might be preferred, more refined adjustments will be needed, and additional ones may be called for. For instance, I do not recommend that all deductions be eliminated. Certain deductions, such as some allowance for emergency medical outlays are a sensible feature of an equitable income tax; others, such as certain kinds of contributions may be defended on valid grounds of public policy other than equity. However, there are further deductions, including interest and most taxes paid, the validity for which is much more dubious. In all, one can hardly deny that the present policy of deductions is much too generous.

Regarding our other adjustments, I see no argument whatsoever against source withholding on capital income, and find it most difficult to find convincing arguments against disallowance of percentage depletion and inclusion of tax-exempt interest. Also, I find the present system of income splitting thoroughly unsatisfactory. The additional burden on the single taxpayer is vastly above what might be justified by differentials in living costs; and for the bulk of taxpayers, the present arrangement merely permits the preservation of a fictitious picture of progression, which may easily mislead the public. If the rate structure applicable to joint returns is the one which Congress intends to apply, then let the single rates be repealed, and let the joint returns schedule be applied to all returns, together with whatever adjustments in relative exemptions are needed to redress the balance between single and joint returns.

6

With regard to capital gains, finally, there is no question on equity grounds (based on the accretion concept of income) that capital gains should be taxed like other income and that unrealized gains at time of death should be treated as if realized. If the effects of such a change under the new pattern of bracket rates remains too detrimental to investment, ways should be found to provide preferential tax treatment to investment income where needed but to do so without puncturing the equity of the progressive income tax structure. All this leaves open the question of how progressive the rate structure for a comprehensively defined income tax should be. This is a problem on which the preceding argument is quite neutral, our point being merely that the desired degree of progression, or lack thereof, should be arrived at in a direct, open, and horizontally equitable fashion. The problem of what the desirable structure of bracket rates should be, given such a tax, is important, but it is not to be dealt with in this paper.

APPENDIX

The analysis is based on table 4, parts 1 and 2, "Statistics of Individual Income Tax Returns, 1956." Joint returns and single returns not head of household are included but single returns of heads of household are disregarded. Taxable returns only are included.

In arriving at computed adjusted gross income under the various plans, the reported adjusted gross income is corrected first to include total realized gains, as given on pages 28 and 32 of "Statistics of Income." The further adjustments are as follows:

If a requirement of mandatory joint returns is possible for constitutional reasons, other techniques accomplishing the same objective may be devised.

SOURCE WITHHOLDING OF TAX ON INTEREST INCOME

The total amount to be added to adjusted gross income is $3,500 million. (See D. N. Holland, this volume, p. 1551). This amount is distributed among returns falling within the 13 brackets of adjusted gross income for joint and single returns, or 26 cells. Using the breakdown by broad brackets given by Holland as a base, the amounts are broken down further between the first brackets of adjusted gross income and between single and joint returns in proportion to the distribution of reported interest income.

SOURCE WITHHOLDING OF TAX ON DIVIDEND INCOME

The amount allocated is $1 billion. Sources and methods are the same as for interest income, using now the distribution of reported dividend income as our base for allocation.

INCLUSION OF TAX-EXEMPT INTEREST

The total addition to adjusted gross income equals $600 million. (See J. A. Pechman, p. 1479). It is assumed that tax-exempt interest accrues to the top six brackets of adjusted gross income. Allocation among single and joint returns and among these brackets is made in proportion to reported taxable interest income for the 12 cells to be included.

DISALLOWANCE OF PERCENTAGE DEPLETION

The total addition to adjusted gross income equals $400 million. (See Pechman, p. 1479.) Allocation among single and joint returns and among the 13 income brackets is by distribution of reported dividend income among the 26 cells.

