porations having net incomes of $55,000 or less would, without exception, have paid a smaller tax to the Federal Government had they done business as partners rather than as a corporation, whereas in 86 per cent of the cases where the net income of the corporation was $100,000 and less a similar conclusion was true. Out of 252,334 corporations reporting net income for the calendar year 1925, no less than 232,346 had incomes of less than $50,000 a year. So that the latest figures available show that 92 per cent of the corporations reporting net income paid higher taxes in a given year than they would have had they been partnerships. The situation is not quite as bad as these figures would indicate. For whereas the number of corporations with incomes of less than $50,000 is high, the amount of income reported by them is comparatively small. One-third of the total corporation taxes is paid by 196 corporations with net incomes in excess of $5,000,000; 53 per cent of the corporation income tax is paid by 1,113 corporations with net incomes in excess of $1,000,000; over 70 per cent is paid by 4,469 corporations with net incomes of over $250,000. But even so, the discrimination appears to weigh with more than usual severity on the stockholder in the closely held corporation whose net income falls in the smaller amounts.

It may be urged that the owner or owners of a closely held corporation with a limited income are no worse off than the stockholder of limited means in a very large corporation who is taxed 1312 per cent on his proportionate share of the net income of the corporation, whereas the tax which the latter might have to pay on that net income were it derived from some other source might not exceed 12 per cent. While this is apparently true, it is probable that the latter class of stockholder looks upon his stock purchases as strictly of an investment character. In other words, he buys this share of stock just as he would a bond on the basis of its actual income yield, and to that extent in making the purchase he has completely discounted the corporation tax. Therefore, as I see the situation, while it is desirable to reduce the rate on all corporations, some additional relief should be granted the stockholders of the small, closely held corporations, whose situation is substantially the same as that of a partnership though they do business in corporate form.

The Treasury Department recommends that the present corporation rate of 1312 per cent be reduced to 12 per cent. This will cause a loss of revenue of approximately $135,000,000.

In order to give further relief to the owners of the closely held corporations with a small net income, the Treasury recommends that all corporations with net income of $25,000 or less and the number of whose stockholders does not exceed 10 be allowed to file their income-tax returns as if they were a partnership and be taxed on the partnership basis. It is estimated roughly that this will occasion a loss of revenue of from $30,000,000 to $35,000,000.

SURTAX RATES

The revenue act of 1926 reduced the rates of the normal tax from 2, 4, and 6 per cent to 112, 3, and 5 per cent and cut the maximum

While there was a

surtax rate from 40 per cent to 20 per cent. readjustment of the intermediate surtax rates, the effect of the drastic cut in the maximum surtax rates and the sharp reduction in normal rates was to benefit the small taxpayers and the large taxpayers somewhat more than those whose taxable income fall in the brackets running from $18,000 to $70,000. In view of the above, I recommend a revision of the rates applicable to the so-called intermediate brackets.

Under the revenue act of 1926 incomes from $14,000 to $24,000 are graded by steps of $2,000. That is to say, the income-tax rate increases 1 per cent for every additional $2,000 of income. From $24,000 to $64,000 the brackets are graded by steps of $4,000.

By the simple expedient of adjusting the rate so that it will rise uniformly, increasing 1 per cent for each additional $4,000 of income on income from $10,000 to $70,000, some reductions will be granted to all surtax payers, but more particularly to those whose incomes fall in the intermediate brackets. Thus, under the act of 1926 a 10 per cent rate applies to incomes ranging from $36,000 to $40,000, whereas under the proposed plan the 10 per cent rate will apply to incomes ranging from $46,000 to $50,000; the 15 per cent rate, instead of being reached at $56,000, will be reached at $66,000; the 18 per cent rate at $80,000, instead of $70,000; and the 19 per cent rate at $90,000, instead of $80,000.

There are attached hereto two tables, the one showing the suggested changes in surtax rates from those of the 1926 act and the second showing the individual income tax upon certain specified taxable net incomes under the revenue act of 1924, the revenue act of 1926, and under the suggested rates.

Suggested change in surtax rates from those of the 1926 revenue act

Individual income tax upon certain specified taxable net incomes. Married person with two dependents, with no capital gains nor dividends, and with earned income of $10,000

The Treasury Department renews its recommendation that the Federal estate tax be repealed. By tradition, legal theory, and revenue necessity, this tax belongs to the States. They and not the Federal Government have developed inheritance taxation in the United States. It is true that they have made many mistakes, but it is not apparent that the entrance of the Federal Government into this field has had any beneficial effect. The Federal Government has only made use of the estate or inheritance tax four times in its history, and then during war emergencies. As soon as the emergency was past, the tax was repealed. There is no occasion to change this policy. It is not based on opposition to the inheritance or estate form of taxation, but on the theory that some taxes inhere to the States and can more properly be levied by them than by the Federal Government and that the estate tax is one of these. It is beyond dispute that the States need this revenue and that the Federal Government does not.

Ever since the war, Federal revenue needs have steadily diminished as the cost of Government was reduced. It has been found possible to repeal most of the war taxes and to cut rates drastically. The contrary is true of the States and of their political subdivisions." Their cost of government continues to mount steadily. Taking the long point of view, this position, in so far as the Federal Government

is concerned, is likely to continue. As the national debt is paid off, the burden of Federal taxes should grow lighter. But it is impossible to foresee the point at which the upward movement of State and local expenditures will be arrested. Moreover, Federal taxes are fairly well diversified and bear some relation to the taxpayer's ability to pay. State and local taxes rest on altogether too narrow a base. The Federal Government should, therefore, retire from the inheritance tax field, and should definitely announce the policy not to resort to this form of taxation save in emergencies.

