If savings should be attracted away from mutual savings institutions and into tax-exempt securities to escape Federal income taxation, the Nation's capital market would be far less effective in allocating resources to the most productive available uses. Moreover, a continued broadening of the tax base through the expansion of savings in mutual savings institutions would be jeopardized.

4. A CLIMATE FOR ECONOMIC GROWTH

Mutual savings institutions play a crucial part in providing a climate in which economic growth can take place without inflation and without a major expansion of the direct participation of Government in the economy.

An absolutely essential component of such a climate is an ample flow of true savings to finance the long-term capital requirements generated by economic growth.

A striking characteristic of the postwar economy has been the growing proportion of voluntary personal savings accounted for by savings accounts. In 1950, the increase in savings accounts amounted to 30 percent of voluntary personal savings, which include life insurance, U.S. savings bonds, and mutual investment funds along with deposittype savings accounts. In 1958, the rise in savings accounts was responsible for almost 75 percent of voluntary personal savings.

The Securities and Exchange Commission reported that savings and time deposits in banks and accounts in savings and loan associations and credit unions accounted for nearly 82 percent of total net financial savings of individuals during the 5 years 1954-58.

Mutual savings institutions have accumulated three-fifths of the savings accumulated in deposit-type thrift institutions. At the end of 1958, they accounted for almost 60 percent of such deposits and accounts, which aggregated approximately $150 billion, and commercial banks accounted for somewhat over 40 percent. Mutual and stock institutions have thus complemented each other quite effectively in fostering the accumulation of the huge volume of capital required to finance economic growth. Commercial banks have a number of advantages in attracting savings deposits because of their many offices and because they can use a part of such deposits to expand consumer loans at high rates. They are handicapped by their need to maintain a high liquidity ratio as demand deposit banks by their preoccupation with supplying short-term loans to business and other borrowers, and by their relatively high ratio of expenses to deposits.

The reason why savings are so essential for growth is the huge volume of new construction of all kinds and of plant and equipment required for economic expansion. Private debt expanded by some $280 billion during the decade of the 1950's, and long-term debt_accounted for approximately 60 percent of this increase. If savings had not been sufficient to finance virtually all of this expansion in longterm debt so that a large part of these funds would have had to be borrowed from commercial banks, inflationary pressures would have been very much greater.

Mutual savings institutions have been by far the most important source of savings to finance homebuilding since 1945. Mortgages outstanding on 1-4 family homes increased from $19 billion to $118 billion in the 13 years 1945–58.

Savings and loans associations and mutual savings banks provided about half of the $99 billion borrowed to finance home ownership during this period of rapid economic growth. Mutual savings banks have been the largest lenders on mortgages guaranteed by the Veterans' Administration.

The present method of taxing these institutions has not undermined their ability to fulfill effectively this essential role of helping to provide a climate favorable to economic growth.

5. EASE OF TAXPAYER COMPLIANCE AND ADMINISTRATION

Owners of savings accounts in mutual thrift institutions may have the amount of their interest-dividends entered in their passbooks as it is credited to their accounts. This facilitates the reporting of such income with other interest on personal income tax returns.

Underreporting of interest and dividend income by individuals is a problem in tax administration. Available evidence on the magnitude of this problem is not reliable enough to provide a sound gage for remedial measures. More accurate data are needed on the extent to which interest and dividend income is escaping taxation, and whether the situation is improving, before such cumbersome and expensive procedures as payer withholding or reporting are undertaken.

Statistics compiled from individual income tax returns show that interest reported by individuals on form 1040 (excluding income reported on form 1040A) amounted to $1,115 million in 1947 and $2,847 million in 1956, an increase of 155 percent between the 2 years.

The following steps might be taken by the Treasury to lessen underand non-reporting of interest income:

1. Individual income tax forms and instructions could be redrawn to make crystal clear that all interest and dividends received from payer organizations, and all such income credited to savings accounts, are income which taxpaying recipients are required to report. One way to do this would be to list in the appropriate schedules in form 1040, and in the instruction sheet on 1040A, the names of each class of financial institution whose interest and dividend payments are to be reported by the taxpayer, such as:

Commercial banks.

Mutual savings banks.

Savings and loan associations.
Credit unions.

