The causes of this favorable experience are various. Immediately after the close of the war the economy was subjected to the immense stimulation of the emergence and growth of a long-delayed building boom, the construction on a large scale of highways and other needed public improvements, the replacing of old automobiles, and in general, the making up of the shortages from the years of the war and of the preceding depression. And the upward movement has been all the greater because of a surge in population growth. More persons have had to be housed, and provided with utilities and other consumer goods and services. Further, except during the past year or so, abundant supplies of money and credit have been available for consumer financing, and have fed a generally inflationary situation. Corporate enterprise and investment in the postwar period have therefore operated in a climate of diminished risk. The high income tax that has been paid, particularly since the Korean war, has not restricted these functions so much as might have been expected under normal conditions.

But regardless of whether the stimulation of the economy will be continued, I do not believe that we should be satisfied with a rate of growth corresponding to or even somewhat in excess of the long time trend.

The need for a much-increased rate is pressing. We may even have to increase our rate of growth in order to maintain our position in the world. For surely we are being subjected to the strongest competition. In the greatly enlarged research programs of corporations, universities, and the Federal Government, we are taking an important measure toward greater production. And we are meeting with success. Every few days we read of new theories, new discoveries, new inventions. Never before in human history have there been so many and such fundamental developments. And the process of exploring our universe continues at an accelerated pace. Knowledge breeds knowledge, and that yet more knowledge. But we need also to take another measure. Equations, formulas, observations, the outcomes of experiments, and demonstrations by models are not sufficient. If these results are to serve any purpose other than intellectual stimulation or gratification, they must find application in the form of investment. Corporations are peculiarly suited to the performance of this function. May I quote here from the Colwyn report, that famous royal commission study of national debt and taxation in Great Britain:

* when a company saves by retaining part of its profit, the operation is smooth and simple. In the case of a progressive business the flow of capital is just in the place where it is required; it is at the growing point of industry, enabling new needs and opportunities to be met without delay as and when they arise. This is true of the new enterprising business, which may as yet be making only small profits, as well as of the established company whose ability to save large sums for development year by year has given proof of efficiency and power of continued expansion. There are cases of course where reserves are accumulated out of a caution rather than enterprise, and are invested, e.g., in the preference shares of outside concerns, but generally speaking it is true that the income tax, when it falls upon company reserves, entrenches upon a form of saving which is of special value to the community.3

The corporation income tax rate of 52 percent should clearly be reduced. How much should the reduction be? Unfortunately, no one

Report of the Committee on National Debt and Taxation, Great Britain, 1927, pp. 148-149.

can give an exact answer. All that anyone can do in recommending a change is to indicate his best judgment. I believe that the corporation tax rate ought to be reduced to 40 percent, except that for incomes below $25,000 it might be 15 or 20 percent. You will note that, for purposes of this statement, I accept the present scheme of rates, and am proposing only the simplest form of reduction possible. I do so because I wish to emphasize the all-important consideration, namely, that the leaving of more money in corporation treasuries gives both the means for additional investment and the incentive to invest. The fact of the reduction, after many years of increases, and the amount suggested would at once stimulate and provide for the financing of

new ventures.

As for any objection that such a rate would be too low, account should be taken of the fact that, save for the small credit currently allowed, any dividends paid would continue to be fully taxable to the stockholders under the personal income tax. Income from this source would still be taxed higher than from unincorporated business or other sources. And no one, so far as I know, has ever demonstrated that the special privilege of operating as a corporation is worth 40 percent of the net income realized. In fact, were it not for the revenue consideration, I should have advocated a rate of not more than 30 percent and perhaps lower.

I realize that in the above recommendation I have not dealt with the problem of undistributed profits. But that problem has never been solved. And, as I said earlier, in view of the difficulty in the present situation of making the adjustments required, I despair of a solution. The fact, however, that the proposed reduction in the corporation income tax rate would, if made effective, result in lower taxation of the undistributed profits allocable to the shares of very rich persons ought not to preclude adoption. The effect of a tax measure on the economy is the prime consideration, and the higher taxes are in relation to the total product, the more true this becomes.

