TAXATION: First Fruits

After several weeks of effort the Ways and Means Committee of the House put together last week its first definite proposals for the tax reduction bill that is to be. As was to be expected the plan was a compromise. The Tentative Plan:

1) Total tax reduction $300,000,000 (Mr. Mellon asked $250,000.000 to $300,000,000).

2) Surtaxes running up to a maximum of 20% at $100,000 and more (the present maximum surtax is 40% at $150,000 and more.)

3) Normal taxes of 1½% on the first $4,000, 3% on the next $4,000 and 5% thereafter. (The Treasury proposed several different schedules of normal taxes very close to this; the present normal tax is graded 2%, 4% and 6% on the same amounts.)

4) Personal exemptions for single persons, $1,500; for heads of families, $3,500, with $400 additional for each dependent, the definition of dependents being extended to include children from 18 to 21 years attending school. (The Treasury favored the present exemptions: $1,000, $2,500 and $400.)*

5) Earned income deductions of 25% of the tax are to be allowed. All income under $5,000 is to be considered “earned.” Income from $5,000 to $20,000 may be classed as earned if really earned. Nothing over $20,000 may be classed as earned. (Secretary Mellon urged abolition of the earned income deduction. He contended that many taxpayers had actually less than $5,000 of earned income, and many had more than $10,000, and further that it was very hard to determine what income was earned. The present law classifies all income up to $5,000 as earned, but nothing over $10,000 as earned).

6) Estate taxes are to be graduated to a maximum of 20% on $10,000,000 and more, with credit up to 80% on state inheritance taxes paid. (The Treasury favored reduction and eventual abolition of estate taxes. The present maximum tax is 40%.)

7) Gift taxes would be abolished, but all gifts made within two years of death would be classed as part of the estate for tax purposes. (The Treasury wished gift taxes abolished. The present maximum gift tax is 40%.)

8) Publication of the amount of tax paid by individuals would be once more forbidden. (The Treasury advocated repeal of the publicity clause.)

9) The corporation income tax of 12½% and the corporate stock tax of $1 per $1,000 will be retained.

The Significance. The Ways and Means Committee, having decided that total tax reduction shall be $300,000,000, has also decided on cuts in surtaxes and normal taxes and increases in personal exemptions, which it is estimated will reduce revenue about $200,000,000. This reduction leaves a balance of $100,000,000 to be applied for reducing all other taxes, and this is not enough for a great deal of other reduction. It is not enough, for example, to allow the removal of taxes on automobiles. On the other hand, many observers expect the Committee to plan reductions which actually go beyond the $300,000,000 mark which it has agreed to. But Chairman Green expressed hope that the committee would be able to present a non-partisan tax bill that would have the support of Democrats as well as Republicans.

The Treasury had figured on reducing income and surtaxes only about 140 millions instead of 200 millions, leaving a considerable margin for other tax reduction.

The Exemption Question. The increase in exemptions is a victory for the Democrats, led by Representative John N. Garner of Texas. The Treasury has contended all along that it was bad policy to increase exemptions, that every one should have a stake in the Government; the Democrats, and with them Republicans such as Senator Couzens, held that the tax on small incomes is costly—too costly—to collect for the amount of income derived. So Mr. Mellon was asked what it cost to collect various taxes. He produced the follow-ing table (for 1924-5):

TAX REVENUE COST PER $100 (in millions)

Income $1,762 $1.65

Estate and Gift 109 1.79

Liquor 28 3.52

Tobacco 345.41

Sales 18 .86

Capital Stock 90.80

Miscellaneous 50 2.37

Average 1.44

He estimated that if the personal exemption were raised to $5,000 (as had been proposed by several Democrats), the loss of revenue would be $167,000,000 and the decrease of cost in collection not more than $5,000,000.

Mr. Garner of Texas could not see the Treasury contention. Said he tersely:

“There are four million taxpayers and if you divide these into $29,000,000* we must deduce that it costs about $7.30 to collect each tax paid.

“Certainly the lowest one million of the four million taxpayers do not pay more than $7.30. If this is true, the tax cost equals the tax derived. Even if these one million pay an average of $14, on the assumption of the Treasury figures it would cost about half that sum in each instance to collect the tax.

“Mr. Mellon has furnished three pages of argument and one page of near facts. He supplies the argument because he knows his position is untenable, and fails to supply the figures for the same reason.”

In the “three pages of argument” referred to by Mr. Garner, Mr. Mellon explained that it was not fair to estimate the cost of collecting small taxes by dividing the total cost by the number of taxpayers, that the small returns were all audited in the field by the regular forces retained there, that an auditor could audit as many as 300 small tax returns in a day whereas he might take weeks on a large return—in short, that the small taxes were a form of byproduct, cheap enough to collect if the larger taxes were to be collected anyhow.

According to Mr. Garner’s estimate, the cost of collecting $100 in small taxes is $50; according to Mr. Mellon’s estimate, it is $3 (much less but still above the average cost of collection).

*The comparative tax for a married man without dependents (other than a wife) is shown by this table :

NET PRESENT TREASURY COMMITTEE INCOME TAX RECOMMENDATION RATE

$ 3,000 $ 7.50 $ 5.00 $ 0.00 3,500 15.00 10.00 0.00 4,000 22.50 15.00 5.63 5,000 37.50 25.00 16.87 6.000 57.50 40.00 28.12 7,000 87.50 65.00 39.37 8.000 127.50 95.00 57.25 9.000 167.50 125.00 74.75 10,000 207.50 155.00 101.25

*The figure furnished by the Treasury as the cost of collecting all income taxes in 1924-5.’