Joseph J. Thorndike is a contributing editor with Tax Analysts. E-mail: firstname.lastname@example.org.
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Roswell Foster Magill was an unlikely New Dealer. He came from a Midwestern family of impeccable Republican pedigree. He made his first venture into politics as a Treasury Department lawyer for the arch Republican tax cutter, Andrew Mellon. His father was a prominent and vociferous opponent of the New Deal, including its tax policies. And he finished his career as a leading critic of the progressive tax regime that he helped create during the 1930s.
But Magill was indisputably one of the most important tax officials of the 1930s. His influence on the New Deal's signature tax measures, including the Wealth Tax Act of 1935 and the Undistributed Profits Tax of 1936, was relatively modest. But he played a vital -- and ultimately more lasting -- role in shaping plans for fundamental tax reform. Under his guidance and supervision, the Treasury Department developed a program that would eventually transform the income tax from a narrow levy on the rich to a broad-based tax on middle-income taxpayers.
Magill was born November 20, 1895, in Auburn, Ill. His father, Hugh S. Magill, was a teacher and school superintendent in nearby Springfield. The elder Magill was also a prominent Republican, steeped in the progressive tradition of Sen. Robert "Fighting Bob" La Follette. While Roswell was still in high school, his father won a seat in the Illinois state senate, and in 1912 he made a bold but unsuccessful run for the U.S. Senate. In 1926 Hugh would try again, campaigning as a supporter of Prohibition and the president. As Time magazine observed: "He believes in God, Abraham Lincoln (whom his father knew well), Calvin Coolidge, and the 18th Amendment."1
But young Roswell left Illinois just as his father's political career was getting off the ground. He went east for college at Dartmouth, graduating in 1916. After a brief stint as an Army captain during World War I, Magill returned to Illinois for law school. He graduated from the University of Chicago in 1920 and began his legal career at the Chicago firm of Alden, Latham & Young.
Public service soon beckoned. In 1923 Magill joined the Bureau of Internal Revenue as a special attorney, and within a year he had been promoted to chief attorney for the Treasury Department. As Treasury Secretary Andrew Mellon's top lawyer, he helped make the case for major tax reform in 1924. And while the revenue act passed that year proved to be a disappointment for Mellon, the battle over its provisions gave Magill a valuable introduction to the tax legislative process.2
Magill's service in the Mellon Treasury was brief. In 1925 he left for a faculty post at Columbia University Law School, where he introduced a class on federal income taxation -- reportedly one of the first in the nation. His colleagues were skeptical. "Federal taxation wasn't considered worth teaching then," Magill later recalled. "All of my friends told me, 'Why go into this? It's a dying subject. Taxes are going down.'"3
Taxes were going down, but not for much longer. In 1929 the economy plunged into recession, and tax revenues began a steep decline. Desperate to stem the tide of red ink, lawmakers responded in 1932 by raising taxes across the board. (In the years before the Keynesian revolution in economics, balanced budgets were still an article of bipartisan faith, even in the midst of depression.) With recovery nowhere in sight, further tax increases seemed likely.
New Dealer, Interrupted
In 1933 Magill returned to Washington, this time as a special tax adviser to Treasury Secretary Henry Morgenthau. His appointment was a surprise: Few expected to see a Republican named to an important New Deal tax post. In fact, Morgenthau's predecessor had already offered the job to Harold Groves, a liberal economist at the University of Wisconsin. But Morgenthau wanted his own man.4
Magill's appointment was not really so improbable. The early New Deal made room for a number of Republicans, including William Woodin, Franklin Roosevelt's first Treasury secretary. In addition, Morgenthau was himself considered something of a fiscal conservative, and he was predisposed to favor advisers who liked balanced budgets as much as he did. Perhaps most importantly, Magill was widely considered one of the nation's leading experts on federal tax law. And once acquainted, he and Morgenthau developed a deep and lasting mutual regard.
Liberals, however, were dismayed. According to The Nation magazine, Magill's appointment closed the door on substantive tax reform. "Magill has been engaged under Morgenthau principally in building traps for tax-dodgers and inventing plugs for holes in the tax laws rather than in devising the whole new system of taxes needed to supplant the present Old Deal holdover which places at least half the burden on consumption taxes," the magazine complained.5
The editors were right, at least for the time being. As Morgenthau's chief tax adviser, Magill worked with Congress to draft the Revenue Act of 1934, an important but ultimately modest effort to broaden the tax base by eliminating various loopholes and preferences. It was a high-visibility assignment, with the press focused on tax avoidance among Wall Street financiers and other wealthy taxpayers (see Tax Notes, Nov. 10, 2003, p. 688, Doc 2003-24382, 2003 TNT 218-9). But it was hardly the sort of wholesale reform that liberals sought.
