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of gaining several hundred percent on his investment, he is willing to take the risk of losing what money he puts in, but, if he knows that the Government will absorb in income taxes most of any profits which he may make, but will insist upon his taking all losses which may eventuate, he will not be foolish enough to put his money into any dubious project. He will, instead, conclude that it is safer to invest his funds in tax-exempt securities. Whatever the reasons bringing about the results, charts 2-A to 2-G, inclusive, prove definitely that high effective tax rates do reduce sharply the percentages of the national income going to individuals in the upper brackets, thus hampering capital accumulation and retarding the upward movements of the incomes of all classes of citizens, extending from wage workers to industrial magnates.

Since high tax rates tend to make for lower incomes, the next question which naturally arises is whether or not high tax rates produce, for the Government, revenue greater than is obtained by low tax rates. The answer to this question is given by charts 3-A to 3-G, inclusive. In these charts, the tax receipts expressed as percentages of the national income have been plotted against the average of the effective tax rates for the given year and the 2 years immediately preceding. Twelve-item to sixteen-item moving medians have been applied to the ordinates representing tax receipts. While the lines connecting these moving medians are a bit irregular, their general trend, nevertheless, shows clearly the connection between effective tax rates and income-tax yields expressed as percentages of the national income.

The facts revealed by these moving median lines are amazing. Charts 3-A shows that, in the $1,000,000 and over income class, a 60-percent effective tax rate actually tends to produce less revenue than that obtained by a 22-percent rate. In the $500,000 to $1,000,000 bracket, the moving median indicates that a 23percent tax rate gives as high a yield as does a 56-percent rate. In the $300,000 to $500,000 income class, the results obtained by a 26-percent effective tax rate are approximately the same as those given by a 50-percent rate. In the $150,000 to $300,000 income class, a 26-percent effective tax rate produced as much revenue as did a 43-percent rate. Chart 3-E indicates that, in the $100,000 to $150,000 bracket, raising effective tax rates from 19 to 32 percent added practically nothing to the Government's receipts. The upturn at the right end of the moving median line is, in all probability, merely accidental.

In the income brackets below $100,000, the effective tax rates in the years preceding 1942 never rose above 28 percent; hence, the moving median linesthe lines which reveal general tendencies-do not extend above 22 percent. Chart 3-F shows that a 21-percent effective tax rate yields about one-fourth more revenue than does an 11-percent rate. Chart 3-G indicates that a 13-percent effective rate produces receipts more than half again as large as those resulting from a 6-percent rate. The evidence, therefore, points to the conclusion that raising the income-tax rate tends to produce additional revenue, provided that the effective rate is not pushed above 21 percent.

However, as the rate rises to a level somewhere in the neighborhood of 21 to 25 percent the yield reaches a maximum, and, from that point on, increasing the rate adds little or nothing to the Treasury receipts.

It may seem that a 25-percent effective tax rate is too low to lessen noticeably any man's endeavors to increase his income. However, it must be remembered that the 25-percent effective rate is computed by dividing the total tax paid by the total income. This average rate is very different from the rate applying to the highest bracket of the individual's income—and it is this marginal rate which acts as a deterrent to further effort. For example, in the case of a person having a $10,000 net income above exemptions, the effective 1947 tax rate on that income is only 25.1 percent, but the tax rate on any income acquired in addition to $10,000 is 38 percent. It is this 38 percent which is considered by the man deciding whether to work harder or play more golf.

This same principle applies to all other effective tax rates. While the effective tax rate on a $200,000 income is 74.5 percent, the tax rate on the last increment of such an individual's income is 91 percent-leaving him but 9 cents out of every additional dollar gained by added effort.

In the light of the facts revealed by this study, it seems obvious that levying confiscatory taxes on very high incomes accomplishes practically nothing in the way of raising revenue, but, as we have seen, such taxes greatly hamper the economic progress of all classes of the population. It, therefore, appears that effective tax rates above 25 percent cannot be justified on a fiscal basis, but can only be defended on the basis of communistic principles, or on the grounds that success is criminal and that those who succeed ought, therefore, to be punished. 79120-51-pt. 2— 8

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CHART 1-A

HOW INCOME-TAX RATES HAVE AFFECTED
THE PERCENTAGE OF THE NATIONAL INCOME
ACCRUING TO THOSE INDIVIDUALS RECEIVING
INCOMES OF $1,000,000 AND OVER

[graphic]

1931

1933

1935

1931

1939

1941

Percentage of

the

National Income

Received

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CHART 1-B

HOW INCOME-TAX RATES HAVE AFFECTED
THE PERCENTAGE OF THE NATIONAL INCOME
ACCRUING TO THOSE INDIVIDUALS RECEIVING
INCOMES OF $500,000 AND UNDER $1,000,000

[graphic]
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Received

Percentage of the National Income

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CHART 1-C

HOW INCOME-TAX RATES HAVE AFFECTED
THE PERCENTAGE OF THE NATIONAL INCOME
ACCRUING TO THOSE INDIVIDUALS RECEIVING
INCOMES OF $300,000 AND UNDER $500,000

[graphic]
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Percentage of the

National Income

Received

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CHART 1-D

HOW INCOME-TAX RATES HAVE AFFECTED
THE PERCENTAGE OF THE NATIONAL INCOME
ACCRUING TO THOSE INDIVIDUALS RECEIVING
INCOMES OF $150,000 AND UNDER $300,000

[graphic]

Percentage of the National Income Received

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