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By closing existing loopholes alone, we can raise from $4.5 to $5 billion in additional revenue. These loopholes would cover such wellknown practices as (1) the split income provision, (2) estate and gift taxes, (3) capital gains, (4) interest from tax-exempt securities, (5) dividend and interest withholding, (6) depletion allowances, (7) stock options, and (8) taxes upon life insurance companies.

The community property and split income tax loopholes, if closed, would provide at least $2.5 billion; the estate and gift tax loophole, if closed, would provide another billion. By closing the six other loopholes mentioned above, another $1-$174 billion would be secured for the United States Treasury.

New taxes upon corporations should raise from 8 to 9 billion dollars rather than the $3 billion suggested by Secretary Snyder in his testimony before this committee. This amount can be raised by tightening excess profits tax rules and by increasing the corporate normal and surtax rates.

Individual income taxes can be raised 3.5 to 4 billion dollars by increasing an average of 4 percentage points on the progression scale.

Thus, through the closing of loopholes, increasing corporate taxes and increasing individual income taxes by equitable means, we can raise from $16 billion to $18 billion in new revenue, without the need for increasing excises, adopting a more extensive type of excise, or for reducing personal individual income tax exemptions.

I would like briefly to refer to each of the types of taxes which I have mentioned above and outline specific proposals in connection with these.


(1) Splitting incomes: In the Revenue Act of 1948 the community property principle of splitting income between husband and wife is extended. As a result of the enactment of this handsome tax loophole for the well-off, the Federal Treasury is currently losing $2% billion in revenue per year.

The maintenance of this provision on the statute books is grossly unfair. It is an outright discrimination against individuals with income of less than $5,000 as well as a discrimination against single persons.

Secretary Snyder has proposed that the individual income tax rates be increased by four percentage points to establish our progression scale one point above its peak in the year 1944. However, in spite of the bracket rates being higher than at the peak of World War II, taxes paid are less in the brackets below $5,000 because of the $100 increase in personal income tax exemptions, and they are substantially less in the higher brackets because of the enactment of the split income tax loophole.

Table No. 6 shows the effect of the existence of the split income-tax provision upon the amount of taxes paid by individuals at various income levels. It shows, for example, that a married couple with two dependents, with a $3,000 income, would pay $144 in income taxes, or $131 less than the wartime peak. Individuals with a $10,000 net income before exemptions will pay $349 less; an individual with $50,000 net income will pay $6,077 less; and an individual with a net income of $500,000 will be paying $20,625 less than he paid at the peak of the war in 1944.

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If we are talking about equality of sacrifice, we cannot enact additional taxes upon low-income individuals, as long as this grossly unfair and inequitous split-income loophole continues on the statute books.

The community property principle is rank discrimination against single individuals and grossly unfair to low-income married individuals.

We should understand just how this community property principle operates. A married person with two dependents must have an income of $4,900 before he receives $1 of tax benefit from this provision. According to table No. 12, contained in Secretary Snyder's testimony of February 5, approximately 34 million--or over 80 percent of our taxpayers earn too little income to benefit from the split income-tax loophole. On the other hand, a little over 7 million taxpayers, constituting less than 20 percent of the total, receive the entire benefit from the existence of this inequitous provision. It is hard to speak of equality of sacrifice to low-income families, when a $2)billion handout is enjoyed by the well-off.

One does not really begin to receive significant benefits from the existence of this provision until his income is in excess of $10,000. In this category, we have only 14 million taxpayers, or 4 percent of the total.

I cannot see how an equitable tax structure can be developed until this provision is eliminated. The community-property principle can be eliminated first by straight outright repeal of the provision in the Revenue Act of 1948 with the requirement of mandatory joint returns without splitting of income, or the same result could be accomplished by establishing special tax rates for married couples. In either case the split income tax provision should be repealed; and, if it is it would produce at least $2.5 billion in revenue.

(2) Estate and gift taxes: Almost $1 billion can be raised in this field by an all-out approach to the multitude of loopholes that exist in the estate and gift tax structure.

There are four major loopholes affecting estate and gift taxes which must be closed. To close them, we must

(a) Integrate the estate and gift tax structure.

(6) Repeal the splitting of property for estate and gift tax purposes which was validated by the Revenue Act of 1948.

(c) Eliminate the life estate problem.