For Magill, however, campaigns against tax avoidance were a necessary part of more ambitious revenue reform. Like many fiscal experts, he believed the federal government should rely more on income taxes and less on consumption taxes. But if lawmakers were going to scale back regressive levies on alcohol, tobacco, and other consumer goods, they first had to make the income tax more productive. To begin with, they needed to limit tax preferences. But at the same time, they also needed to lower personal exemptions, bringing middle-income taxpayers into the system. Ultimately, more people should pay the income tax, Magill believed, and they should have fewer loopholes at their disposal. Only a broad-based, relatively uncluttered income tax could pay for excise tax reform.6
As Morgenthau's tax adviser, Magill hoped to build the case for this sort of comprehensive tax reform. He began by trying to replenish Treasury's store of tax expertise, which Morgenthau considered inadequate. With help from other members of the department's "financial Brain Trust" -- including economist Jacob Viner and legal scholar Herman Oliphant -- he assembled a staff of talented analysts.7 Together they prepared a series of influential reports (collectively known as the Viner reports) that made the case for Magill-style tax reform. In the years to come, those studies would become a touchstone for Treasury officials seeking to remake the tax system. Indeed, the studies would play an important, if indirect, part in shaping the fiscal watershed of World War II.
Congress was impressed by the Treasury's approach to tax reform, not to mention its new reservoir of expertise. "The Ways & Means Committee of the House, which normally would be busy drafting such plans, has practically surrendered the job to the Treasury," observed Time magazine.8 Indeed, Magill seemed poised to oversee the first major tax reform of the New Deal era.
And then he resigned. The timing of Magill's departure in November 1934 was striking: It came just a few weeks after Morgenthau gave him formal responsibility for drafting a tax reform program, and just a few weeks before another group of Treasury advisers -- led by Oliphant -- proposed their own set of changes. The Oliphant plan was a far cry from anything Magill had contemplated. It included a new federal inheritance tax to discourage the growth of dynastic fortunes, as well as several levies to limit the size of business entities (including graduated rates for the corporate income tax and a new tax on intercorporate dividends).
Was Magill trying to distance himself from these notably progressive -- and politically controversial -- plans? Was his departure some sort of protest against the Treasury's creeping liberalism and antibusiness animus? It seems likely. But publicly, Magill insisted that he simply wanted to return to academia, and most observers took him at his word.
After returning to New York, Magill resumed teaching and established an independent law practice. In 1936 he published the first of his major scholarly works, Taxable Income.9
New Dealer, Repeated
Magill's father must have greeted his son's departure from the Roosevelt administration with relief. In 1934 the elder Magill had been named president of the American Federation of Utility Investors, a pressure group noted by Time magazine for its "thoroughly Tory orientation."10 Over the next several years, Hugh Magill would become one of FDR's most vigorous critics, accusing the president of despotic ambitions. "I vow to go to death before I'll stand for this," he told one audience just a month before his son resigned from Treasury. "I'll go to the limit to preserve this precious heritage of American liberties, now threatened by a body of those who seem to love Russia more than the Stars and Stripes."11
Roswell Magill did not, apparently, share his father's politics. In January 1937 he rejoined the Roosevelt administration as undersecretary of the Treasury, with principal responsibility for fiscal policy. And once ensconced in his new office, Magill found himself leading another high-profile campaign against tax avoidance.
In early 1937, FDR had fixated on aggressive tax avoidance among the rich. It was not a new hobbyhorse, but rather a favorite Roosevelt topic. Treasury experts had been studying the issue closely for several years, and the revenue acts of 1935 and 1936 had both been designed, at least in part, to limit and compensate for certain types of tax avoidance. But the 1937 antiloophole campaign was distinctive for its intensely personal quality: Roosevelt asked for - - and Magill delivered -- a roster of notable offenders. FDR wanted to close loopholes, to be sure, but he also wanted to name a few names while doing it.12
At the president's behest, Congress established a special committee to investigate tax avoidance, focusing on techniques outlined in the Magill memo, including the use of foreign and domestic holding companies, the incorporation of yachts and private estates, the invention of artificial losses and deductions, and the creation of multiple family trusts designed to shield large incomes from high marginal tax rates.13 And as part of the investigation, the names of offending tax avoiders made their way into the press. Offenders included actor Charles Laughton, newspaper publisher Robert Scripps, and executives with U.S. Steel and General Motors. (For more on the Revenue Act of 1937, see Tax Notes, Apr. 29, 2002, p. 664, Doc 2002-10472, or 2002 TNT 83-4.)