Let me now, in order to place the 40 percent in the perspective of the past, cite the reports of the committee of the National Tax Association on the corporate net income tax. That committee had a distinguished membership of 15 persons. among whom were Profs. Harold Groves (chairman) and Richard Musgrave, and Drs. Gerhard Colm and Richard Goode. A table given in the preliminary report, issued in 1949, indicated that the 40 percent levied from 1942 to 1945 was, up to that time, the highest regular or ordinary rate ever levied on corporate income. The rate, as of the date of the report, was slightly lower, 38 percent.

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The principal recommendation of the committee, made in 1950 in the final report, was that the corporate rate should be increased to 45 percent, but that one-third of any dividends should be deducted from the base of the tax. Thus, in effect the corporation rate would be 45 percent on retained earnings and 30 percent on dividends. The committee pointed out that corporations as of that time paid out on the average half of their earnings. With such a division, the rate on the

A subsidiary recommendation was that small corporations (those with incomes ranging perhaps to $250.000) be taxed 30 percent on at least half of their incomes regardless of whether retained or paid out.

whole would be 3712 percent. Without commenting on the scheme of taxation proposed, I wish to emphasize that when account is taken of the usual practice of corporations respecting the payment of dividends, this outstanding committee did not recommend that the then existing 38 percent rate be increased.

The loss of revenue that would result from reducing the corporate income tax rate from 52 to 40 percent is now to be recognized. According to the budget for 1960, the amount would be approximately $5 billion. The question therefore arises as to the source or sources from which this deficiency should be obtained. When I testified before your committee in 1958 on much the same subject, I advocated that the estate and gift taxes should be greatly increased, and that remaining deficiency in revenue should be made up by increases in the personal income tax rates below a suggested maximum of 65 percent. Let me take up these proposals in order.

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The estate and the associated gift taxes have been levied at the same rates for many years. But their effectiveness has been greatly lessened by the marital deduction as amended, which was introduced in 1948. In addition, the relationship of the gift to the estate tax, and the concept of property underlying the definition of a gift or a bequest, make for large-scale tax avoidance. Gifts of property during life remove it from the highest applicable rates of the estate tax to the beginning and much lower rates of the gift tax. The transfer, however, whether by gift or by bequest, may be of a life interest only, with the property to descend ultimately to designated heirs. In that event no tax is paid on the property when the tenant dies. The usual way of effecting such a disposition is to set up a trust fund. By the skilled use of this instrument, the estate tax may be skipped for two and sometimes even for three generations.

I need not go on. No other tax avoidance scheme has been better publicized. But what I say should be sufficient to introduce my proposal. I believe that the rates of the estate and gift taxes should be integrated so that the aggregate payment would be the same whether much or little of the property were given away before death. I also believe that, save for an allowance for the period between transfers, the passing of an estate at death should result in the imposition of the tax. I see no basis for a theory which assumes that a life tenant does not own property because he does not possess unlimited power to dispose of it after death. He receives the income or other benefits while living. But neither he nor the accumulator of the original estate can receive any benefits after death. Why then should not the tax attach when the property passes at that time? This is now the rule in England. I think it should also be the rule in this country.

A third change in the estate tax which I would favor is a sharp increase in the rates applicable throughout the brackets in excess of $300,000 or perhaps $500,000. Not all the estate should ever be taken, but the top rate might well be 90 percent. As for the $300,000, most persons would consider that amount, less existing taxes, adequate to support the family of the decedent, and still more would regard $500,000 as sufficient. And if during life the decedent accumulated greater wealth, he could leave a larger estate to his heirs, though,

There would be some increase in dividends thus permitting the recovery of a portion of this amount, though not a large one, through the personal income tax.

because of the increasing rates of taxation applicable, not so much as can be left under existing legislation.

The changes proposed in the estate and gift tax have, however, much greater significance than the increased revenue that would follow from their adoption. At present too much emphasis is placed on the preservation of wealth. The opportunity to avoid the estate tax for one or two generations by making gifts or bequests in trust offers an overwhelming temptation. Besides, even if that avenue of escape were closed, there would remain the consideration of making the will of the donor or decedent effective. In giving or bequeathing his wealth to his heirs, he wishes to provide for them. But he cannot do so unless the property is safeguarded. And here is another service offered by the trust arrangement. The trustees can act only according to the agreement. But even where having discretion, they interpret their power conservatively, as indeed they must, because they are in the business of preserving capital. And their incomes from the service rendered depend on that accomplishment. The safety, therefore, of the principal fund becomes the prime consideration. As a result, great wealth accumulated by active and adventurous enterprise is likely after the death of the owner to become a hoard of cautious capital, avoiding risk, whatever the sacrifice in yield.