(d) Reduce exemptions. The following is a brief discussion of each of these major points:

(a) Integrated estate and gist tax: The present system is a dual system with separate exemptions and lower rates for gifts. As a result, considerable juggling is possible to reduce the tax on transferring wealth. This is particularly true with respect to gifts made in contemplation of death. The necessity to prove that a gift made shortly before death was or was not in contemplation of death involves time consuming litigation, with the Government often unable to prove that the gift was made in contemplation of death. Only in about 20 percent of the cases has the Government been successful in proving its charges. Substitution of a single set of rates and exemptions, and integration of the taxes so that taxwise the time of the transfer would not affect the tax, would not only increase revenue, but would close loopholes in the tax.

(6) Splitting property for gift and estate tax purposes: In 1942 tax amendments were enacted to equalize the treatment of estate and gift taxes between the community property States and those other States not having the advantage of community property laws. These amendments required equal treatment in all States, thus in effect setting aside the provisions of community property laws in those States having such benefits.

The Supreme Court of the United States has upheld the validity of these 1942 amendments. The repeal of these amendments by the

. Revenue Act of 1948 weakens our estate and gift tax structure. The Secretary of the Treasury has estimated that this results in a loss of revenue amounting to $245 million or 30 percent of the yield of the estate and gift taxes.

(c) Life estates: At present a man may place his property in trust, make provision that his wife (or anyone else) have the income for life (i. e., life tenant), and that at her death the income or the property go to their children or someone else. Although ability to enjoy the income is, in effect, virtual ownership, no estate tax is imposed on the life tenant for the value of the life estate. The effect of this is to skip at least one estate tax on the property. This procedure may,

. with skillful drafting of the trust instrument, be extended so that trust property is subject to estate tax only once every 100 years. Ordinarily, property is subject to estate tax once every generation (say 30 vears); the exemption of life estates may, therefore, postpone the tax for an additional 70 years. This is the largest single loophole in the law. Closing that loophole alone could at least double the yield of the death tax.

The British, to whom settled property is at least as important an institution as it is to us, saw through the tax avoidance possibilities of life estates about 50 years ago (and may I add way before the Labor Government) and provided that the value of property subject to a life estate should be included in the gross estate of the life tenånt. A similar procedure in the United States would represent a major step forward in equitable taxation.

(d) Reduce exemption: Present law provides for a $30,000 gift tax exemption, plus a $60,000 estate tax exemption, plus an annual gift tax exclusion of $3,000 to each of as many persons as the donor wishes. It is not too difficult for a man to pass $250,000 to his relatives, free of tax. Such liberality in the law allows most estates to escape any tax. Reduction of the combined estate and gift tax exemption to $25,000, and the annual gift tax exclusion to $1,000, would not only increase revenue but would increase the equity of the tax.

No basis exists for estimating the revenue potentialities of these four suggested changes. A modest guess, however, would be that they yield $1 billion additional annually.

(3) Capital gains: The existing rate of 25 percent for capital gains held for 6 months or more is extremely inequitous, as Secretary Snyder so clearly pointed out in his recent testimony. With the recommendation of the Secretary that the rate be increased we are in wholehearted agreement. We would, however, recommend that the rate be increased to at least 50 percent and the holding period extended to at least 1 year.

We propose only one exception—that profits received from the sale of a house should be exempt from taxation when they are used to

purchase another house, assuming, of course, that both houses are occupied by the owner.

Capital gains are a common source of income to the wealthy. For example, less than one-half of 1 percent of the income in the lowest net income class comes through capital gains, while in the $500,000 class one-third of income is derived from capital gains.

The amount of the income derived from long-term capital gains, under present laws is subject to only a 25-percent tax while the suggested rate for individuals in the $500,000 bracket is 91 percent for all income in excess of $200,000.

The 25-percent rate would be only one percentage point higher than the rate recommended for the lowest bracket. Increasing the rate for capital gains to 50 percent would set the rate equal to that applicable to surtax net income of $14,000 to $16,000. This is still a modest proposal.

There is one additional loophole in the capital gains structure which should be closed. That has to do with accretions in the value of securities held until death. No capital-gains tax is now levied on securities when the owner dies and their "basis" to the heir is their appreciated security value for estate tax purposes. This situation encourages holding securities until death to avoid income tax. It could be corrected by considering transfers at death as a realization. If this were done, a capital-gains tax would be payable in the year of the death by the decedent's estate.