The resulting uproar prompted Congress to close a variety of loopholes, especially those involving personal holding companies. But lawmakers did nothing about several of the most effective means of legal tax avoidance highlighted in Magill's memo: percentage depletion allowances and the exemption provided to state and local bonds.14
The antiloophole campaign was controversial and colorful. It was also politically important, underscoring a consistent theme of New Deal taxation: that progressive taxation must not be vitiated by aggressive tax avoidance. But in concrete terms, the Revenue Act of 1937 had a modest effect, closing a few egregious loopholes but leaving the tax system fundamentally unaltered. By contrast, the 1938 tax law was more substantive, if far less satisfying for the Roosevelt administration. When the dust finally settled, the Revenue Act of 1938 would undo the most important tax reform of the New Deal era: the undistributed profits tax.
In the summer of 1937, having wound up the campaign against loopholes, Magill turned his attention to a less visible task -- developing a plan for comprehensive tax reform. He supervised preparation of the Tax Revision Studies, a series of reports on every aspect of federal taxation. Key recommendations included a rollback in consumption taxes, an extension of the income tax (including higher rates on middle-income taxpayers), and a major simplification of the corporate tax regime. The reports endorsed the principle of an undistributed profits tax (UPT), while also suggesting a range of improvements to the UPT passed in 1936. Finally, the reports opened the door to countercyclical tax policy, suggesting that annual budget balance was an unrealistic and undesirable goal. Instead, the tax system should produce a deficit during recessions and surpluses during prosperity, helping smooth the rough edges of the business cycle.15
Roosevelt was unimpressed with the Tax Revision Studies, and he seemed to blame Magill for what he considered their conservative tone.16 And when the reports arrived on Capitol Hill, they were widely ignored by lawmakers, too. Instead, Congress focused on gutting the undistributed profits tax, appeasing business critics who had been campaigning against the levy since its enactment two years before.
But if the Tax Revision Studies were initially ignored, they were still important. In conjunction with the Viner reports of 1934, they established a consistent Treasury program for tax reform. Political factors made this program impractical in 1937 (much as it had three years earlier). But when World War II made reform imperative, the tax studies of the 1930s gave Treasury a vital store of ideas and arguments. Ultimately, Magill's supervision of the Tax Revision Studies may well have been his most important -- and lasting -- contribution to the modern tax regime.
In September 1938 Magill again left the Treasury, this time for good. His resignation letter was full of gratitude, but according to some news reports, he was already unhappy with the drift of New Deal taxation. In particular, he had been a reluctant defender of the UPT, and the bitter fight over its retention had left him eager to depart the Treasury.17
Once gone, Magill began moving to put some daylight between himself and the New Deal. Just two months after leaving, he gave a speech criticizing federal corporation taxes as complex and burdensome. And over the next several years, he complained repeatedly about New Deal spending and tax policy, insisting that deficits imperiled the country's long-term economic health.18
Perhaps even more importantly, Magill began shoring up his conservative credentials. He helped found the Tax Foundation in the late 1930s, a nonpartisan group that nonetheless targeted most of its criticism at Democrats. And as World War II brought major and unavoidable change to the tax system, Magill became a constant critic of administration and congressional tax policies, aligning himself with Republican congressional leaders.19
Many of Magill's wartime tax recommendations echoed the conclusions of the 1937 tax revision studies: He called for a broader individual income tax, with lower exemptions, as well as higher rates on middle-income taxpayers. Treasury had been making the same suggestions since 1934. At the same time, however, Magill urged Congress to adopt a national sales tax -- something the Treasury had never endorsed. And he advised against high taxes on corporations and wealthy taxpayers, warning that such levies would discourage initiative and hurt the war effort. Treasury, by contrast, sought heavy taxes on both groups.20
As the end of the war drew near, Magill raised the prospect of lower taxes, especially for business. In 1943 he called for repeal of the excess profits tax once the war ended. And he soon began urging cuts in the regular corporate income tax and individual income tax as well. Indeed, in a major study published in 1945, A Tax Program for a Solvent America, Magill and several colleagues called for an overall reduction of 50 percent in federal taxes.21
Magill soon intensified his calls for tax reduction. In 1949 he was named president of the Tax Foundation (having served on the board since 1942), and from that post, he called frequently for lower taxes and reduced spending. He endorsed a top individual rate of no more than 50 percent (as compared with the 86 percent rate on the books in the late 1940s). He also called for an end to the double taxation of corporate dividends, proposing an individual credit for taxes paid at the entity level. In general, Magill was dismayed by the persistence of heavy wartime taxation long after the war had ended. "We cannot expect to go on indefinitely applying the highest peacetime tax rates we have known," he declared, "to the highest national income we have ever known."22
When war returned in the early 1950s, Magill remained a staunch critic of Democratic tax policies, ramping up the stridency of his rhetoric. In 1951 he denounced a tax increase designed to help pay for the Korean War as "probably the most badly devised tax measure in our history." Indeed, he said, by depriving many Americans of more than half their annual income, the bill promised to bring the United States "closer to a socialistic state."23 He continued such complaints for the rest of the decade, unhappy that both Democrats and Republicans seemed willing to tolerate high rates throughout the 1950s.