But the persons who have wealth are the very ones who should pioneer in the economic field by starting new firms, developing new products or processes, or otherwise venturing their capital for gain. For they are the individuals best able not only to obtain the information necessary for calculating the chances for the success of such undertakings but also to bear the attached risks. This negation of the economic function of wealth is to be deplored. And unfortunately the present estate tax, by encouraging the use of trust funds, actually furthers the sterility of what ought to be a most important source of economic progress.

The heir of great possessions may, however, wish to have a career in business. If so, he finds the way smoothed for him by his wealth. He need not start at the bottom. Indeed, if he or his trust fund has a controlling or even large interest in a company, he may start well toward the top. He may or may not have a natural aptitude or an acquired training for his duties. For he does not owe his appointment to qualifications for the position.

Undoubtedly some sons of very rich men have done well in business. Names will occur to anyone at all familiar with American industry. But it does not follow that as a group such persons are as good managers as are those who without the aid of money or status have had to win every step upward in the severest kind of competition. Indeed, how could they be? The requirements for the successful conduct of business are onerous today, and are made more so by the ever-increasing pace of change sparked by technological research and development. Education, training by experience, a high order of mental capacity, a willingness to work hard, and perhaps natural ability, are all needed.

In an economy such as ours, characterized in the main by freedom of enterprise, there is a large social interest in having the best business management that it is possible to obtain. The size of the private and major component of the gross national product depends on management as well as on capital and labor. For capital and labor produce

more or less according to the knowledge and skill with which they are combined and directed, and the spirit that is infused into the organization. We cannot afford to perpetuate any arrangement that gives large responsibilities to persons of unproved fitness. Not only is such a distribution capricious in results but it is also discouraging to those who seek on their merits to reach the top positions.

But are any gains in the quality of business leadership that would follow from the adoption of this proposal going to be purchased at the cost of an important disadvantage? The greatly stepped up amount to be taken from estates might conceivably diminish the motive to accumulate an estate of more than $300,000 or $500,000 for the purpose of leaving it to one's family. For the high taxes would impose a barrier to that accomplishment. On the other hand, by no means all the incentive for adding to property holdings is to be found in the desire to provide for heirs. Some extremely rich men, Andrew Carnegie for example, have accumulated wealth chiefly for the purpose of making gifts to educational, charitable, or religious institutions. And John D. Rockefeller, Sr., must have been largely so actuated.

This motive, however, would not be disturbed by the proposals made here, which do not include a repeal or limitation of the existing exemptions. But irrespective of the ultimate distribution of a large estate, its accumulation confers power, prestige, and a sense of accomplishment on the owner. For he has won in the most highly regarded of all competitions. The attached rewards afford present satisfactions and are felt as such. The estate tax is a long-distance influence that only becomes effective after death. But what active enterpriser or investor knows when he is going to die? Besides, there is always the possibility, or at least the hope, that the rates of the tax will be reduced. For these reasons it would appear that the heavier taxation of estates would result in little, if any, lessening of the desire to accumulate wealth.

On balance, every consideration, both immediate and long term, favors the extremely heavy taxation of estates. It is better on all counts to tax the property of dead men than the profits, incomes, or economic transactions of living men.

The personal income tax, in my opinion, has two great advantages as a fiscal instrument for obtaining the additional revenue needed to make up the deficiency from the proposed reduction in the rate of the corporation income tax. First, that impost takes into the reckoning, as does no other, both the financial obligations of the taxpayer, and the means which he has of meeting them. For this reason, together with the associated progressive rates, it is almost universally acclaimed as the fairest tax. I prefer that statement to the more controversial ability to pay.

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Second, the personal income tax strikes directly the income of individuals without distinction as to source, and without discrimination against any particular use. Thus in conception this impost is neutral. It does not subject business profits to a special levy, as does the corporation income tax. Nor does it burden some purchases but not others, as do the Federal excises.

This is a general rule. The interest on tax-exempt bonds and capital gains are exceptions.