The enactment of these recommendations in capital gains would bring into the Federal Treasury at least one-half billion dollars.

(4) Tax exempt interest from State and local securities: There is today over $20,000,000,000 of State and local securities in the hands of individuals, income from which is wholly exempt from taxes. It is these securities which should be taxed, if the tax-exempt interest question is to be eliminated. There is, naturally, opposition by State and local communities to this proposal, so a compromise measure to tax only future issues of State and local securities has been presented. However, it would be 1975 before 90 percent of the current outstanding State and local securities would expire. Thus little would be accomplished in the immediate future by a proposal to tax only future issues of State and local securities.

Needless to say, those with vested interests in these exemptions defend its continuance on the ground that they paid for this benefit when they bought the securities. It is clear, however, that they did not pay for benefits at the present rate.

The States and localities claim that elimination of the exemption would raise interest costs. However, a subsidy by income-tax payers to the States and localities is clearly inequitable. Certainly it cannot be stated that States and localities could not finance their operations without this benefit.

If this provision to tax interest from State and local securities were enacted, at least one-quarter of a billion dollars in Federal revenue could be collected.

(5) Dividends and interest withholding: The facts here are fairly well known. The Congress debated this question last year. It is currently estimated that approximately $1,000,000,000 of dividend payments go unreported each year. If it is fair to withhold taxes from

wage earners, it is equally fair to withhold taxes on dividends and interest paid by corporations.

The enactment of a provision withholding a tax against the payments of dividends and interest would be directed at improving compliance with reporting of income.

If this provision were enacted, approximately one-quarter of a billion dollars in revenue would come to the Treasury which is now lost through tax evasion.

(6) Depletion allowances: At the present time oil, gas, and mineral companies are permitted excessive exemptions for depletion. Onehalf billion dollars a year in taxes could be collected merely by taxing these companies and corporations at the same rate as everyone else.

The United States Treasury has shown that in 1947 the oil companies that are worth over a $100,000,000 claimed percentage depletion of more than 13 times actual depletion on an original cost basis. In plain language, that is practically equivalent to allowing a businessman to recover the cost of his plant 13 times through tax-free “depletion” or depreciation deductions. As long as we are going to play that game, I suppose it is only fair to allow taxicab drivers to deduct the cost of their cab 13 times for income-tax purposes. The cab drivers certainly need it and probably deserve it just as much as, if not more than, the oil companies.

Referring to the lush, tax-free profits which a few companies are enjoying in the name of depletion allowance, Senator Hubert Humphrey recently pointed out:

For example, during the 5 years, 1943-47, during which it was necessary to collect an income tax from people earning less than $20 a week, one oil operator was able, because of these loopholes, to develop properties yielding nearly $5,000,000 in a single year without payment of any income tax. In addition to escaping the payment of tax on his large income from oil operations, he was also able through the use of his oil-tax exemptions to escape payment of tax on most of his income from other sources. For the 5 years his income taxes totaled less than $100,000 although his income from nonoil sources alone averaged almost $1,000,000 each year.

This is a shocking example of how present tax loopholes permit a few to gain enormous wealth without paying their fair share of taxes.

Indeed, the comparative profitability of the oil and gas industry is found in recent statistics showing net income expressed as a percentage of sales, released by the National City Bank in its monthly letter for April 1950. This report shows that in 1948, 40 companies producing oil and gas had a return of 34.8 percent on their book assets as compared with an average of 13.6 percent for 3,322 companies drawn from all industries. Expressed as a percentage of sales and profits of the oil and gas producers were 33.1 percent in 1948, and 26.9 percent in 1949. The equivalent percentages for the entire group of 3,322 corporations were 7.3 percent in 1918 and 6.6 percent in 1949.

A dean of tax experts and former counsel of the Treasury has well summed up the case against percentage depletion and oil and gas: “(Subsidies) are inexcusable when they serve no public purpose and indiscriminately favor entire industries which are in an established financial position far beyond need of special Government help.

For then their effect is to shift part of the tax burden to the shoulders of others who are less able to bear that burden. A sound tax system would permit no one segment of business to ride roughshod over others” (Randolph Paul, Taxation for Prosperity (1947), p. 307).

We in CIO see no reason why special benefits should be given to oil companies, oil-well owners, and to the owners of various other mineral properties.

(7) Stock options: One wide loophole was opened up by the Revenue Act of 1950 and that has to do with the employee stock options.


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