Toward the end of his public career, Magill abandoned some of the antiloophole zeal that had animated his service in the New Deal. While acknowledging that an ideal tax system would abjure most preferences, he believed that the actual tax system depended on them. "The trouble is that, so long as high surtax rates persist, special provisions are essential to give the tax law reasonably fair application," he wrote in 1960. Inequities were tolerable when rates were low, but when rates stayed high, every small inequity cried out for legislative relief. Congress could not help but respond.24
Magill died in 1963. To the end, he remained a tireless critic of the modern fiscal state, insisting that taxes were too high and spending too free. Once optimistic about the prospects for sound, scientific tax reform, he had been twice disillusioned -- first by the New Deal's tendency toward soak-the-rich taxation, and later by the bipartisan consensus that left wartime rates unchallenged in the postwar years.
1 "'Mail Order' Magill," Time, Oct. 11, 1926, available at http://www.time.com/time/magazine/article/0,9171,729533,00.html.
2 "Roswell Magill Gets Treasury Job," The New York Times, Jan. 23, 1937, p. 24.
3 "Roswell Magill, Lawyer, 68, Dead," The New York Times, Dec. 18, 1963, p. 41.
4 "Magill Appointed Treasury Tax Aide," The New York Times, Nov. 24, 1933, p. 2.
5 Paul W. Ward, "Henry Morgenthau and His Friends," The Nation, Aug. 14, 1935, p. 182.
6 "New Deal Plans Higher Income Taxes Next Year," The Wall Street Journal, Jan. 17, 1938; "Simplification of Tax Urged," Los Angeles Times, Feb. 9, 1938; "Magill Favors Increased Use of Income Tax," The Wall Street Journal, Feb. 9, 1938.
7 John Morton Blum, From the Morgenthau Diaries, vol. 1 (Boston: Houghton Mifflin, 1959-1969), 298; "Atlas & His Burden," Time, Sept. 17, 1934.
8 "Atlas & His Burden," id.
9 Roswell Foster Magill, Taxable Income, rev. ed. (New York: The Ronald Press Co., 1945).
10 "Ways and Means," Time, Jan. 31, 1938, available at http://www.time.com/time/magazine/article/0,9171,759017-4,00.html.
11 Philip Kinsley, "Block New Deal Tyranny! Magill Urges Patriots," Chicago Daily Tribune, Oct. 25, 1935, p. 18.
12 Blum, supra note 7, at 328-329.
13 Gladys Blakey and Roy G. Blakey, "The Revenue Act of 1937," 27(4) American Economic Review 699 (1937).
14 Blum, supra note 7, at 337.
15 United States Department of the Treasury, "Tax Revision Studies: General Statement, Revenue Estimates, Summaries, and Recommendations," in Tax Revision Studies, 1937; Tax Reform Programs and Studies; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives at College Park, Md. (1937).
16 Blum, supra note 7, at 440.
17 Frank R. Kent, "The Great Game of Politics: Another Undersecretary Goes By," The Wall Street Journal, Dec. 26, 1939, p. 4.
18 "Present Federal Taxes on Corporations Hit by Roswell Magill," The Wall Street Journal, Nov. 10, 1938; "U.S. Finance Found Weak for New War," The New York Times, Nov. 14, 1939; "Magill Assails New Tax Proposal," The New York Times, June 9, 1940.
19 "Fiscal Flaws Seen in Defense Program," The New York Times, May 2, 1941, 26.
20 "Further Tax Rises May Kill U. S. Initiative, Warns Magill," Chicago Daily Tribune, Nov. 18, 1942; "Magill Sees Retail Sales Tax as Policy Needed to Combat Inflation," The Wall Street Journal, Nov. 11, 1943. For these and other suggested reforms, see Roswell Foster Magill, The Impact of Federal Taxes (New York: Columbia University Press, 1943).
21 "Would Repeal Tax on Excess Profits," The New York Times, Sept. 23, 1943; Roswell Magill, "Group in Whom All Have Confidence Should Guide Nation's Taxation Policy," The Washington Post, Nov. 14, 1943.
22 "Magill Urges Cut in Federal Budget," The New York Times, Feb. 6, 1947; "Broad Revisions of Tax Laws Proposed in Magill Report to House Committee," The Wall Street Journal, Nov. 5, 1947.
23 Robert Young, "House Tax Bill Termed Worst in U.S. History," Chicago Daily Tribune, June 27, 1951.
24 Roswell Magill, "High Taxes and Growth," The Wall Street Journal, July 5, 1960.
END OF FOOTNOTES