The loss in revenue will be insignificant. Owing to the 80 per cent credit on the taxes paid the States, it is estimated that in five years the Federal estate tax will not produce more than $20,000,000. Should it be repealed, the loss in revenue in the fiscal year 1929 will not exceed $7,000,000.

THE AUTOMOBILE TAX

I realize that great pressure will be brought to bear on the Congress to repeal the excise tax on the sale of automobiles. I can not agree to the advisability of such a repeal.

The Federal appropriation for good roads in the fiscal year 1928 runs as high as $71,000,000, and in the fiscal year 1929 will be $75,000,000. These expenditures by the Federal Government are for the direct and immediate benefit of automobile owners. They should make some contribution in return.

There is another aspect of this situation deserving consideration from the standpoint of justice and fairness. The automobile is one of the railroad's chief competitors. Our railroads are paying heavy taxes to the United States Government, a part of which is being used for highway purposes. The revenue act of 1926 materially reduced the tax on automobiles designed for the transportation of passengers and repealed the tax on trucks and accessories. The latest available figures for railroad corporations having taxable net incomes indicate an increase in the income tax paid by them to the Federal Government from $57,000,000 for the calendar year 1924 to $94,000,000 for the calendar year 1925. Is it quite fair to ask the railroads to contribute to the construction and maintenance of the roads on which their rivals operate while exempting the latter from any contribution?

The automobile is a semiluxury article of such widespread use that it furnishes a broad base on which to apply a low tax. The rate being low, there is no appreciable hardship to the taxpayer; the base being broad, the tax is a good revenue producer. Unless we are to rely almost exclusively on direct taxes paid by a few and are prepared to see our National Government supported not by the entire body of our citizens but by a limited class, this is the kind of tax which should be retained.

The income tax has gradually become so restricted in its application that it is a class rather than a national tax. For the calendar year 1925, 9,560 taxpayers returned about 49 per cent of the total tax returned. Three hundred and twenty-seven thousand and eighteen individuals returned $701,497,726 out of a total of $734,555,183. Out of our entire population of 114,000,000 only 2,501,166 individuals returned taxable income, and of these, 2,174,148 returned only

$33,000,000 of tax, the balance of $701,000,000 being returned by 327,018 individuals. According to these returns, less than threetenths of 1 per cent of our population returned 95.5 per cent of our total income tax; about 1.9 per cent returned 4.5 per cent, and the remaining 97.8 per cent of the population returned no tax whatsoever. Obviously, some other taxes should be retained.

Once the automobile tax is repealed it can not be reimposed in time of peace. This creates a situation which should squarely be faced at this time. Both the Treasury Department and the Congress desire to reduce taxes to the greatest possible extent consistent with the prospective revenue needs of the Government. The reduction will be made under the reasonable assumption that business conditions will continue to be fairly prosperous. Should this assumption prove to be false and should there be a falling off in business, with a consequent immediate reduction in the yield of the corporation and individual income taxes, or should the day come when taxes as revised at this session of Congress are inadequate to meet the cost of Government, it is obvious that revenue needs will compel an increase in rates of the taxes then existing. It is equally obvious that under such circumstances corporation income-tax rates and income-tax rates on individuals will have to be increased to an extent where they will not only make good the loss of revenue resulting from the reduction of income returned, but will in addition be required to contribute the $66,000,000 more or less that the present excise tax on automobile sales now yields. In other words, the narrowing of the tax base in days of prosperity inevitably means that when the time for increased tax burdens arrives those taxpayers who are unfortunate enough to remain on the rolls are compelled to pay more than their just share. Injustices in the field of taxation are inevitably committed under the pressure of necessity, and the time to preserve the integrity of a well-rounded, well-balanced system is in days of prosperity when rates can be kept at a minimum and no particular hardship is inflicted on any one class. Under such circumstances, to yield to the temptation to dispense with a tax which some day may prove to be an essential part of the tax system, is to be guilty of the most short-sighted economic error. It should never be forgotten that in taxation the ideal to be aimed at is a broad base and low rates.

We have eliminated most of our excise taxes. There remain for revenue purposes the excise tax on tobacco and automobile sales, the admissions tax, and a few stamp taxes. All of these should be retained in the interest of a well-balanced tax system. I have not seen it suggested that the excise tax on tobacco should be reduced, but when we consider the burden borne by the users of tobacco, an article which is likewise of the semiluxury type-though many would classify it as a necessity-the 3 per cent automobile sales tax appears insignificant in character. Because this 3 per cent is levied upon the factory, or wholesale price, which is much smaller than the retail price, the automobile tax amounts to but 2 cents for every dollar paid by the ultimate consumer. Contrast this with the fact that for every dollar spent by our citizens for the articles enumerated, there is a tax required of 2 cents to 5 cents on cigars, 9 cents on theater and other admissions, 20 cents on playing cards, from 4 cents to 22 cents on chewing and smoking tobacco, and from 17 cents to 40 cents on cigarettes.