Regulated investment companies.
U.S. savings bonds.

Such a revision should greatly lessen underreporting due to ignorance or oversight. It would also help the Treasury to determine the types of payer organizations for which under- and non-reporting are more

common.

2. Payer organizations such as commercial banks and mutual savings institutions could be asked to put printed notices in passbooks calling attention to the fact that interest and dividend income received or credited (whether entered in the passbook or not) is reportable as taxable income by the recipient taxpayer. Payer organizaions could also be requested to post in their places of business a conspicuous notice that interest and dividend income is subject to Federal income tax.

It is reasonable to proceed at this time on the assumption that failure to report is due more to ignorance of the law or honest forgetfulness than it is to deliberate evasion. The suggested measures would do much to test the validity of this assumption. They would provide a reliable indicator within a reasonable period of time of how far underreporting of interest income is being corrected.

SUMMARY

The income of mutual savings banks and savings and loan associations is taxed through taxation of the interest-dividends received by the owners of saving accounts in these institutions.

Because these mutual savings institutions have been notably successful in stimulating and attracting savings, the funds entrusted to them have grown at an annual rate of 11 percent per annum during the 5 years ended June 30, 1959. The interest-dividends they pay into the taxable income stream will thus tend to double every 6 years if this rate of gain is sustained. Moreover, rates of return paid to savers are rising.

The success of mutual savings institutions in attracting savings in large volume brings about a constant broadening of the tax base, a focal point in this study of Federal income tax revision.

As judged by the five basic criteria laid down by the committee to guide this study, the present method of taxing mutual savings institutions:

1. Is equitable and fair because it recognizes that mutual savings institutions have characteristics in common with regulated investment companies, common trust funds, qualified pension trusts and credit unions, and does not endanger the ability of these institutions to provide a specialized savings account service on a sound and effective basis.

2. Assures progression in the distribution of the income tax burden because interest-dividends paid to savers are added to their highest taxable income bracket.

3. Permits the free play of market forces in allocating resources as these institutions seek to invest in suitable obligations offering the highest rates of return.

4. Helps to provide a climate favorable to sustainable economic growth because mutual thrift institutions are by far the largest single source of personal savings to finance the huge long-term capital requirements of a growing economy on a noninflationary basis.

5. Taxpayer compliance is facilitated by the entry of taxable income credits in the saver's passbook. Taxpayer compliance can be furthered through printed and posted notices by payer organizations and through revision of income tax forms and instructions.

Indiscriminate taxation of the earnings set aside by mutual savings institutions as a needed reserve against losses on investments and loans could yield at most only a very limited amount of tax revenue by comparison with that which the Treasury will derive over a period of years from the rapid expansion of taxable interest paid out to individuals by these institutions. Because such a tax would hamper and impede the growth of these institutions, it would result in a nar

rowing of the income tax base, rather than the broadening contemplated by the committee.

APPENDIX A

Illustrative projection of revenue obtained annually by taxing additions to reserves of savings banks and savings and loan associations and revenue to be realized by taxing interest and dividends paid

1 Assuming additions to reserves continue at the annual average, 1954-58.

2 Assuming savings are allowed to grow at the average annual increment, 1954-58.

NOTE.-At the end of 20 years, the additional taxable income distributed by mutual savings institutions, if the rate of growth of the past 5 years is sustained, would be producing for the Treasury over a billion dollars a year in additional taxes at a 23 percent average rate; and every year the amount of such tax collections would become $57.5 million greater with the growth of savings.

Taxing the addition to reserves of these institutions would still be yielding only $180 million in taxes at the end of 20 years, even on the very optimistic assumption that additions to reserves would remain at the level of the past 5 years.

TABLE 2.—Spending units with savings accounts percentage ownership by income

Source: Board of Governors of the Federal Reserve System, "1959 Survey of Consumer Finances," supplementary table 7, Federal Reserve Bulletin, July 1958, p. 715.

TABLE 3.-Personal income, interest income, and interest-dividends paid by savings banks and savings and loan associations, United States, 1947–58

Source: U.S. Department of Commerce, "Savings and Loan Fact Book, 1959," "Savings Banks Fact Book, 1958," and National Association of Mutual Savings Banks.