UNREALIZED GAINS AT DEATH

The total addition, following Pechman in what seems a somewhat heroic estimate, is set at $5 billion. Next, a percentage distribution was computed for holdings of depreciable assets, based on R. Goldsmith, "A Study of Savings in the United States," volume III, page 126. Depreciable assets are defined to include the Goldsmith categories of columns 3, 4, 7, 8, and 9. Since the Goldsmith distribution is for 1950, and in order to obtain a corresponding distribution for 1956, the bracket limits of the Goldsmith distribution were raised by the ratio of personal income in 1956 to personal income in 1950. This distribution was then adjusted to correspond to brackets given in "Statistics of Income." The fraction accruing to over $10,000 was broken down further, in proportion to the distribution of reported realized capital gains, among the 20 cells (10 brackets each for joint and single returns) over $10,000. For the six cells (three brackets each for joint and single returns) under $10,000, this method seemed inappropriate since the assets here are mostly residences. Instead, the breakdown was made in proportion to number of returns in the six cells.

WAGE SUPPLEMENTS

The total adjusted gross income equals $9.9 billion. (See Pechman, p. 261, volume 1.) From "Study of Consumer Expenditures, Income and Saving," volume XI, University of Pennsylvania, 1957, pages 8 and 9, using data for "Large Cities in North," we obtained the ratio of wage supplements to wage and salary earnings by income bracket. Wage supplements were defined to include the survey categories of public unemployment and social security benefits and pensions; public social assistance and private relief; military pay, allotments, pensions; etc. The ratios for income brackets up to $10,000 were then applied to wage and salary income reported in these brackets (using returns for all taxpayers), thus obtaining hypothetical amounts of wage supplements for each bracket. The percentage distribution of these amounts was then used to allocate the $9.9 billion of wage supplements among brackets under $10,000. The amounts thus allocated were split between joint and single returns in the ratio in which the total wage and salary income is divided between joint and single returns, the same ratio being used for all brackets under $10,000.

47060-59-pt. 345

TAXATION AND THE SIZE DISTRIBUTION OF INCOME 1

Robert J. Lampman

A progressive tax may be defined as a tax which narrows inequality of income among persons. A regressive tax is one with the opposite effect, that is, a widening of income inequality. Hence, in any discussion of progressivity of income tax rates a relevant consideration is: How does the proposed tax alter the size distribution of income? It is also useful to have as background information a historical and comprehensive view of the overall American tax system. How far back does the practice of narrowing inequality via taxes go and how much has the principle of progressivity come to dominate the Federal, State, local tax system in this country? Finally, it may also be valuable to review the reasons for and against narrowing income inequality through taxes. This paper is an attempt to illuminate these

matters.

1. HISTORICAL CHANGES IN OUR TAX SYSTEM

This is the 50th year of continuing experiment with progressive taxation. It was in 1909 that Congress passed a corporation income tax law and started the ball rolling on the 16th amendment, which gave the Federal Government power to tax personal incomes at progressive rates. At about the same time, in 1911, Wisconsin enacted what is generally regarded as the first successful State income tax.

In the last 50 years the broad trend in the development of our Federal, State, local system has been toward a more income-equalizing tax system. Before 1909 local government was the most important tax collector and the local property tax was by far the most important tax in the Nation. The Federal Government raised its revenues almost entirely by customs, duties and excises upon liquor and tobacco, while State governments relied almost entirely upon property and sales taxes. The overall combination of taxes resulted in a regressive system, or one that compounded the pretax inequality of incomes.

During World War I it was established that income taxes could yield large revenues. In the 1920's there was a retreat from heavy use of income taxes, but it appeared that income taxing was firmly established as a part of the economic policy of government. By 1929, it would seem, some measure of equalization had become fixed as an outstanding characteristic of our fiscal system. Indeed this characteristic was almost as highly developed in 1929 as it is today. It is interesting that income taxation became relatively less important in the overall tax picture in the decade of the 1930's.

In 1939 only 17 percent of all taxes were levied on income as compared to 23 percent in 1929. This fall occurred in spite of the facts that the Federal Government increased the top rates (few people had

1A presentation of much of this material appeared in the September 1959 issue of Commentary.