preferences.11 Lawmakers did tighten the rules limiting nonprofit organizations and their revenue-producing activities, but they actually liberalized mineral depletion allowances. And they shortened the holding period for long-term capital gains from six months to three.12
The committee's Republican minority was unhappy with almost everything in the bill. "For seven long months the Democratic majority fiddled while the people waited," they complained in the minority report. "Taxes are eating at the foundation of our free-enterprise system; are stifling the incentive and ambition to produce; and are enslaving the American people by depriving them through excessive taxation of their right to spend their own money."13 But Republicans were in no position to do much more than complain. A solid Democratic majority stood poised to work its will.
In a masterstroke of poor timing, however, Ways and Means delivered its bill one day before war broke out on the Korean Peninsula. The House opened debate on the measure several days later and passed the bill on June 29 -- the same day Truman authorized American intervention in the Korean conflict.14
Lawmakers paused to consider the situation. The war's outbreak made talk of tax reduction seem frivolous, and Senate taxwriters delayed taking up the House measure. Within a few weeks, they moved decisively to gut it. The bill taking shape in the Senate would feature barely a hint of targeted tax relief. Instead, it would focus principally on raising money to fight a new and expanding war.
On July 19 Truman asked Congress for new taxes to help cover the projected $10.5 billion in war costs. Those taxes would help limit borrowing, while also restraining inflation. "The increase of taxes is our basic weapon in offsetting the inflationary pressures exerted by enlarged Government expenditures," he said.15 The president stressed his intention to limit war profiteering, implying a revival of the excess profits tax.16
In a classic rally-round-the-flag response, politicians in both parties endorsed the call for fiscal sacrifice. Foreign policy expert John Foster Dulles made the case in the pages of The New York Times. "The time for sacrifice and discipline is here," he declared. "Most of us will have to work longer hours and with more intensity. We shall all have to give up some material enjoyments and be more frugal in our living. There will be fewer automobiles, television sets, and gadgets to buy and there will be bigger tax bills to pay."17
On August 2 Snyder outlined necessary revisions to the stillborn House legislation. He did not ask for a new excess profits tax, despite agitation from many Democrats to revive this revenue workhorse. Drafting such a complicated levy would take time, and the first order of business was to revise existing levies. Snyder proposed, in particular, a return to peak World War II individual rates and an increase in the corporate income tax (with a new top rate of 45 percent). Snyder also asked that House giveaways, like the liberalized depletion allowance, be shelved. And needless to say, the slated excise tax reduction had to be eliminated, too. Altogether, these changes would produce a bill raising $5 billion annually, he predicted.18
The Senate Finance Committee agreed with most of Snyder's requests.19 "Military action in Korea coupled with substantial increases in defense and related expenditures has made it necessary to convert the excise tax reduction bill passed by the house in June of this year into a bill to raise revenues," the committee explained.20 In a nod to the administration's emphasis on speed, the panel noted: "It is not anticipated that these increases will be of sufficient size to offset the new defense and related expenditures. However, this bill accomplishes all that can be done quickly."21
On the Senate floor, several leading Democrats -- led by Sen. Joseph O'Mahoney -- renewed the drive for an immediate excess profits tax, insisting that it was only fair. "When we adopt the Selective Service System and take a young man from his school or business, or whatever activity in which he is engaged, we take his body and we put it on the firing line," O'Mahoney said. "Shall we say, while we are taking the body, which cannot be replaced, and drafting it into the service of the Nation, that we shall be tender with profits?"22
But senior lawmakers were uneasy with a rush to tax excess corporate profits. Finance Chair Walter George was particularly reluctant to push through a new levy without ample thought beforehand. He effectively marshaled opposition to the idea and eventually won support from the White House. To mollify angry colleagues, he agreed to an amendment committing the Finance Committee to report an excess profits tax during the next congressional session.23
Revenue Act of 1950
The bill as finally passed by both houses followed the Senate legislation closely. It raised $4.5 billion in new revenue, chiefly through higher taxes on personal and corporate income. It closed some of the loopholes targeted by Truman in January, including those related to charitable organizations and the treatment of capital gains. It did not, however, do anything to scale back preferences for extractive industries, including the "gross inequities" surrounding "everything that smells of oil," according to Harvard Law School Dean Ernest Griswold.24
Individual income tax rates increased in all brackets, approaching the heights achieved during World War II. The new top rate was pegged at fully 91 percent, while even the lowest bracket was taxed at 20 percent. Exemptions (which had been raised in 1948) remained unchanged.
Tax rates on corporate income were reconfigured, leaving most small and medium-size companies with lower burdens while saddling bigger firms with an increase of up to 7 percentage points. Lawmakers also eliminated the "notch rate" that had previously taxed medium-size companies at higher rates than large ones. Congress replaced the two-year carryback and two-year carryforward of corporate losses with a one-year carryback and a five-year carryforward, thereby extending the period over which a company might average income from five years to seven. It also established more liberal amortization schedules for investments certified as essential to national defense.25
The Revenue Act of 1950 was widely viewed as a decent start on the daunting task of war finance. But no one considered it the last word. If nothing else, the Senate was committed to delivering an excess profits tax during the lame-duck session that would follow the 1950 congressional election.
In the next installment: Taxing War Profits -- Again
1 Treasury Department, "Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30," at 193 (1951).
2 John D. Morris, "Snyder Asks Limit on Excise Tax Cuts to 6 Major Items," The New York Times, Feb. 4, 1950, at 1. Snyder suggested that the 3 percent tax on transporting freight be repealed; the 15 percent tax on transporting people be reduced to 10 percent; the 25 percent tax on long-distance telephone and telegraph messages be cut to 15 percent; the 20 percent tax on furs, luggage, jewelry, and toilet preparations be cut to 10 percent; and the 20 percent tax on baby oils, powders, and lotions be repealed.
3 Gallup Poll, available at http://www.ropercenter.uconn.edu/data_access/ipoll/ipoll.html. Snyder's list omitted a number of excises frequently targeted for reduction, including those on photographic equipment and film, tires and inner tubes, local phone service, sporting goods, cars, gas, light bulbs, entertainment admissions, and dues and initiation fees. And the secretary actually suggested that Congress expand the 10 percent tax on radios to include television sets.
4 Treasury annual report, supra note 1, at 196-198.
5 Randolph E. Paul, Taxation in the United States, 544 (1954).
6 Treasury annual report, supra note 1, at 196-198, 200-207. Snyder suggested cutting taxes on corporate incomes between $25,000 and $118,750, while raising them 10 percent on incomes above that threshold.
7 Morris, supra note 2, at 1.
9 Paul, supra note 5, at 545.
10 House Ways and Means Committee, "Revenue Act of 1950."
11 John F. Witte, The Politics and Development of the Federal Income Tax 137 (1985).
12 Id.; Paul, supra note 5, at 546-551.
13 Id. at 551.
14 Steven A. Bank et al., War and Taxes, 112 (2008).
15 Paul, supra note 5, at 554.
16 Bank, supra note 14, at 113.
18 Id. at 114; Paul, supra note 5, at 555-556.
19 Witte, supra note 11, at 138.
20 Senate Finance Committee, "Revenue Act of 1950," at 1.
22 Paul, supra note 5, at 562.
23 Witte, supra note 11, at 138.
24 Paul, supra note 5, at 567.
25 Id. at 568.
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