TAXATION: First Draft

One hot day last May Inquisitor Pecora of the Senate Banking & Currency Committee asked Mr. J. P. Morgan:

"Did you pay income tax in 1930?"

"No."

"Did you pay income tax in 1931?"

"No."

"Did you pay income tax in 1932?"

"No."

Then and there, politics being what it is, a change in the U. S. tax laws became inevitable. The public was in no mood to see anyone as rich as Mr. Morgan escape paying income taxes, even in years when he had no net income. Into the Recovery Act a few days later were hastily jammed provisions limiting the tax deductions a man might take because of capital losses.

Because no more than a temporary job could be done at the time, a subcommittee of the House Ways & Means Committee has been drafting all summer long more elaborate devices to make people pay income taxes. Last week a partial draft of those plans was made public. Certain it is that the draft will be altered, perhaps unrecognizably, to meet the needs of the budget as well as of practical politics. But equally certain is it that a new tax law will be enacted by Congress this session, and last week's announcement gave the first inkling of the direction those alterations may take. The chief proposals:

1) Instead of the present graduated normal tax of 4% up to $4,000 and 8% thereafter, one flat 4% normal tax. To compensate for this reduction surtaxes would be upped approximately 4% throughout the scale. Result: to increase by 4% the tax on income from dividends. Persons with net incomes up to $6,000 would pay exactly the same tax as under the present law. Personal exemptions, which now can be deducted only in figuring normal taxes, would also be applied to surtaxes. Thus on incomes of over $6,000 married men would pay slightly less, single men slightly more.

2) Instead of taxing (and allowing tax deductions) of 12½% on gains and losses on capital invested more than two years, a new sliding scale allowing: 100% on capital invested less than one year; 80% less than two years; 60% less than three years; 40% less than five years; 20% over five years. It is hoped thus to stabilize the revenue from this source which under present conditions tends to fluctuate greatly.

3) A reduction of 25% for the next three years on the tax deductions allowed for depreciation and depletion.

4) A tax of 35% on personal holding companies on undistributed net income. At present such companies must pay only the corporate income tax of 13¾% and their owners do not have to pay personal income tax in addition except on such amounts as they actually declare to themselves in dividends.

5) Denial to corporations, which are 95% or more affiliated through stock ownership, of the right to file consolidated tax returns in which the losses of one company may cancel out the profits of another.

Several dozen other provisions were aimed to plug up means of avoiding taxes by reorganizations, partnership losses, etc. Annuities would be taxed on a flat 3% basis; income tax deductions for estate and gift taxes would be disallowed; losses on sales of property to members of one's family would be ignored for tax purposes.

Total additions to revenue expected from these proposed changes: $270,000,000.